Is A Trade War as Easy to Win as Trump Thinks?
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In a move that is the latest in a raft of proposed protectionist moves, US President Donald Trump has said that his administration will levy tariffs of 25 percent on steel and 10 percent on aluminum imports. The new tariffs are widely expected, by traders who hedge with Forex options, to significantly affect the countries that export large amounts of the two metals into the US, as well as their associated currencies. Trump’s idea is ostensibly to boost domestic production of steel and to create more employment in the American steel industry as it expands to meet the shortfall.
Why the New Tariffs Could Be A Problem
Despite Trump’s intentions, Dr. Stephen Kirchner, an investment expert, has indicated that the new move is more likely to destroy at least five jobs in other sectors of the US economy for each new job created in the steel industry. In addition, the price of steel in the US is likely to rise sharply in the short term, resulting in a flow-on effect within the defense and construction industries, pushing up inflation and devaluing the US dollar.
The chief concern among international industry players is that unilaterally imposed tariffs by America are likely to anger its trading partners and spark retaliatory tariffs on US goods and escalate the situation into a major trade war, hurting the economies of all countries involved.
It Is Not Yet About China
Analysts say that it is still too early for China to be concerned about the tariffs on steel and aluminum, despite Trump’s assertion that the balance of trade between the US and China is unfair to his country. This is because China’s overall exports of steel to the US are quite small, accounting for just 2 percent of the American market. Instead, experts believe that US allies will be hardest hit by the new tariffs. International trade law expert, Dr. Giovanni Di Lieto, believes that three other countries are the clear targets of the new laws – Canada, Mexico and Germany.
In spite of this, China has already issued a warning through the Xinhua News Agency that there could be retaliation from itself and other affected nations. Beijing, which is no stranger to scraps with the US – a former rival during the Cold War – is expected to keep a closer eye out for further protectionist measures that would directly affect its business with the US.
New Tariffs Are Trump’s NAFTA Bargaining Chip
Another major cause for concern is the fact that Trump seems to have turned the new tariffs from a matter of protecting national security interests into a bargaining chip in his efforts to get Canada and Mexico to sign a new North American Free Trade Agreement (NAFTA) deal. According to details of the ongoing negotiations, the US has offered to exempt Mexico and Canada from the steel and aluminum tariffs if a new NAFTA agreement can be reached.
The US is in a hurry to sign a new deal because it could take months to receive congressional approval, with the US mid-term congressional polls taking place later in the year. Also, a left-wing populist, Andres Obrador, is leading in the polls for Mexico’s July presidential elections. What remains to be seen is whether Canada and Mexico are open to a new deal.
The Tariffs’ Effect on Currencies
The beginning of March has shown no slowing down in a significant and rapid downturn in investor sentiment regarding the Canadian Dollar. This has been largely down to a major drop in oil prices and an increase in unemployment figures. Now, at the most inopportune time possible, the CAD has been left reeling due to the new steel and aluminum import regulations. Canada is the largest supplier of the two metals to the US, with 80 percent of its exports going to its southerly neighbor. The result is that the terms of trade between the US and Canada are incredibly important to Canada’s well-being as well as the strength of its currency.
For many Forex options watchers, however, the outlook for the CAD is not as bleak for the currency as it is for the euro (EUR/USD) for two major reasons. First, Canada will still remain the largest supplier of aluminum and steel to the US. In addition, there are significant trade ramifications that other steel and aluminum suppliers will not experience due to the preferential status being offered to Canada and Mexico as part of the remodeling of the North American Free Trade Agreement. To top it off, the European Union has made it very clear that they are considering imposing duties on US imports worth over $3.5 billion if Trump pursues his plans. The big question now is which country will win this trade war?
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