American steelworkers' jobs have disappeared as a result ofautomation and globalization. In an effort to preserve theindustry, President Trump recently took a protectionist step andproposed steep tariffs on steel (25 percent)and aluminum (10 percent).

Analysis by trade credit insurance firm Atradius suggests thatthe tariffs will positively impact some players in the metalssector and negatively impact others. The real threat, however, isthat this measure is just the first step toward increasinglyprotectionist measures that will land the world in an ugly tradewar.

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The Metals Market

China currently dominates the global metals market in bothproduction and consumption. In 2017, China produced a little morethan half of the world's steel and consumed 44 percent of globaloutput. Meanwhile, the EU accounts for just 10 percent of steelproduction, India 6 percent, and the United States 5 percent.

Steel prices decreased following the 2009 global economiccrisis. Recently, however, prices have started to recover; they arecurrently 80 percent higher than the 2015 low point.

The global aluminum market is significantly smaller than thesteel market. China leads by a wide margin here, too—China isresponsible for more than 54 percent of global aluminum production.Trailing far behind are Russia, Canada, India, the United ArabEmirates (UAE), and Australia, each responsible for 6 percent orless. Aluminum prices have come under pressure since 2011 but havesince bottomed out and are on the rise.

In this landscape, the U.S.metals sector seems unable to fully cope with the forces ofglobalization. Unhampered trade between the United States and therest of the world has already squeezed many less-efficient domesticmetal factories out of the market, and problems persist.Utilization rates are low in domestic steel and aluminummanufacturing facilities. Domestic aluminum smelters, for example,currently operate at only 48 percent of capacity, while steelproduction is at 74 percent of capacity, on average. These lowutilization rates suggest that domestic producers are notsufficiently competitive, further evidenced by a lack of investmentin new technologies, inflexible labor contracts, and increasinglegacy health and pension costs.

Because of the sector's low utilization, the United States runsa trade deficit in steel products. Last year, the U.S. importedabout a third of domestic consumption. Its main suppliers wereCanada (17 percent of imports), Brazil (13 percent), South Korea(12 percent), and Mexico (9 percent). Despite its overcapacity insteel, China is not a major exporter to the United States, areflection of past measures to curb imports.

U.S. aluminum production has been declining for decades. In2015, the sector took a big hit when China flooded the market, andin 2017, the United States produced only 1.2 percent of globaloutput. The U.S. currently relies heavily on aluminum imports, withChina providing 55 percent of imported product, followed by Russia(18 percent) and the UAE (13 percent).

In both metals sectors, the low utilization rate of domesticsmelters suggests plenty of potential for production to rise tomeet any shortage caused by the Trump administration's tariffs.

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Enter Tariffs

The most obvious effect of the tariffs will be a significantincrease in the price of imported metals, which will provideprotection for U.S. metals producers. That is the intendedconsequence of the tariffs, but the effects won't end there; anegative impact on other parts of the U.S. economy is likely. Thebig-picture impact for domestic metal producers includes:

• Increased domestic metal prices. Domesticmetal producers should be able to raise their prices by the sameamount as the tariffs without losing market share, but smartplayers will price their product slightly lower in order to driveforeign firms out of the market.
• Increased domestic metal production. The priceincrease will correlate with increased production, helping domesticproducers replace a large share of imports.

Taking the steel tariffs implemented under President Bush in2002 as a benchmark, we expect steel prices to increase by 21percent once the Trump tariffs take effect. Foreign metalconsumption and imports will decrease, and U.S. steel productionwill increase.

Although they deliver a competitive edge to domestic metalproducers, the tariffs will likely impede the large domesticmanufacturing sector that uses metals as an input in production.This includes fabricated metals, automotive, and industrialmachinery industries. The expected effects of the tariffs for thedomestic manufacturing sector include:

• Increased production costs. This will erodecompetitiveness against foreign firms or lead to higher prices,thereby reducing product demand. According to Oxford Economics, thetariffs will reduce the sector's growth by 0.2 percent.
• A major loss in jobs. The tariffs will cause aprojected loss of 80,000 jobs in the metal-using manufacturingsector over the next two years. In comparison, without the tariffs,the sector would gain 10,000 jobs.

