The Art of the Steel (and Aluminum)

Last week, President Trump moved to place tariffs on imported steel and aluminum imported from our allies in Canada, Mexico and the European Union. Political leaders in North America and Europe have universally condemned this with threats of retaliation, while economists and businesspeople are overwhelmingly on record in supporting free trade. Why then, would the first chief executive of this country coming from a business background, promote new tariffs?

The answer may be in the “Art of the Deal.” And “deal” rhymes with “steel.” Thinking positively, the true purpose of this move may be to initiate better deals with our trading partners across the board.

Many have attributed protectionist motives to this action, but is that the only rationale? The real threat on metal imports is from China, whose industry possesses excess capacity and has been dumping product at subsidized prices into this country. Besides that, recall the larger context of President Trump’s threats to block sales of German cars just last week. He said, “When you walk down Fifth Avenue, everybody has a Mercedes-Benz parked in front of his house … How many Chevrolets do you see in Germany? Not many, maybe none.” Further, the new tariffs have been justified for national security reasons. This means that selected allies who cooperate in negotiations can be taken off the list with an artful stroke of the pen.

If this analysis is correct, then the likelihood of an all out trade war is low, and instead, we are more likely to see these themes used in renegotiation of NAFTA and EU trade deals. If my opinion is wrong, and trade conflicts persist, then the initial, direct impact would be higher prices for metals and other goods, a.k.a. “inflation.” Fortunately, the Investment Committee at Private Ocean has recently taken a close look at how our portfolios respond to inflation and to consider refinements. While higher inflation could be detrimental, our portfolios are appropriately positioned to respond to higher inflation within the most likely scenarios that we can foresee.


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