Trump’s tariffs on aluminum and steel add uncertainty to the markets

If anything has become clear in Donald Trump’s 50 days in office, it’s that his threats—especially regarding tariffs—aren’t always carried out. The 25% tariff on aluminum and steel imports did go into effect after midnight on Tuesday, Washington time. But it’s unclear, given what we’ve seen, for how long, or whether the time-consuming negotiations between his neighbors and main trading partners, Mexico and Canada, will succeed, as they have several times in recent weeks, in lifting them, or at the very least in delaying them. The tariffs will affect around $150 billion in imported consumer products, according to Bloomberg.

The tariffs went into effect at the end of another chaotic day at the White House. Tuesday had begun with the news that the U.S. president was planning to double the announced tariffs on aluminum and steel, but only for Canada, in retaliation for the previous day’s announcement that the province of Ontario had decided to add a 25% surcharge on the price of electricity it sells to the states of Michigan, Minnesota, and New York. Trump’s aggressive measure led Ontario authorities to backtrack, and things returned to the original plan: that Canada would only face a 25% tariff, the same percentage as other countries.

But Canada is no ordinary country. Not only because of the strong economic and social ties that bind it to the United States, which are now being shattered by the annexation aspirations of the new White House resident, who wants to make Canada the 51st state of the Union, but also because Canada is the largest exporter of steel and aluminum to the United States. The top five steel suppliers to the United States in January were Canada ($11.2 billion), followed by Brazil, Mexico, South Korea, and Germany. As for aluminum, Canada once again tops the list, followed by the United Arab Emirates, Russia and China, all a considerable distance behind.

Trump’s tariff back-and-forth caused markets to plummet on Monday amid fears of a U.S. recession triggered by the White House’s aggressive and volatile trade policy. It was the worst day so far this year for the stock market, also due to the U.S. president’s failure to clearly rule out on two occasions—in an interview on Fox News and in response to a reporter’s question on board Air Force One—the possibility that the country was heading toward a recession.

Tuesday began on Wall Street with a tentative hint of improvement. On Monday, the S&P 500 index had lost 2.7%. While stocks posted gains in the early stages of trading, the retaliation against Canada turned the market on its head, and even Trump’s reversal failed to assuage investor sentiment. The tech-heavy Nasdaq closed the trading day with a slight loss of 0.18%. The more traditional Dow Jones Industrial Average, meanwhile, gave up 1.1%, while the S&P 500 retreated 0.76%.

All eyes will once again be on market performance this Wednesday, now that the steel and aluminum tariffs, which Trump signed by executive order on February 13, have gone into effect. These aren’t the only tariffs underway: the trade war with China escalated a couple of weeks ago with the imposition of a 10% tariff on imports from the Asian giant, which responded with reciprocal tariffs.

Echoes of the past

The U.S. tariff threat on steel and aluminum exports is not new to Mexico and Canada. In June 2018, during his first term, the Republican imposed a tariff of between 10% and 25% on these goods. Although the tariffs were only in effect for a year and were then eliminated, last July the Biden administration once again targeted these strategic supplies due to an unusual increase in shipments and the suspicion that Mexico was being used by China as a gateway into the United States. At that time, the U.S. government tightened trade requirements by requiring companies to prove that the exported steel was being melted and poured in North America if they wanted to avoid paying a tariff.

Now, the controversial measure is based on the United States’ trade deficit in this sector. However, in Mexico’s case, this justification does not apply, as the balance of trade is in favor of the United States by more than $6.8 billion, according to official figures. Mexican Secretary of Economy Marcelo Ebrard has argued since his first term that the imposition of tariffs “is unfair.” The Mexican steel industry has joined in rejecting this measure, arguing that this tariff wall puts 75% of Mexican steel exports, valued at $2.1 billion, at risk and jeopardizes investments in the sector. “If we fail to achieve the exclusion of Mexican steel from this measure, it will be necessary to apply reciprocal retaliation against U.S. steel products,” they said in a statement.

Trump’s erratic and untimely nature complicates forecasts; however, the Mexican Institute for Competitiveness (IMCO) has estimated that exports affected by these new tariffs will exceed $29 billion in value. In its analysis, it indicates that the tariffs on the targeted products will impact 4.7% of total Mexican exports, due to the inclusion of essential goods for the automotive, electronics, and household appliance sectors. “The inclusion of vehicle parts and accessories in these measures directly impacts the automotive sector, one of the country’s main export sectors,” the association states in its document.

Among the products most affected by these taxes will be steel sheets, widely used in the construction and auto industries. Steel pipes, necessary for the oil and construction industries, will also be affected. An increase in prices is also expected for orders of metal structures and steel bars, used in the manufacture of machinery and industrial components. Exports of steel, aluminum, and derivatives to the United States are primarily located in states with manufacturing profiles in the northern and central regions of Mexico. The state of Nuevo León exports 36% of total steel and aluminum to the U.S. market, followed by Coahuila with 13%, Baja California with 8.6%, and Tamaulipas with 7.9%. Across the Rio Grande, demand for Mexican steel is centered in Texas, Illinois, and California.

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