Tariffs on Aluminum and Steel imports in the US: What could Canada be in store for?
Earlier this month, the United States government announced a 25% and 10% tariff on steel and aluminum imports to the US respectively. The objective of the US government is to increase market share for steel and aluminum at home and increase employment in the industry, which could move the economy forward using an industry that is more price inelastic relative to others. Canada is by far the largest steel and aluminum exporter to the US making up approximately 16% of steel demand in the US. China only makes up about 2% of steel demand in the US, but China has increasingly been able to lower its cost of production, thus, reducing the price of the commodities. Canada has received a temporary exemption along with Mexico as NAFTA negotiations are ongoing.
- Drop in Canadian Dollar:
With a lower demand for steel and aluminum product from such Canadian manufacturers, be prepared to see a drop in the Canadian Dollar. Canadian steel and aluminum manufacturers will seem as a less attractive investment to the market because of the trade barriers, lowering the demand for Canadian dollars. There would likely be a jump in the US Dollar as US companies in the targeted industry would be expected to realize higher gains. From previous patterns, when such barriers of trade and political risk have been introduced, there has been a higher level of flight to the USD for confidence and stability for the US economy to rebound. A good example of this was of the Brexit vote in 2016. Furthermore, with a weak in Canadian dollar, expect imports to Canada become more expensive.
- Increase in unemployment for Canada:
With Canadian steel and aluminum companies facing a tariff barrier of trading their product to the United States, unemployment within these companies could potentially rise. This is due to a drop in sales and retained earnings to invest in the business, reducing returns for shareholders. Canadian companies in this industry could potentially lay off employees and seek ways to increase efficiency though automation and technology, allowing for economies of scale. This would in turn lower costs and price points of the firm.
- Drop in interest rates?
If Gross Domestic Product (GDP) falls in Canada, we can expect the Bank of Canada to lower the Bank Rate, allowing for interest rates or the cost of borrowing to drop. This will aim to stimulate spending and investment in Canadian businesses. This would also appreciate the Canadian dollar, due to the higher demand for dollars.
What should the US consider?
If US companies end up buying steel and aluminum product for a higher price in the United States, consider inflation to increase within the United States on various products that integrate such materials into the cost of production. A higher cost of production and increased pricing as a result, could cause various companies or industries to experience reduced returns, negatively impacting output and economic growth. Companies could experience reduced profits and seek other alternatives to buying steel or aluminum from US companies to lower the cost of production. As China only makes up only 2% of steel demand in the US, imposing a tariff with Chinese exporters could be a more sustainable strategy, rather than the United States’ biggest trading partner – Canada, as the costs could outweigh the benefits of the tariffs.
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