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US Pushes Ahead With Steel Tariffs, Reignites Trade War Fears

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The White House is moving ahead with tariffs on steel and aluminium imports from top U.S. allies -- Canada, Mexico and the European Union (EU), triggering renewed fears of an international trade war and tit-for-tat retaliatory actions.

The Trump administration said yesterday that it would levy a 25% tariff on steel imports and 10% tariff on aluminum imports from these three allies. The U.S. Commerce Secretary, Wilbur Ross said that the tariffs will go into effect today and are based on the lack of progress in the ongoing North American Free Trade Agreement (NAFTA) renegotiation talks.

Following the initial tariff announcement on Mar 1, President Trump softened his stance by excluding Canada and Mexico -- two major sources of steel imports to the United States -- from the tariff orders, noting that they represent “a special case,” and will continue talks with them to address concerns.

Canada is the largest steel exporter to the United States, accounting for roughly 16% of total U.S. steel imports in 2017, per the U.S. Census Bureau data. Mexico is the fourth-largest exporter of the metal with around 9% market share. They together represent roughly a quarter of U.S. steel imports.

The U.S. administration extended negotiations on tariffs with Canada, Mexico and the EU by a month in May. The temporary exemptions on these major trade partners expired at midnight yesterday.

U.S. Steel Makers Breathe a Sigh of Relief

The Trump administration’s move is aimed at protecting the domestic steel and aluminum industries which had long been grappling with the onslaught of cheap imports and has suffered significant reduction in production and employment. President Trump believes that steel and aluminum companies have been “very unfairly treated by bad policy, by bad trade deals, by other countries” and the tariffs are necessary to protect the national security.

The imposition of trade tariffs ends a month-long uncertainty surrounding the exemption of countries from the Trump tariff orders, providing a breather to American steel stocks. Shares of major U.S. steel makers got a lift yesterday following the tariff news. Shares of U.S. Steel Corp. (X - Free Report) , AK Steel Holding Corp. (AKS - Free Report) , Steel Dynamics, Inc. (STLD - Free Report) and Nucor Corp. (NUE - Free Report) popped as much as roughly 8.2%, 7.4%, 3.6% and 3.3%, respectively.

U.S. Steel, AK Steel, Steel Dynamics and Nucor each currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Domestic steel makers struggled to cope with a renewed tide of cheap steel imports last year. These imports hurt selling prices and margins of U.S. steel makers.

The trade tariffs would provide a much-needed reprieve to the U.S. steel makers. The tariffs would provide a boost to steel prices, give American steel makers more pricing power and help to level the playing field.

Steel prices have been on an upswing in the United States on the back of the Trump administration’s trade actions to curb imports, reflected by the run-up in hot-rolled steel prices. The trade tariffs contributed to a spike in U.S. steel prices, driving the performance of domestic steel makers in the first quarter. The pricing momentum is likely to continue in the second quarter, thereby providing a boost to margins of U.S. steel players.

The tariffs are expected to lead to lower imports into the United States, which would in turn boost demand for American steel and drive profitability of U.S. steel makers. All these are likely to help in creating hundreds of new steel jobs in the country.

According to the American Iron and Steel Institute (“AISI”), an association of North American steel makers, total and finished steel imports dipped 3% and 1.7%, respectively, year over year in the first quarter. For 2018, annualized total and finished steel imports are expected to decline 8.8% and 7.6% year over year, respectively, per the AISI.

The tariffs are also expected to boost production capacity of domestic steel makers amid lower imports. The U.S. Department of Commerce earlier said that the trade actions are aimed at increasing domestic steel production to roughly 80% operating rate from its present 73% capacity.

But Trade War Fears Flare Again

The tariff announcement stoked concerns of a global trade war and sparked selloff on Wall Street yesterday with the Dow Jones Industrial Average falling roughly 1% while the S&P 500 losing around 0.7%.

Moreover, fears of higher steel prices as a result of the tariffs hit the stocks of some of the major industrial companies that are key consumers of the metal. Shares of Caterpillar Inc. (CAT - Free Report) lost 2.3% while The Boeing Company (BA - Free Report) was down 1.7%.

The announced trade actions have prompted fiery responses from major U.S. allies. Canadian Foreign Minister, Chrystia Freeland said yesterday that Canada would impose retaliatory tariffs on C$16.6 billion worth of U.S. exports beginning in July and also challenge the U.S. measures under the NAFTA and the World Trade Organization (WTO). Canadian Prime Minister, Justin Trudeau also said the tariffs are "totally unacceptable" and “these tariffs will harm industry and workers on both sides of the Canada-U.S. border”.

Mexico, in its response to the U.S. tariffs, said that it will impose equivalent measures on a vast range of U.S. farm and industrial products including steel, pork legs, apples, blueberries, grapes and various cheeses. Mexico's economy minister noted that the measures will remain in effect until the United States eliminates the tariffs.

Meanwhile, the European Commission (EC), in a tweet, said yesterday that “The EU believes these unilateral US tariffs are unjustified and at odds with World Trade Organisation rules. This is protectionism, pure and simple.” “We will immediately introduce a settlement dispute at WTO and will announce counterbalancing measures in the next hours. Unilateral measures are totally unacceptable” the EC added.

The EU had earlier threatened to impose tariffs on Harley-Davidson motorcycles and other iconic U.S. brands in retaliation to the Trump administration’s tariff move. The 28-nation bloc, in March, published a list of U.S. products worth around $3.4 billion on which it had planned to impose trade penalties.

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