Given the impact on metal-using manufacturers, the overallresult of the tariffs for the U.S. is expected to be slightlynegative but largely benign. The U.S. will probably lose some GDP,as the decline in production in the metal-using sector willoutweigh the production increase in the metal-producing sector.That's because the metal-using sector represents 40 percent of U.S.manufacturing output, versus the metal-producing sector's 4percent. As proposed, the tariffs themselves will also bring inabout $5.8 billion in revenue for the U.S. government. That maysound significant, but the number pales in comparison to the $3.3trillion of total tax revenue the U.S. is expected to collect in2018.

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Tariffs and Trading Partners

The tariffs can also be expected to have a negative effect onmany U.S. trading partners. Countries that export a large share oftheir metals production to the United States stand to lose themost. Assuming no exemptions are granted (more on that later),Canada, Mexico, and Brazil will be most affected. In 2016, 88percent of Canadian steel exports went to the U.S., while Mexicosent 73 percent of its exports to the U.S. and Brazil sent 34percent.

That said, the overall impact for these and other tradingpartners will not be too bleak. Firms that export metals to theUnited States will lose a competitive edge, but companies withproduction facilities in the U.S. will likely gain. And in the bigpicture, U.S. steel imports do not account for a large portion ofthe global economy. With the tariffs' impact on U.S. GDP low, theimpact on GDP for the rest of the world should be marginal. Infact, the effect on global GDP may be hardly perceivable.

The possible exemptions to the tariffs complicate the picture.They might simultaneously undermine the U.S. tariff and benefit theexempted countries. Pending NAFTA negotiations might result inCanada and Mexico—both major players in the U.S. metalsmarket—being exempted from the new tariffs. Australia may be exemptvia a security agreement with the Trump administration. Morecountries may follow. If Canadian, Mexican, and/or Australian firmsreceive exemptions, they will likely take one of two strategies asU.S. prices rise:

• Sell at the new U.S. price and expandproduction. This strategy would reduce the opportunity forU.S. steel producers to ramp up production. The increased supplyfrom exempted countries would also push metals prices lower thanthey would be without the exemption, though higher than they werebefore the tariffs.
• Sell at pre-tariff prices. This strategy wouldenable these firms to massively expand their market share in theUnited States. It would not entirely prevent U.S. metals pricesfrom rising, but it would limit the price increase, dampening theintended effect of the tariffs.

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Global Trade War Threat

Do Trump's tariffs signal the beginning of a trade war? Manyanalysts fear this scenario, particularly now that chief economicadvisor Gary Cohn has departed. The Trump administration has lostits most vocal opponent of protectionist actions.

Beyond the exemption of countries, two additional uncertaintiesexist that will have a major impact on how Trump's tariffs playout. First, trading partners subject to the import tariff areexpected to retaliate. The EU has prepared a list of American exports it would hit with areciprocal 25 percent tariff; the list includes bourbon, bluejeans, and Harley-Davidson motorcycles. Trump responded to thisnews with a threat to slap a tariff on cars. China has also announced measures to protect itsinterests if the U.S. tariffs take effect.

Second, the U.S. government will likely come up with additionalprotectionist measures. This could escalate countervailing measuresby other nations, initiating a global trade war. While we're notthere yet—and hope this isn't how the tariffs play out—one optionfor businesses looking to protect themselves against uncertaintrading conditions is trade credit insurance, which protectscompanies against the failure of their customers to pay because ofdefault, bankruptcy, and insolvency.

Aaron Rutstein joinedAtradius in 2016 as senior manager of buyer underwriting, riskservices–Americas. With more than a decade of experience in thetrade credit insurance industry, Rutstein has developed expertisein business development, risk analysis, and buyermonitoring.