Mary Mathers, MBA, CFA
Senior Investment Director
Why the market volatility?
Another day, another Trump tweet - this time on international trade. On March 1st, global stock markets reacted negatively to fresh fears of a potential trade war, ignited by President Donald Trump's declaration that the United States would impose tariffs of 25% on imported steel and 10% on imported aluminum. Trump cited national security concerns and utilized Section 232 of the Trade Expansion Act of 1962, which authorizes the Secretary of Commerce to investigate the effect of imports on US national security.
Just as quickly, equity markets reversed their downward trend and moved higher on March 5th, on expectations that Trump might have eased up and opened the door to potential negotiations. Rapid market moves like this remind us that headlines (and tweets) can often cause short-term panic. For those employing a thoughtful and disciplined investment approach, periods of short-term panic can provide an opportunity to purchase securities at attractive valuations. As one of the greatest investors in history, Warren Buffet, said, "Be greedy when others are fearful, and fearful when others are greedy."
Clarity finally emerged on March 8th, with President Trump announcing that Canada and Mexico would be exempt from the tariffs, but conditional upon a satisfactory renegotiation of NAFTA. Other countries will have to justify why they should also be exempted.
What is a tariff and why does it matter to stock markets?
A tariff is a tax or duty on an imported good or service. The purpose of imposing these tariffs on imported steel and aluminum into the US is to make US-produced steel and aluminum from the likes of Nucor (steel) and Alcoa (aluminum) more attractive to users such as Boeing and Campbell Soup. China is a notable target of these tariffs because the US has argued for years that China is selling steel and aluminum for less than they cost to produce. Some have proposed China does this because its government's interests lie in creating and preserving jobs rather than driving corporate profitability. Markets care about tariffs because an escalation of US protectionism can lead to a potential global trade war as other countries retaliate and impose tariffs on US goods and services entering their countries. For instance, Europe responded with a list of possible tariffs including US motorcycles (e.g. Harley Davidson), jeans (e.g. Levi's), peanut butter and orange juice.
What the White House says about fears over steel and aluminum tariffs
US Commerce Secretary Wilbur Ross said the cost to consumers of a can of Campbell's soup could rise by a mere penny and a half with a 10% tariff on aluminum. He also said a US$35,000 car that uses about one ton of steel, which fetches about US$700 per ton, could rise by another $175, a 25% increase on US$700. The discussion of new tariffs by the President has not come without criticism from Republicans, both inside 1600 Pennsylvania Avenue and in the Republican-held Congress. Look no further than the resignation of Gary Cohn, White House Chief Economic Advisor and a staunch opponent of the tariffs. While it is difficult to predict the potential impact of these tariffs, there are voices within the Republican Party playing counterbalance to Trump's heavy-handed approach.
What you need to know
Total global steel production was
metric tons in 2016 1
The US is the world's largest steel importer to the tune of
metric tons (to Sept, 2017)2, accounting
for less than 2% of global output
Over 100 countries export
to the United States
Top 10 countries accounted for 78%3 of
steel imports into the US. Canada is number one at
16%; China is tenth at 3%4
The gap between US demand for steel and production rose to 19.2 million metric tons, with imports capturing increased penetration from 22.7% to 33.3% between 2009 and Sept 30, 20175
Canada, Brazil and Mexico sent more than
a third of their total steel exports
to the United States in 20166
- The purpose of imposing tariffs on steel and aluminum imported to the US is to make US-produced steel and aluminum more attractive to users than imports from foreign countries.
- The US is the world's largest steel importer to the tune of 26.9 million metric tons (to Sept, 2017)7, but still only accounts for less than 2% of global output. Canada is the biggest exporter of steel to the US.
- When you follow a disciplined investment approach, market volatility driven by short-term panic can present opportunities to purchase securities at attractive valuations.