Trump/steel tariffs: firing blanks

Donald Trump fired his most aggressive broadside against China this week with plans for steep tariffs on steel and aluminium imports. When the smoke has cleared, the target will emerge little scathed. Collateral damage to the likes of Canada and Brazil will be heavy. Investors may capitalise on the barrage by betting on China’s producers as near-term beneficiaries.

Chinese exports to the US amount to a mere 0.2 per cent of production, according to Credit Suisse. Only 13.2 per cent of 2016 output was exported, though that was a quarter of all global exports, due to the large size of the country’s steel sector. Its best customers are Asian countries such as South Korea and Vietnam. For Mr Trump’s tariff tantrum to hurt China, it would need to set off a cascade of trade protectionism world wide.

China has been cutting steel and aluminium capacity with the aim of increasing industrial efficiency and reducing pollution. Exports consequently fell in 2017. Listed steelmakers such as Baoshan and Angang Steel are running at record margins, due to the resulting boost to steel prices within China. Consolidation will further improve their domestic competitive position.

Japan is the world’s second largest steel exporter. Two-fifths of production goes overseas. It competes, along with South Korea, for Asian markets. High US tariffs would increase competition there. Chinese groups would likely beat their regional rivals. However, shares in Korea’s Hyundai Steel and Japan’s Nippon Steel & Sumitomo Metal have so far fallen only in line with Chinese counterparts, by about 3 per cent.

Mr Trump should have ganged up with trading partners, instead of slapping everyone with tariffs. Developed markets need a new toolkit to deal with the painful overcapacities that China’s state-led economy will inevitably produce as it moves into higher-value goods. Mr Trump’s tariffs are dud shells in a battle whose outcome is already decided.