Trade War

this is going to be awesome

Powell’s got this under control. A firm squinting of the eyes and "hmmm"ing from him in the direction of the trade ministers of those countries, and they’ll all fall in line.

Stifel had a good piece on this. This is just opening round of negotiations going into trade agreement discussions. This will put the pressure on NAFTA and give us something to offer Canada and Mexico as well as negotiations with Korea. If you look at the trade practices through an independent eye since 2000 the agreements have been very bad with the US going in with pre announced red lines that resulted in a weak hand and concessionary stance. This time around, China needs us to avoid disruption as they begin to deal with fixing their domestic LGFV and SOE leverage and hitting on soy imports is unlikely as it will kill their pork industry and drive food instability. We’ve been financing everyone else’s trade surplus’s with our deficit and people are on crack if they think Europe with its VAT taxes and EU standards has not been talking free trade while being protectionist. This will be the first time in my generation we’ve entered trade negotiations with a strong hand reflective of our role in the global economy. Short term volatility for long term economic strength. Kudos.

dont forget the 4D plan for TPP

Trade war, and even WW3, are high probability events with the economic center moving East, and America’s social/economic collapse this century (MAGA is their response).

On a side note, I’m skeptical about any policy out of DC being for the benefit of the masses. Without doing any analysis at all on tariffs, I would put my base case on it being a boost to corporate profits, not a benefit to the masses.

overall trade wars are bad for everyone, but bottom line trade wars are better for those who are at a deficit. if we were to impose tariffs it should be with the countries with the largest deficits. we should prolly impose it on the best margin businesses, that way we keep the good companies in house.

we import about 2.7 trillion worth of goods vs 2.2 trillion of exports for a $500b deficit. apply a 15% tariff. and we’ll make roughly $500b in tariffs. and hopefully we bring down teh number of imports as our consumer choose to buy domestic.

of course prices will rise for consumers. an whos a bigger consumer than the us of a. but perhaps its time we end us consumerism and focus on us productivity!

I can’t believe I’m saying this, but I agree with Nerdy.

the problem with this statement is that generally production in america is dead & we lack the skill/know how on the whole to do it on a large scale since we offshored the bulk of our production years ago. now a huge portion of the population is working mcjobs and cant afford prices to go up for goods unless wages start drastically rising for unskilled labor (hint: it wont) and there will be more and more people falling into poverty.

i would be wholly surprised if this leads to a large shift in manufacturing to the US - but we’ll see what happens. i imagine the administration will focus on the reactionary measures done by europe/china and cry about them punishing us when we acted first. this is all part of the alt-right anti globalism plan to distance the US from the rest of the world. china seems more than happy to step into our role so the world wont care nearly as much as the US thinks it will

Protectionist policies have never worked in the history of the world, but I’m sure this time will be different.

China is obviously the outlier. Most of what the US imports from China is cell phones and other household goods ($70b), computers and computer accessories ($77b), telecom equipment ($33b), toys/games/sporting goods ($27b) and apparel/textiles ($41b). I combined some categories (computer stuff, apparel stuff) to get the broad picture.The above represent approximately half of US imports from China.

Interestingly, the US only imports $1.5b in Chinaware from China.

So, what makes sense to cut/tax? I could do without all the crappy plastic toys and poor quality clothing. Toys r’ us is going bankrupt anyway, I guess it would hurt Hasbro and Mattel, but maybe they could produce the quality of days past, such as Gobots (which were from Japan, but much better quality than today’s toys).

https://www.census.gov/foreign-trade/statistics/product/enduse/imports/c5700.html

no company is going to make huge long-term capex decisions based on a tariff. this is why tariffs are so bad. they don’t actually change the natural unemployment rate and they make everything more expensive for everyone. a tariff is a tax remember and a corporate tax at that. let’s tax profitable corporations less and then tax potentially unprofitable corporations more and bankrupt a few. yay!

The whole EU creates a protectionist ring fence and uses VAT to drive their policy. China is the definition of protectionist policy and has had great success. Subsidized SOEs, no financial access, direct investment only with tech transfer and capital controls.

This isn’t broad based protectionism either. There is full consensus around Chinese production with the EU and Brazil also having thrown Anti dumping and countervailing duties against China as well in recent years. Unfortunately they simply pushed product through rerolling mills in Korea, Taiwan and Vietnam and the duties really failed to account for displaced production that wound up in the US. The US has gone from around 14 aluminum smelters pre crisis to 5 and only two can produce military grade aluminum. This is simply forcing accountability to China in a specific segment (steel and aluminum) so that they accelerate the supply cuts already underway. It will also strengthen NAFTA negotiations which can come with exemptions.

Also, the US has not “lost” steel and aluminum production capability, NUE, STLD, ARNC, ATI, CMC, X are all world caliber firms but this will simply create more fair trade terms.

Yeah but there is already significant CAPEX ramp underway at firms like NUE STLD and X so this supports profitability. X and most of these guys are looking at either restarting stacked mills or individual lines within functioning mills so the capex is actually a very manageable amount since its more short cycle flex capacity. In addition, China (~50% of global production) closed 15% of capacity over the past year and is targeting another 5-10%, so what is more likely is that this will accelerate that process as most of those are already loss making (which is what triggered this). As those mills close the tariffs will become long term by default.

Most people commentating on this are blind to this having been a 20 year problem with W Bush having raised a Section 201 case against steel, Obama levied 256% hot rolled coil AD/CVD charges against Chinese firms in 2015 (still in place) that forced Chinese production elsewhere. However that displaced production that came here, this is addressing that.

good for US steel cos, bad for everyone else. some companies that use steel and aluminum will go under, directly as a result of this action. there will likely be net job losses as a result. but hey, i’m a guy who thinks corporate taxes and tariffs shouldn’t exist anywhere.

