US tariff hike: The hidden side-effects of Donald Trump's trade wars

India and EU fear the tariff-related deflection of aluminium and steel trade flows to their shores

We have seen Tata Steel Managing Director TV Narendran at his aggressive best when he successfully led his company’s bid for the insolvent Bhushan Steel. 

But expect him in his role as chairman of World Steel Association (WSA) economics committee to be diplomatically astute with words on the US steel tariff issue, which though continues to invite strong criticism from India, China and the European Union. 

Isn’t Narendran underplaying the impact that the seriously protectionist US import duty of 25 per cent on steel on flippant national security considerations could have on global trade in his introductory note to the recently released WSA short-range outlook for the commodity?

Narendran says as the global economic situation is expected to remain favourable in the next couple of years supported by among other things “strengthening recovery of investment levels in advanced economies,” steel demand should meet with sustained growth. 

He, however, puts a mild caveat that “rising trade tensions” could disturb the demand growth momentum.

Trade tensions began when in March US President Donald Trump announced tariff plans on steel and aluminium imports.

The unexpected tariff initiative sending shock waves across the globe is based on specious argument that global oversupply of steel and aluminium, particularly on account of China is hurting US producers of the two metals considered vital for national security.

The US is by far the world’s largest importer of steel that amounted to 34.6 million tonnes (mt) in 2017, a 15 per cent rise on 30mt in 2016.

The country’s present steel import penetration is 32.6 per cent, up from 22.6 per cent in 2009. Interestingly, neither China nor India figures prominently among sources of US steel imports. The five leading steel exporters to the world’s largest economy Canada, Brazil, South Korea, Mexico and Russia accounted for 58 per cent of foreign origin metal that arrived in the US last year. China and India had a share of around 2 per cent each of US steel imports.

China invites criticism from the US and the rest of the world for its hugely large profile in the global steel and aluminium industries. Its big exports forced by surplus production are found to be causing harm to steel industries in several countries, including India forcing them to take proactive trade remedial measures.

India’s steel imports from China amounted to 2.5 mt in 2017 that is 4 per cent of total Chinese exports. Big production of steel and aluminium to which ageing and dirty mills and smelters make significant contribution invites China censure for causing damage to environment.

While all this is true, the fact is not to be wished away that China’s outbound shipments of steel have started retreating over the past couple of years. Meaningful exports pullback are seen by many analysts as Beijing’s response to rising complaints of China selling steel in global markets at less than production costs aided by a not-so-hidden government subsidy. 

Even while China remains the world’s largest steel exporter, its outbound shipments took a sharp dip of 31 per cent in 2017 to 73.3 mt from 106.6 mt in 2016. Mind you, this happened despite China’s crude steel production being up 5.7 per cent last year to 831.7 mt, giving it a share of 49.2 per cent of global output of 1.691 billion tonnes (bt). Chinese steel exports were a record 112 mt in 2015 that invited howls of global protests.

Steelmakers from India to the EU to Americas finding their share of domestic markets being lost to products imported from China brought pressure on their respective governments to take steps to stop dumping. Responding to such demands, governments around the world have taken as many as 134 trade remedies, including five by India. Like other steel producing countries, India too finds no merit in the US Administration’s claim that national security concerns justify the tariffs on the two metals.

This is seen as a ruse to keep the tariffs outside the remit of WTO. India’s concern is not that much about its sales of steel and aluminium to the US shrinking as portions of tariff triggered displaced exports finding their way into our market. Steel secretary Aruna Sharma says based on ongoing ground level work, the country’s steel capacity should grow to 150 mt by 2020 from the current 134 mt. To protect the investment in steel, it is imperative that New Delhi stays on guard against unwarranted imports.

The US meets nearly two-thirds of its requirements of aluminium and about a quarter of steel by imports. This is precisely the reason why India and the EU are concerned about the tariff-related deflection of aluminium and steel trade flows from the US to their shores.

All the major exporting countries to face the US tariff heat will automatically target India seen as the best hope for steel consumption growth in the world. WSA sees India’s steel use growing 5.5 per cent in the current year and then 6 per cent in 2019 against expected global demand rise of 1.8 per cent and 0.7 per cent in the corresponding periods.

A redeeming feature in the current unsettled situation holding a threat to India’s status as a net steel exporter is the Financial Times survey of analysts saying that as a state-mandated shutdown of capacity begins to bite, China’s production will grow marginally by 0.6 per cent in 2018. This along with recent Chinese export restraints will be an antidote to global oversupply of steel. But South Korea and Japan are likely to push more steel to India taking advantage of their free trade agreements (FTAs) with this country.

Sharma says the raft of trade actions that India took to give the local industry a level playing field has made India a net exporter of steel. The country’s steel exports were up 16.7 per cent to 9.621 mt in 2017-18 when imports rose 3.5 per cent to 7.482 mt.

No doubt the US Administration’s focus on infrastructure renewal and the import tariff are enabling US steelmakers to win back domestic customers from overseas suppliers. The development is likely to lead to a 3.4 per cent growth in steel production in 2018.

This is exactly what Trump promised during his 2016 election campaign in rustbelt states. At the same time Trump’s tariff actions are fanning trade disputes with a good numbers of countries ready to retaliate with import restrictions on US farm and industrial products.