In March and April, Trump imposed a tariff on steel and aluminum. This move would see that 25% of tax would be deducted from the steel imported while 10% on the aluminum. Trumps administration based its argument on the decision that the U.S is relying too much on the importation of the metals from other countries. Therefore, by imposing tariffs, it would enable the U.S to make enough weapons or vehicles using its industry in case a war broke out (Jim, 2018). According to the statistics released recently, Canada and EU are the top exporters of metal to the United States. Theoretically, what this tariff means is that taxing foreign steel and aluminum will make U.S companies to purchase local metals instead of importing thus it boost the U.S steel and aluminum industries since more companies would want to buy their goods. In short, Trump was practicing protectionism which is trying to impose tariffs to boost the industries in his country and shield it from foreign competition.
The controversial announcement of the tariff by Trump caught the investors unaware, and it immediately raised concern about retaliation from major U.S trading partners. On Thursday after this announcement, the Dow dropped 420 points (Ian, 2018). This came in after speculation by chief market strategist Quincy Krosby that if the outcome of tariffs imposition would raise the prices of the steel and aluminum, then companies that rely heavily on these materials will pass some of the costs to the consumers hence raises the specter of creeping inflation. As a result, there was a sharp reaction in the market. In particular, the stock market ended a volatile session higher while the bond market fell with close to 4%.
The protectionist effort by the U.S government has resulted in dollar weakness. This is because the currency market, in general, dislikes any form of trade interventions. Previously, during the reign of President Bill Clinton and George W. Bush, the tariff resulted in a 15% decline in the dollar overall, and this is according to the estimates from TD securities. Also, the impact of this tariff at this time on U.S dollar is a reduction. The retaliation by other countries could prompt the withdrawal of capital flow from the United States especially the time when country has to finance from its burgeoning twin deficits. When the capital flow dynamic is changed, countries like Japan, China, and Europe turned this into net creditors by pushing money to oversee in search for better yielding assets hence the trade with the U.S reduced.
I think the impact of a potential trade war on U.S companies, investors and consumers is inflation. When companies are taxed more on import goods, the production goes down. These companies do not want to carry a heavy burden with them, and as a result, they pass it over to the consumers indirectly by raising prices. Often, when the prices shoot up, the rate of sales of the company reduces which results in more losses. With many losses, the investors become demoralized and withdraw their investments from such companies and consequently collapse of the companies. Finally, the economy of the country is damaged.
Bremmer, Ian, (2018). “Donald Trump’s China Tariff Fight Is About More Than Trade.” Time, Time, 5 Apr. 2018, time.com/5228991/president-trumps-tariff-tussle-with-china-is-just-the-beginning/.
Tankersley, Jim, (2018). “Trump’s Tariffs Keep Allies, Markets and Industry Guessing.” The New York Times, The New York Times, 24 Mar. 2018, www.nytimes.com/2018/03/24/business/trumps-tariffs-trade.html.