Steel prices decreased following the 2009 global economic crisis. Recently, however, prices have started to recover; they are currently 80 percent higher than the 2015 low point.

The global aluminum market is significantly smaller than the steel market. China leads by a wide margin here, too—China is responsible for more than 54 percent of global aluminum production. Trailing far behind are Russia, Canada, India, the United Arab Emirates (UAE), and Australia, each responsible for 6 percent or less. Aluminum prices have come under pressure since 2011 but have since bottomed out and are on the rise.

In this landscape, the U.S. metals sector seems unable to fully cope with the forces of globalization. Unhampered trade between the United States and the rest of the world has already squeezed many less-efficient domestic metal factories out of the market, and problems persist. Utilization rates are low in domestic steel and aluminum manufacturing facilities. Domestic aluminum smelters, for example, currently operate at only 48 percent of capacity, while steel production is at 74 percent of capacity, on average. These low utilization rates suggest that domestic producers are not sufficiently competitive, further evidenced by a lack of investment in new technologies, inflexible labor contracts, and increasing legacy health and pension costs.

Because of the sector's low utilization, the United States runs a trade deficit in steel products. Last year, the U.S. imported about a third of domestic consumption. Its main suppliers were Canada (17 percent of imports), Brazil (13 percent), South Korea (12 percent), and Mexico (9 percent). Despite its overcapacity in steel, China is not a major exporter to the United States, a reflection of past measures to curb imports.

U.S. aluminum production has been declining for decades. In 2015, the sector took a big hit when China flooded the market, and in 2017, the United States produced only 1.2 percent of global output. The U.S. currently relies heavily on aluminum imports, with China providing 55 percent of imported product, followed by Russia (18 percent) and the UAE (13 percent).

In both metals sectors, the low utilization rate of domestic smelters suggests plenty of potential for production to rise to meet any shortage caused by the Trump administration's tariffs.

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Enter Tariffs

The most obvious effect of the tariffs will be a significant increase in the price of imported metals, which will provide protection for U.S. metals producers. That is the intended consequence of the tariffs, but the effects won't end there; a negative impact on other parts of the U.S. economy is likely. The big-picture impact for domestic metal producers includes:

• Increased domestic metal prices. Domestic metal producers should be able to raise their prices by the same amount as the tariffs without losing market share, but smart players will price their product slightly lower in order to drive foreign firms out of the market.
• Increased domestic metal production. The price increase will correlate with increased production, helping domestic producers replace a large share of imports.

Taking the steel tariffs implemented under President Bush in 2002 as a benchmark, we expect steel prices to increase by 21 percent once the Trump tariffs take effect. Foreign metal consumption and imports will decrease, and U.S. steel production will increase.

Although they deliver a competitive edge to domestic metal producers, the tariffs will likely impede the large domestic manufacturing sector that uses metals as an input in production. This includes fabricated metals, automotive, and industrial machinery industries. The expected effects of the tariffs for the domestic manufacturing sector include:

• Increased production costs. This will erode competitiveness against foreign firms or lead to higher prices, thereby reducing product demand. According to Oxford Economics, the tariffs will reduce the sector's growth by 0.2 percent.
• A major loss in jobs. The tariffs will cause a projected loss of 80,000 jobs in the metal-using manufacturing sector over the next two years. In comparison, without the tariffs, the sector would gain 10,000 jobs.

Given the impact on metal-using manufacturers, the overall result of the tariffs for the U.S. is expected to be slightly negative but largely benign. The U.S. will probably lose some GDP, as the decline in production in the metal-using sector will outweigh the production increase in the metal-producing sector. That's because the metal-using sector represents 40 percent of U.S. manufacturing output, versus the metal-producing sector's 4 percent. As proposed, the tariffs themselves will also bring in about $5.8 billion in revenue for the U.S. government. That may sound significant, but the number pales in comparison to the $3.3 trillion of total tax revenue the U.S. is expected to collect in 2018.

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Tariffs and Trading Partners

The tariffs can also be expected to have a negative effect on many U.S. trading partners. Countries that export a large share of their metals production to the United States stand to lose the most. Assuming no exemptions are granted (more on that later), Canada, Mexico, and Brazil will be most affected. In 2016, 88 percent of Canadian steel exports went to the U.S., while Mexico sent 73 percent of its exports to the U.S. and Brazil sent 34 percent.

That said, the overall impact for these and other trading partners will not be too bleak. Firms that export metals to the United States will lose a competitive edge, but companies with production facilities in the U.S. will likely gain. And in the big picture, U.S. steel imports do not account for a large portion of the global economy. With the tariffs' impact on U.S. GDP low, the impact on GDP for the rest of the world should be marginal. In fact, the effect on global GDP may be hardly perceivable.

The possible exemptions to the tariffs complicate the picture. They might simultaneously undermine the U.S. tariff and benefit the exempted countries. Pending NAFTA negotiations might result in Canada and Mexico—both major players in the U.S. metals market—being exempted from the new tariffs. Australia may be exempt via a security agreement with the Trump administration. More countries may follow. If Canadian, Mexican, and/or Australian firms receive exemptions, they will likely take one of two strategies as U.S. prices rise:

• Sell at the new U.S. price and expand production. This strategy would reduce the opportunity for U.S. steel producers to ramp up production. The increased supply from exempted countries would also push metals prices lower than they would be without the exemption, though higher than they were before the tariffs.
• Sell at pre-tariff prices. This strategy would enable these firms to massively expand their market share in the United States. It would not entirely prevent U.S. metals prices from rising, but it would limit the price increase, dampening the intended effect of the tariffs.

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Global Trade War Threat

Do Trump's tariffs signal the beginning of a trade war? Many analysts fear this scenario, particularly now that chief economic advisor Gary Cohn has departed. The Trump administration has lost its most vocal opponent of protectionist actions.

Beyond the exemption of countries, two additional uncertainties exist that will have a major impact on how Trump's tariffs play out. First, trading partners subject to the import tariff are expected to retaliate. The EU has prepared a list of American exports it would hit with a reciprocal 25 percent tariff; the list includes bourbon, blue jeans, and Harley-Davidson motorcycles. Trump responded to this news with a threat to slap a tariff on cars. China has also announced measures to protect its interests if the U.S. tariffs take effect.

Second, the U.S. government will likely come up with additional protectionist measures. This could escalate countervailing measures by other nations, initiating a global trade war. While we're not there yet—and hope this isn't how the tariffs play out—one option for businesses looking to protect themselves against uncertain trading conditions is trade credit insurance, which protects companies against the failure of their customers to pay because of default, bankruptcy, and insolvency.

Aaron Rutstein joined Atradius in 2016 as senior manager of buyer underwriting, risk services–Americas. With more than a decade of experience in the trade credit insurance industry, Rutstein has developed expertise in business development, risk analysis, and buyer monitoring.