The Trump administration’s latest move to slap tariffs on steel and aluminum imports from its closest allies has drawn criticism and threats of retaliation. The economic effect of these tariffs, however, will be modest, according to Goldman Sachs.
The administration announced on May 31 that it would not extend exemptions on tariffs on steel and aluminum imports that had been granted to Europe, Canada, and Mexico.
Trump signed orders in March imposing a 25 percent tariff on steel and a 10 percent tariff on aluminum imports. However, he had kept the doors open to negotiations and temporarily exempted the duties for the European Union, Canada, and Mexico until June 1.
The allies have already announced plans to strike back against the United States with tariffs of their own on American goods. With the rising tension, some analysts have warned that the spat could turn into a trade war and hurt the U.S. economy. According to Goldman Sachs, however, the economic effect of the tariffs will be “modest.”
“Although the steel tariffs represent a substantial escalation in trade protection, the total amount of trade affected is still fairly modest, at around $50 billion in imports,” stated a Goldman Sachs report.
U.S. actions could raise the core PCE inflation by around three basis points (0.03 percentage points), according to Goldman Sachs. The core PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices.
“By contrast, if the White House follows through with all of the tariffs it has proposed formally or informally, around $475 billion in goods would be affected, which could add around 15bps [0.15 percentage points] to year-on-year core PCE inflation if implemented around the same time,” the report stated.
Other allies that supply the highest volumes of steel and aluminum include the EU, Japan, and South Korea.
The EU’s commissioner for trade called the tariffs “illegal.”
“We will now trigger a dispute settlement case at the WTO, since the U.S. measures on steel and aluminum clearly go against agreed international rules,” said the EU’s trade chief, Cecilia Malmström, at a news conference on June 1.
The EU published in March a list of American products that would face retaliatory duties if the steel tariffs were implemented.
By getting tough on tariffs, Trump aims to create a bargaining chip to reduce trading barriers to American goods.
Trade and investment flow between the United States and the EU creates the largest economic relationship in the world.
The EU imposes a low levy for nonagricultural goods, however, there are some high tariffs that affect U.S. exports, such as a 10 percent duty on passenger vehicles and 22 percent on trucks.
There are some non-tariff barriers on American goods as well. One of the challenges for American companies in the EU market is “European standardization and conformity assessment procedures,” stated the USTR report. The EU’s standard measures are so rigid that the products that conform to international standards may not meet EU standards. Therefore, U.S. exporters face extra burdens in accessing the EU market.
The Trump administration launched in May a new investigation on auto imports that could lead to new U.S. tariffs similar to those imposed on steel and aluminum.
Commerce Secretary Wilbur Ross said on a call with reporters on May 31 that the negotiations with trading partners would continue.
“We look forward to continued negotiations, both with Canada and Mexico on the one hand, and with the European Commission on the other hand, because there are other issues that we also need to get resolved,” Ross said.
With the imposition of tariffs, a near-term deal on the North American Free Trade Agreement (NAFTA) has become less likely, according to Goldman Sachs.
“We do not believe a NAFTA withdrawal is likely,” stated Goldman Sachs. “However, we do believe that the likelihood is increasing once again that the White House will formally announce the intent to withdraw.”
Permanent exemptions from steel and aluminum tariffs were granted to several countries including Australia, Argentina, and South Korea in return for quotas to restrain imports from these countries.
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