Last week, President Trump said he would impose a 25% tariff, or tax, on steel imports and 10% on aluminum, sparking a big sell-off in stocks.
The stock market drop reflected a bigger concern: a possible “trade war” if other countries hit by the tariffs impose tariffs in retaliation, sparking a back-and-forth of rising tariffs that hurt the growth of economies.
Here’s a breakdown of what it all means:
Why does Trump plan to impose tariffs?
For years, China has been accused of selling steel and aluminum in the U.S. at prices that are below the cost of production, partly because China has so much capacity. Trump says the practice has cost the U.S. steel industry hundreds of thousands of jobs. Trump won the election by promising blue-collar voters in Midwestern, steel-producing states that he would get tough on imports. Now, he’s making good on that vow.
Can any country slap on tariffs so easily?
Normally, the administration would present its case to the U.S. International Trade Commission, says Gary Hufbauer, senior fellow at the Peterson Institute for International Economics. Trump, however, invoked a rarely used provision of the Trade Expansion Act to argue that the steel and aluminum imports pose a national security threat. For example, only one U.S. company now makes the type of aluminum needed for military aircraft. The provision allows the president to impose unlimited tariffs unilaterally. Critics say the idea that the imports present a national security threat is highly questionable.
Why did stocks plunge after Trump made the announcement last week?
Foreign steel and aluminum makers are likely to pass along the higher price of the materials to U.S. manufacturers that use the material, such as makers of cars, planes, boats, soup and beer. That’s further stoking fears of higher inflation that were already making markets jittery. Higher inflation could make the Federal Reserve more likely to raise interest rates. Higher rates make bonds more appealing compared to stocks and discourage borrowing and economic activity, hurting corporate earnings. Alternatively, if companies decide to absorb the higher steel and aluminum costs, that also would pinch profits. Others fear a trade war.
What’s a trade war?
A trade war happens when other countries affected by the tariffs impose tariffs of their own in retaliation, potentially setting off a battle of escalating tariffs and hobbling economic growth. Already, the European Union, Canada and China have threatened tariffs in response. That would hurt the makers of a wide variety of U.S. exports, including beef, corn, pork, cars and motorcycles. Trump, in turn, said he would then hit European cars with tariffs.
What does the Trump administration say about the fears?
Administration officials say the effect of the higher steel and aluminum costs on American products will be trivial because the materials make up only a small fraction of the cost of products such as cars and beer. For example, White House trade adviser Peter Navarro says a 10% tariff on aluminum would mean just a cent-and-a-half increase in the price of a six-pack of beer.
How are the tariffs affecting negotiations to revise the North American Free Trade Agreement?
Trump appears to be using the tariffs as leverage with Canada and Mexico in the NAFTA talks. In a tweet Monday morning, Trump said, “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.” His tweet suggests that the administration may be open to modifying the sweeping tariffs to exempt certain countries, a move that would limit the economic damage.
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