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Opinion | Metals are first victims of the trade war, many will follow

Copper, the proxy for global economy is at a year's low. Other sectors and countries are showing early signs of stress from the trade war

July 24, 2018 / 01:35 PM IST

The first telltale sign of trade war stress on the global economy is now visible.

Copper prices, which were trading at four-year highs a month ago, have shed 20 percent and are close to their lowest levels in a year. Copper is considered a proxy for the global economy on account of its usage in multiple industries — from construction to consumer durables. The fall in copper prices is on account of companies delaying their expansion plans in anticipation of a slowdown ahead.

The eyeball-to-eyeball confrontation between the US and China has moved a step further with both parties landing soft punches by imposing tariff restrictions on some products. While these tariffs were too small to impact the overall economy, the threat of both parties taking their gloves off has sent investors in metals running for cover.

There is a reason why metals are the first to get trampled in the fight. China accounts for 50 percent of global consumption of most metals. Any restriction on China will have an immediate impact.

But the story has moved on from China. When US President Donald Trump first swung by introducing tariffs on steel and aluminum imports, little did he know the punch would land on his face. A study by NERA Economic Consulting found that a 7 percent aluminum tariff would save 1,000 jobs annually in the aluminum industry but wipe out 22,600 other jobs across the US economy.

Steel and aluminum prices in the US have already decoupled themselves from international prices. While hot-rolled steel prices in China have recovered from the fall after imposition of tariff, US steel has moved higher by 25 percent.

Higher steel prices have already impacted the fasteners industry in the US. As fasteners are commodities with low-value addition, they are directly impacted by the price of underlying commodities.

Mid Continent Nail, a privately-held company, was the first to make the headlines when it said it would have to shut shop and shift to Mexico if it is not able to secure exemption from the tariff. The same is the case with hand tools manufacturers.

Even automobile companies and machine manufacturers are now feeling the heat in the US. Analysts are talking of the companies moving production, just as Harley Davidson did recently.

History shows that in wars and trade wars, there are no winners, only survivors. Trump, before bulldozing his idea of protectionism, would have done better to look at how the US fared every time they tried to protect the economy by imposing tariffs.

A recent example is when the Obama administration introduced tariffs on Chinese tyres, which was met with China introducing a tax of 105 percent on chicken feet from the US. Chicken feet are thrown away in the US but relished in China. A study by The Peterson Institute for International Economics calculated that the tariffs probably saved 1,200 American jobs in the tyre sector — but consumers paid over $900,000 in higher tyre prices for each job saved. The data highlights the cost of protectionism.

In 2002, President George W Bush imposed tariffs on Chinese steel. The move allowed US steel producers to increase prices, raising costs for companies that buy steel and pressuring them to cut back elsewhere. Studies show that the move resulted in the US economy losing as many as two hundred thousand jobs. A similar fate is expected from the current round of tariff hikes in the US.

Though metal prices signal a slowdown going forward, the economic data print does not show the stress, at least immediately. Despite Trump’s effort to cut US trade deficit with China, Chinese data released recently show that the gap widened to $28.97 billion in June from $4.39 billion from May. That data might not go down well with Trump. Already, he has threatened to slap tariffs on all of US’s $500 billion imports from China.

Metals have already tripped, oil prices corrected by nearly 10 percent from the top last week. Earlier this week, after a meeting of finance ministers, the group of 20 warned about rising risks to economic growth over the short and medium term. “These include rising financial vulnerabilities, heightened trade and geopolitical tensions, " the release said.

Equity markets are holding on globally. Only time will tell if the equities are waiting for a full-scale trade war to react. Perhaps, headline indices are steady because new economy stocks account for significant weightage in these gauges. If that’s the case,  in which case the broad market indices will reflect it when most of the damage is already done.
Shishir Asthana
first published: Jul 24, 2018 01:34 pm