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In today’s issue, U.S. plans to impose tariffs on aluminum and steel imports ratchet up trade tensions with allies and bring warnings of higher costs at home, the U.S. is poised to overtake Russia as the world’s top oil producer, small banks are reporting more missed credit card payments, and elections in Europe leave Angela Merkel in charge of Germany but generate uncertainty for Italy.
TRADE SKIRMISH
President Donald Trump announced steel and aluminum tariffs, domestic industry, trade partners and allies warned of consequences, and the White House appeared to welcome the tempest with threats to ratchet up trade pressures.
The administration is expected to release details of the tariff plan this week, or possibly next, Andrew Tangel, Harriet Torry and Mike Colias report. The sheer size of the U.S. economy means the trade barriers, by themselves, would have a modest impact on overall growth or the inflation rate, said UBS economist Seth Carpenter. Steel and aluminum only account for about 1.6% of imports and 0.2% of gross domestic product.
But discrete sectors could be affected, and fallout could reverberate if U.S. trade partners retaliate, Washington responds in turn and amps up trade measures. “Expect retaliation,” says Philip Suttle of Suttle Economics. “NAFTA talks could fall apart; new measures aimed at China are likely.”
IT’S A TAX
The U.S. economy churned out more than $19 trillion in goods and services last year. The steel and aluminum tariffs will be a drop in the bucket.
But there will be costs. Ian Shepherdson from Pantheon Macroeconomics looks at the U.S. auto industry and estimates consumers could end up paying an extra $170 per vehicle due higher steel and aluminum prices, or about 0.5% of the average sales price. Not a ton. But it adds up.
“Overall, we reckon consumers will have to hand over nearly $3 billion more to drive away the same cars in the year after the tariff is imposed, compared to the previous year. That’s $3 billion that could have been spent on other goods or services, or, heaven forbid, saved,” he said.
Studies on previous trade barriers show broader costs. President George W. Bush had a brief dalliance with steel tariffs. “More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself,” Trade Partnership Worldwide said in a review of the trade action.
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WHAT TO WATCH TODAY
The Institute for Supply Management’s nonmanufacturing index for February is out at 10 a.m. ET. Economists expect a reading of 59.0, down slightly from January but still well into expansion territory.
The Federal Reserve’s Randal Quarles speaks on foreign bank regulation at 1:15 p.m. ET.
China’s National People’s Congress started Monday. Premier Li Keqiang laid out plans to keep economic growth steady at “about 6.5%” this year, control debt, revamp the bloated state sector and open markets wider to foreign capital, Lingling Wei and Chun Han Wong report. He didn’t signal any major shift in the government’s tactics.
TOP STORIES
INFRASTRUCTURE PROJECTS NEED STEEL
Tariffs on U.S. steel and aluminum imports could undermine one part of President Trump’s “America First” economic agenda: Rebuilding U.S. infrastructure.
Tariffs on imported aluminum and steel could drive up the cost of infrastructure investments, accentuating price pressures already brought on by a growing global economy, David Harrison writes.
The American Iron and Steel Institute estimates that 43% of U.S. steel consumption goes to the construction industry.
TARIFFS MISS CHINA
China accounts for almost half of global steelmaking capacity, Jacob M. Schlesinger, Emre Peker and Bob Tita report. But the Asian nation supplies just 2% of U.S. imports.
That’s left U.S. allies in North America, Europe and Asia fuming that they will end up the target of new tariffs while little will be done to confront China’s massive industrial overcapacity. The White House, so far, is dismissing their concerns.
“It doesn’t matter who is sending us this product, the fact is if we keep receiving it the way we are, we’re not going to have an aluminum industry, we’re not going to have the steel industry,” Peter Navarro, a White House trade adviser, told Fox News.
OIL THAT IS, BLACK GOLD, TEXAS TEA
One old-industry sector where the U.S. has been outperforming the rest of the world: oil.
The U.S. will overtake Russia to become the world’s largest oil producer by 2023, accounting for most of the global growth in petroleum supplies, Sarah Kent reports.
U.S. crude production is expected to reach a record of 12.1 million barrels a day in 2023, up about 2 million barrels a day from this year, said the International Energy Agency. American oil output will surge past Russia, currently the world’s largest crude producer at about 11 million barrels a day.
CREDIT RISK
Here’s something to keep an eye on. Missed payments on credit cards at small banks have risen sharply over the past year, AnnaMaria Andriotis reports. It’s a sign that cardholders are taking on more debt than they can handle.
Overall card losses are still relatively low, though they’ve been slowly climbing in the last two years. The rise is especially apparent at smaller banks. Their average charge-off rate (the share of outstanding card balances written off as a loss) is near an eight-year high. The 3.5% loss rate at large banks remains well below the 10.6% seen in 2010.
CENTER IS SQUEEZED IN EUROPE
The results over the weekend from two big votes in Europe left Angela Merkel in charge of Germany and a much less certain picture in Italy.
Germany’s center-left Social Democratic Party voted to join a coalition with Ms. Merkel’s conservatives, clearing the way for her to become chancellor for a fourth time and offering continuity for Europe’s biggest economy.
Italy’s national elections yielded no outright winner, initial projections showed, likely ushering in a protracted period of political instability and tension in the eurozone’s third-largest economy. Antiestablishment, EU-skeptic parties won about half the vote.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
Here is some recent economic literature looking at trade and tariffs.
Tariffs and other temporary trade barriers cause short-run output to fall and inflation to rise but accomplish little else, the Université du Québec à Montréal’s Alessandro Barattieri, HEC Montréal’s Matteo Cacciatore and the University of Washington’s Fabio Ghironi write. “Our main conclusion is that, in all the scenarios we consider, protectionism is not an effective tool for macroeconomic stimulus and/or to promote rebalancing of external accounts.”
The costs of trade are often stark: a factory closed or a job lost due to international competition. The benefits can be more diffuse and harder to measure. “We show that trade increases product market competition by reducing markups, thereby triggering firm selection and productivity growth,” the University of Nottingham’s Giammario Impullitti and Omar Licandro write in the Royal Economic Society’s latest Economic Journal. That leads to substantial welfare gains—a move from full economic independence to the current level of U.S. trade yields a 50% permanent increase in consumption, half of which is due to innovation-driven productivity growth.
Maybe trade agreements aren’t that great for the average Joe after all. “An alternative perspective is that trade agreements are the result of rent-seeking, self-interested behavior on the part of politically well-connected firms–international banks, pharmaceutical companies, multinational firms,” Harvard University’s Dani Rodrik writes. That means that deals are as likely “to produce welfare-reducing, or purely redistributive outcomes under the guise of free trade” as they are to result in mutually beneficial trade.
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