In focus: US takes a step back to protectionism

Transcription

1 In Focus: US trade tariffs Treasury Research Group For private circulation only In focus: US takes a step back to protectionism US imposition of tariffs on steel and aluminium imports is the latest move in a series of protectionist measures preferred by President Trump. Even as a trade war is unlikely to be the outcome of this move, global supply chains will undergo sharp changes. While the impact on India may be minimum, possible retaliatory stances by other countries will vitiate the trade atmosphere. US President Donald Trump has announced his intentions to plug the trade deficit that the US faces with several countries. The President intends to impose import tariffs of 25% and 10% on steel and aluminium imports respectively, for a long period of time. The formal order is expected to be signed this week. Further, Peter Navarro, who heads the White House Office of Trade and Manufacturing Policy, has said that while there could be exceptions for specific business uses there would be no carve-out for individual countries. We take a look at the US trade dynamics with emphasis on steel imports. Tariffs a fallout of US worries over trade deficits While steel imports of the US forms a meagre fraction of its import basket in value terms (~1-2% only), the US is the largest steel importer in the world, and hence this announcement has wide-ranging ramifications for its trade partners. The United States has maintained a persistent trade deficit in steel products for over a decade. Since 2009, imports have returned to average levels seen prior to the global recession, while exports have remained relatively flat in comparison, and the trade deficit has widened accordingly. US Imports For Consumption of Steel Products March 5, 2018 Sumedha DasGupta sumedha.dasgupta@icicibank.com (USD bn) Value Volume (RHS) (mn metric tons) Source: US Census Bureau (not seasonally adjusted series), ICICI Bank Research Reactions from other countries have been unfavourable The composition of the source of US steel imports has changed quite a lot over the last few years. Canada has accounted for the largest share of US steel imports by source country at ~16% in While the rankings of the top 10 source countries for US steel imports has fluctuated over time, Canada has retained the top spot. Other top source countries from which the US imports steel include Brazil (~14%), Korea (~10%), Mexico (~9%) and Russia (~8%) (all percentages in volume terms, as of 2017) The US already has in place measures such as Anti-Dumping duties and Countervailing Duties to address the issue of trade deficits in the steel segment for several countries, including India (for details, refer to Appendix). Please see important disclaimer at the end of this report The tariff announcement elicited an adverse reaction from the trade partners of the US. This includes its allies such as Canada, Japan, European Union and Australia. Initial reactions to the announcement have varied from disappointment to talks of retaliation. Canada said the measures were unacceptable, threatening retaliatory measures if Canada did not get exemption from the trade actions.

2 Japan s Trade Minister Hiroshige Seko responded on Friday saying, steel and aluminium imports from Japan, which is an ally, do not affect US national security at all. The European Union vowed to react firmly with World Trade Organization-compliant countermeasures in the next few days. Australian Trade Minister Steve Ciobo called the move disappointing and said his country is seeking an exemption. However, the largest producer of steel worldwide, China, has given a much more muted official response. Foreign Ministry spokeswoman Hua Chunying merely said on Friday that China urges the US to follow trade rules. Following this, Chinese spokesman Zhang Yesui said at the ongoing National People s Congress in China that the country will not allow its interests to be harmed and doesn t want a trade war. While such a muted response is uncharacteristic of China, the paradox could be explained by the fact that only ~2-4% of US steel imports come directly from China. Interestingly, China is already looking into possible protectionist measures against US exports of soybean. Change in shares of countries in US steel imports in volume terms over time Others, 19% Canada, 21% Others, 22% Canada, 16% China, 4% China, 2% Brazil, 14% Taiwan, 10% Brazil, 12% Taiwan, 3% Germany, 4% Germany, 4% Turkey, 3% Russia, 5% Mexico, 10% Korea, 12% Japan, 5% Turkey, 6% Russia, 8% Mexico, 9% Korea, 10% Source: US Census Bureau (not seasonally adjusted), ICICI Bank Research Impact on India The tariff hike by US is unlikely to have a major immediate impact on Indian exports, as Indian steel exports to the US are miniscule. Around 1-2% of US steel imports by volume are accounted for by India, while on a value basis, it is marginally better at ~2-3% (as of 2017). However, the move is likely to pose some problems in the longer run for companies that have been focusing on exports to expand their market base and beat sluggish demand at home. Escalation of protection measures: In order to negate the impact of the move and ensure that the recovery in domestic steel industry is maintained, Government of India might have to relook the anti-dumping charges. The minimum import prices for steel products introduced last year are well below the current market price and may prove ineffective in margin protection for local producers. The minimum prices introduced last year will not help as the cost and demand supply scenario has changed. For instance, reference minimum import price for HR Coil is much below the rate at which domestic as well as foreign players are selling (in the range of USD 700-USD 850 per ton). Withdrawal from a free and fair trade regime is disappointing In the absence of exports to US, the countries exporting to the US are likely to look at other markets to sell their surplus, even at lower prices. The threat to prices could also come from exporters cutting prices to nullify the tariff impact to an extent. While the actual impact of these protectionist measures is hard to gauge without further details, it is evident that the global trade atmosphere has been vitiated by President Trump s move and commentary. Retaliatory measures from other countries may be forthcoming, further compounding the problem. While a trade war may not arise, disruption in supply chains will adversely impact growth. In a world order where largely free trade is accepted as a desired outcome, the US President s repeated steps back from this dictum has disappointed others. Trump s withdrawal from the Trans-Pacific Partnership, imposing anti-dumping duties for different goods, and now this latest tariff announcement have unsettled markets looking to avoid trade wars. 2

3 APPENDIX Trade Remedies in the Steel Sector Antidumping duties (AD), countervailing duties (CVD), associated suspension agreements, and safeguards are often referred to collectively as trade remedies. These are internationally agreed upon mechanisms to address the market-distorting effects of unfair trade, or serious injury or threat of serious injury caused by a surge in imports. Unlike anti-dumping and countervailing measures, safeguards do not require a finding of an unfair practice. Before applying these duties or measures, countries investigate allegations and can remedy or provide relief for the injury caused to a domestic industry. The table below provides statistics on the current number of trade remedies the United States has against imports of steel mill products from various countries. The U.S. has no steel mill safeguards in effect. Country AD CVD Suspension agreements and undertakings Total Brazil China Germany India Japan Mexico Russia South Korea Taiwan Turkey Total (As in December 2017) 149 Source: International Trade Administration, ICICI Bank Research 3

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