The United States’ planned tariffs could have a large positive or negative impact on individual industries. However, the potential for them to have a meaningful effect on gross domestic product is very low, suggesting that the recent market volatility has largely been tied to the markets’ concern that the tax on steel could result in a trade war. Though, according to Chief Investment Strategist John Lynch, “While talk of trade risks will likely continue to be a source of increased volatility, economic fundamentals do remain sound and trade risks to date should not derail the bull market.”
The tariffs may also be a warning shot for China, as the Trump administration prepares to make a decision on the country’s alleged abuse of intellectual property rights. However, it is important to note that, despite its status as the world’s largest steel producer, China is only the tenth largest exporter of steel to the United States (see the chart below). It’s also likely that much of the intent around the tariff proposal is to apply pressure to the North American Free Trade Agreement (NAFTA) negotiations, since Canada and Mexico account for a third of U.S. steel imports.
For a more in-depth analysis of the tariffs’ potential economic impact, why the trade war is still a major concern, and how we believe the Trump administration can dilute the impact of the tariffs while still gaining a political victory, take a look at this week’s Weekly Economic Commentary.