March 12, 2018
Quite a bit of the news cycle has lately been taken up by the new steel and aluminum tariffs signed into effect last week and the impact these policies may have on our trading partners. It seems for the moment that Canada and Mexico are going to be “exempt” since they are close “neighbors” with vibrant U.S. trade activity. A quick Google search indicated that the top five exporters of steel and aluminum to the U.S. were:
|Steel Exporters to US||Aluminum Exporters to US|
|1. Canada||1. Canada|
|2. Brazil||2. Russia|
|3. South Korea||3. United Arab Emirates|
|4. Mexico||4. China|
While China ranks 4th in aluminum it doesn’t even make the top five exporters of steel. In fact, China ranks 11th among the countries that export to the U.S. market. In reviewing a recent research report from one of our Emerging Market equity managers, Matthews Asia it became more clear as to the impact of these policies on China and some of the “false premises” of these policies.
First, one of the major talking points in favor of tariffs is China’s massive production capacity is being used to flood the rest of the world with cheap Chinese steel and aluminum. While China does account for 50% of the world’s steelmaking capacity, it also consumes an astounding 90% of what it produces. Put another way, they consume a total of 45% of the world’s steel on an annual basis. It is also worth noting here that China exports only 7.2% of its total steel output, and that this figure has been declining for several years and it is expected to continue to do so. The production and consumption statistics show a very similar story but are even more pronounced. China produces a total of 55% of the world’s aluminum, of which it consumes 96%. Here also exports are down, more than half of their peak value in 2007. Will an export tariff of 25% meaningfully impact these numbers?
The second argument used in support is that tariffs such as this will impact the Chinese economy and force an internal policy change by their government. The data however does not back up this claim. The total value of all steel and aluminum exported to the U.S. by China equaled only 0.03% of Chinese GDP in 2017. It would not be rational for any government to make significant policy changes due to such a minimal tax on such a minimal part of their economy. The Chinese should, and most likely will, continue to produce as much of these metals as they need in order to fuel their own internal growth, a feat which will implicitly help the U.S. through increased demand for those assets we do export in today’s economy, services and intellectual property.
In short, the data does not suggest that these new tariffs will do anything to meaningfully change the way China produces its steel and aluminum. The economic impact of their exports to the U.S. are just too small for either country to notice. On a more political note, perhaps the recent visit to the White House by the South Koreans had some to do with petitioning the Trump Administration for tariff relief on their steel exports to the U.S. More on this story later.