I really think you’re overestimating the content cost and understating the ability to pass through here. This is really about restoring a market balance that’s already begun to form underway that is a small portion of the economy but disproportionately impacts areas that need it. All within the last six months as this case became likely:

Century aluminum hawesville restart:

https://www.reuters.com/article/us-usa-trade-aluminum-century/century-aluminum-will-rehire-workers-if-trump-imposes-tariffs-ceo-says-idUSKCN1G728E

"Century Aluminum Co (CENX.O) Chief Executive Michael Bless told Reuters on Thursday that the Commerce Department recommendations for aluminum tariffs or quotas would allow U.S. primary aluminum producers to restore all of“what’s left” of their idled capacity to production.

Century could probably bring its Hawesville, Kentucky smelter back to full output of around 265,000 to 270,000 tons annually by early 2019, Bless said. The company has shut down three-fifths of Hawesville’s production machinery in response to a flood of imports in recent years from China, the Middle East and Russia."

AKS asheville restart was telegraphed with tariffs on earnings.

Republic Steel Lorain restart

https://www.usnews.com/news/best-states/ohio/articles/2018-02-28/republic-steel-partnership-to-restart-idled-blast-furnace

"LORAIN, Ohio (AP) — A partnership between Republic Steel and a Minnesota iron ore company says it plans to restart a northeast Ohio blast furnace that’s been idle since 2016.

The Elyria Chronicle-Telegram reports Lorain Pig Iron LLC says the furnace capable of producing 1 million tons of pig iron annually could be operating at the Lorain mill by the end of 2018. The partnership between Republic and ERP Iron Ore is considering restarting a second furnace at the mill to produce pig iron used in steel production.

The newspaper reports that 200 workers were laid off in 2016 when the mill was idled and that more than 1,000 Lorain steelworkers have been laid off."

US Steel Granite Works

http://www.nwitimes.com/business/local/u-s-steel-investing-in-gary-works-to-restart-granite/article_b9569221-7abf-5b11-b499-65e1123b7440.html

“U.S. Steel is likely restarting the hot strip mill at Granite Works near St. Louis because of a trade case it’s pursuing against slabs imported from South Korea, Bradford said. If tariffs get imposed, a plant in California likely will look to source steel slabs from somewhere in the United States, and Granite Works could step up to fill that demand.”

It’s funny to me that for all the crying fowl about protectionism articles like this received no uproar for 20 years:

https://www.cnbc.com/2017/03/05/protectionism-in-china-is-growing-german-ambassador-to-mainland-says.html

"China’s leaders may be touting efforts to offer foreign investors a level playing field, but on the ground, protectionism appears to be growing, Germany’s ambassador to China told CNBC.

“It doesn’t matter which trading partner you talk to – be it the Japanese or the U.S. or neighboring countries or European countries. They all feel the same, that there’s a growing protectionism here,” Michael Clauss, the German ambassador to China, told CNBC’s “Squawk Box” on Monday.

He noted that the protectionist concerns related to German investments within China.

“The service sector is basically off limits. Many companies that would like to produce here in China and build a factory and start producing are forced into going in a joint venture,” he noted. “It’s also frequently they’re asked to transfer technology, which is against the rules of the WTO. And the tendency seems to be growing. That’s the complaint we get from German businesspeople.”

But Clauss pointed to signs that Chinese rhetoric on trade and investment has been changing."

except the tariffs attack some of its closest allies most - Canada, South Korea, Brazil - and some of the biggest importers of US finished goods. now these countries are forced to retaliate in order to keep everything on an even keel and fair as getting taxed to hell at the basic goods stage as an exporter and then not recouping the tariff at the finished goods stage as an importer doesn’t make sense. taxing Canada like China doesn’t make sense when we share supply chains in every industry. even america loses if canadian foundries close down. this aids chinese global power more than anything. turning inward is how america starts to lose.

^Yes, if that happened it would be bad. I honestly think they chose the 25% option over more targeted approach because of 1) ease and lower cost of enforcement and 2) the approaching trade renegotiation.

But what you mentioned won’t happen and that’s what the hysterical pop-fin media is missing. NAFTA renegotiation is going on in Mexico next week. This will give the US a stronger starting point and increase urgency while also allowing a for a better trade agreement. I agree that taxing Canada is silly in this case and I’m 100% sure that when the dust settles, Canada will be exempt and better off for this. Once NAFTA is closed, Canada and Mexico will be given exemptions as members and now not only will they not have the tax, but they will have the benefit of selling at fair market prices within the trade agreement on good footing similar to how the EU is structured. And honestly, that is what a trade agreement should look like for all parties. Beyond that, similar agreements will be reached with allies but under terms that prevent this kind of abuse. South Korea and Brazil have frankly been huge abusers of trade policy around steel.

Keep in mind, China already agreed this is a problem and shuttered 15% last year and is targeting further cuts, this really just encourages them not to take their foot off the gas just because the macro backdrop recovered. I think the big concern most people had was that the supply reforms in China would pause with demand improvement then we’d be back in the same boat again with imports if domestic demand falls. As closures occur, I expect the tariffs to come down.

It’s also worth noting that frictionless academic economics is often misguided. If you go back 15 years the IMF was emphatic in insisting through white papers that capital controls categorically had no place in global trade and only hurt economics. Fast forward and now they openly promote them as a useful tool to stabilize emerging economies, post China’s successful implementation that ran against their recommendations.

Thanks for your insights BS, this has been a very interesting read.