The stock market’s love affair with the Trump economic agenda was tested last week after the president’s surprise announcement that he would slap tariffs on imports of steel and aluminum.
The S&P 500 tumbled 1.3% on Thursday, when President Trump announced his intention to tax imports of steel at 25% and imports of aluminum at 10%.
“We must protect our country and our workers,” tweeted Trump. “Our steel industry is in bad shape. If you don’t have steel, you don’t have a country!” he added.
Trump’s announcement spooked investors who had hoped that the protectionist policies that the president had campaigned on wouldn’t come to fruition. For the past year, it certainly seemed like those policies were merely campaign rhetoric, but now they are closer to reality than ever before.
All throughout last week, news headlines touted the potential for a trade war, where U.S. tariffs prompt retaliation from other countries, followed by more U.S. tariffs and so on. Indeed, many countries have already promised to respond to the steel and aluminum tariffs; the European Union said it could levy taxes on shipments of American motorcycles, blue jeans and bourbon into the 28-member bloc.
President Trump himself seemed to relish in the idea of a trade war. “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” he tweeted on Friday.
Then on Saturday, he threatened to escalate the war: “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a tax on their cars which freely pour into the U.S.”
While potentially popular with his political base, Trump’s tariff announcement was widely derided by investors, economists and business leaders, who claim higher taxes on imports will harm the economy.
A tit-for-tat trade war would leave all parties worse off, they say, while doing little to address the underlying causes of the United States’ big trade deficits.
Industries that are large users of steel and aluminum have been especially vocal in their opposition to the tariffs, including automakers, aerospace companies and others.
An analysis from the Heritage Foundation showed that 6.5 million people are employed by such industries, dwarfing the 200,000 people that work in industries that will benefit from the tariffs.
It's no wonder that industrials were the worst-performing sector on Thursday, the day Trump announced the tariffs. The Industrial Select Sector SPDR Fund (XLI) shed nearly 2% amid steep losses in shares of Boeing, Caterpillar and Lockheed Martin.
On the other hand, steel and aluminum producers in the U.S. have praised the tariffs as much-needed relief from foreign competitors, who, according to them, are selling metals below cost. These firms will surely see their profits bolstered if the tariffs come to pass.
The only pure-play steel ETF on the market, the VanEck Vectors Steel ETF (SLX), jumped 1.1% on Thursday, as the rest of the market tumbled. However, the fund’s move was watered down due to its global scope. Gains in U.S. steel producers were partially offset by losses in shares of foreign producers, who are likely to be negatively affected by the tariffs.
The SPDR S&P Metals & Mining ETF (XME), which exclusively holds shares of U.S. metals and mining firms—including steel producers, aluminum producers and others—performed better on Thursday, rising 2.5%.
YTD Returns For SPY, XLI, SLX, XME
Whether the market movements witnessed last week will continue depends a lot on what happens this week. The final form that the steel and aluminum tariffs take won’t be known for at least a few more days.
Will they be watered down? How will other countries retaliate? How will President Trump respond if they do retaliate? These are all open questions that will determine where stocks go from here.
Most experts believe that if the U.S. tariffs are limited to steel and aluminum, the economic damage is likely to be relatively small. A report from Bloomberg showed that the hit the economy took from steel tariffs enacted by former president Bush in 2002 resulted in a reduction in GDP to the tune of a few hundred million—tiny compared with the $19 trillion economy.
On the other hand, if these tariffs are the first shot in a prolonged trade war that spirals out of control, the economic damage could be far more severe.
Mark Zandi, chief economist at Moody’s Analytics, recently said that if trade tensions cause the U.S. to pull out of the North American Free Trade Agreement, it could cost the economy 1.8 million jobs. A full-blown trade war could cost 4 million jobs, he says.
Follow Sumit Roy on Twitter @sumitroy2