Although Donal Trump says “trade wars are good and easy to win,” history suggests otherwise. In March 2002, George Bush gave lobbyists and slapped tariffs on steel between 8% and 30% on imported steel. At the time, Bush excluded Canada and Mexico because of NAFTA, plus several developing countries.
Immediately after the application of these tariffs, the S&P 500 fell over 33% over the next seven months.
Trump shows that he is no smarter than Bush was, assuming the trade war is a ‘good thing’. Every time a country implements protectionist policies, other countries do the same, and the losers are consumers who end up paying more for finished products.
Governments always react, never fully understand the end result. Trying to protect inefficient industry in your country by applying tariffs to a more productive country does not make domestic industry more efficient, but only makes finished products more expensive for your consumers. Tariffs are designed to increase the cost of imported goods. They are nothing but a tax, and in this case a tax paid by American consumers.
It is certain that Trump may succumb to a steel lobbyist in the U.S. and apply these tariffs to save 143,000 jobs in the steel industry, but these tariffs will hurt over 6 million other workers in industries like the automotive industry that use steel to produce their products. The end result is finished products that use steel or aluminum, and consumers will cost more. So how’s that “good thing?”
For American companies that use steel and aluminum, not only will costs rise, but they will be less competitive, and their exports will suffer. And then of course we will have the problem of reciprocal tariffs that have already threatened countries affected by Trump’s tariffs on steel and aluminum. The European Union and Canada have already said they will retaliate.
Currencies play a major role in the cost of imported products. Canada is the largest steel exporter in the United States. CAN $ CAN is currently trading at 77.50 against the dollar, which means all other things being equal, steel at a price of CAN dollars will be 22.5% cheaper than steel at a price of US $.
While these tariffs may help bottom out for U.S. steel companies, the real losers will be U.S. consumers. If this turns into a complete trade war, there will be many more victims globally, including investors.