Game of Steel: lots of signals, but little substance

AMID the rhetoric and prognostications around US tariff imposition on steel and aluminium imports, we believe the tariffs likely won't change the global supply-demand dynamic for steel.

To those who think that US President Donald Trump is engaging in imposing tariffs on various imports based on electoral considerations, we offer the following historical factoid.

In 1987, Mr Trump, entertaining perhaps a presidential bid for the first time, took a full-page advertisement in the New York Times. In that diatribe, he railed against foreign countries - ostensible allies - taking advantage of US security protection on the one hand and stealing US jobs through cheap exports on the other hand. Thirty-one years later, he has the same convictions, willing to exempt some allies and negotiate with others the terms of market access, something he believes should cost those who enjoy US protection.

Amid the rhetoric and prognostications around the tariff imposition on steel and aluminium imports, a few critical facts have been ignored.

First, US steel production today is not materially different from what it was three decades ago. While year-to-year production figures fluctuate owing to economic cycles and idiosyncratic factors, if we average the annual output across decades, we find that the trend has been flat since the 1980s. Indeed, domestic production today makes up the same share of total US steel demand (about 80 per cent) as it did in the early 1980s.

Second, China is by far the largest steel producer in the world today, but the US remains the third-largest.

Third, while production has been broadly unchanged, US employment in the steel sector has fallen sharply (and productivity has soared), owing to better use of technology and automation. This has been a worldwide phenomenon.

Fourth, since China is the dominant supplier of steel worldwide, what happens to US domestic steel prices will hardly matter for global prices. Since China barely exports 1 per cent of its total production to the US, the real impact will be on sentiment, as this may well be the beginning of a much broader set of import restriction measures.

Fifth, US tariffs likely won't change the global supply-demand dynamic for steel; it is also unlikely that producers in Japan, South Korea, and Taiwan will have to divert their steel exports elsewhere, creating a global supply glut outside of the US. China's goal to reduce steel output will be a far more dominant factor in driving steel supply and prices in the coming years.

A tariff war may generate a few jobs in the US steel sector (although not many due to the high degree of automation embedded in the production process), but there will be more losers as the cost of manufacturing rises and trade frictions deepen.

To us, the key worry is what comes next. If the US strategy is to engage China in a wider array of products, retaliation will be all but inevitable. This will not only hurt trade but affect investment sentiment and company performance. In the end, this will be a lose-lose proposition.