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CCR2 International Credit Management


Any economic growth arising from higher domestic steel and aluminum output should be largely offset by reduced income – and, potentially, diminished consumption and investment – stemming from higher prices to downstream users


Longer-term harm Longer term, we certainly see some chance of economic harm arising from downstream margin compression and reciprocal tariffs. With respect to the former, consumers of


steel and aluminum should undoubtedly face higher costs in the near term, although metals arriving through exempted countries, and the restart of idled domestic capacity, should buffer some of the move. In fact, US Steel has already announced


its intent to restart a blast furnace at its Granite City Works plant, expecting a sustained uptick in demand. As a result, any economic growth arising


from higher domestic steel and aluminum output should be largely offset by reduced income – and, potentially, diminished consumption and investment – stemming from higher prices to downstream users. In Figure 2, we proceed to summarise the anticipated winning and losing sectors


as a direct consequence of these recently announced tariffs.


Retaliation Retaliation, on the other hand, is a bit more difficult to handicap. Goldman Sachs published a report detailing the European Union’s response to the imposition of steel tariffs and export subsidies in 2002 and 2004, respectively. Their research found that retaliation will


typically focus upon three main categories of goods, those being: l The subject of protections. l Consumer goods – particularly those with a luxury tilt. l Agriculture. Jean-Claude Juncker, president of the


European Commission, has since publicly stated that the potential targets for trade reciprocity include American-made motorcycles, bourbon, and blue jeans.


Figure 2: Correlation analysis – steel price vs. margin (Likely) impacted downstream industries


Positive Impact On Margins l Primary steel makers. l Aluminium smelters.


Negative Impact On Margins l Auto OEMs. lMotor vehicle or trailer-part makers. l Aluminium-can makers and packagers. l Aerospace and defense companies. l Shipping containers. l Railcar and rail manufacturers. l Construction and infrastructure. l Energy industry, including pipes and tubes.


April 2018 www.CCRMagazine.com While these items do fall into the often-


targeted consumer-goods category, they seem engineered to elicit pressure from high-ranking politicians on both sides of the aisle. We should note that Speaker of the House Paul Ryan is from Wisconsin, home to Harley-Davidson Motorcycles; Senate Majority Leader Mitch McConnell is from Kentucky, home to many bourbon distilleries; and House Minority Leader Nancy Pelosi is from California, home to Levi’s jeans. More recent examples of retaliation


follow similar themes – in February, China initiated anti-dumping and anti-subsidy investigations into US sorghum exports two weeks after the US imposed tariffs on solar panels and washing machines.


Conclusion Overall, while the risk of a trade war has risen materially in recent days, we would caution that the currently contemplated tariffs appear quite marginal given their limited scope, and may merely be an opening salvo ahead of the more important debates surrounding NAFTA, the Trans- Pacific Partnership, the Korea-US Free Trade Agreement amendments, and a more encompassing negotiation surrounding US- China trade dynamics. Therefore, while cognisant of potential


harm in the event of trade-war escalation, we remain sanguine on the fundamental strength of the economy and prospects for coordinated global growth. CCR2


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