Disrupting Global Tariff Order: Zero Sum Possibilities

The temporary reprieve on tariffs for Steel at 25% and aluminum at 10% imported into U.S. is expiring at midnight today for those countries who constitute 50% of the imports, namely EU. Canada, Mexico etc. The action designed to protect U.S. Steel and Aluminum industry has an equal and opposite reaction on the consumers of the products made from Steel and Aluminum, who have to pay for this increase. The consumers include aerospace, infrastructure, defense, packaging and a range of engineering and construction businesses.

The common man living in the Mid-West, working in farms and service sector jobs, it would seem, would be the least impacted, but no. The retaliatory measures actually started with this group of people, first targeted by China, in agricultural and farm outputs, which gets exported into China. Now EU has announced today that the first set of retaliatory actions would include raising of tariffs on agricultural products.

These actions are retrograde, but more importantly they do not impact the same class of consumers, one gains or loses at the cost of the other and in disproportionate measures.

But one of the real consequences is the impact on prices and inflation. The factoring of inflation so far has not found its place in the FOMC minutes, nor has it been priced in the forecast going forward. The quantum of impact on account of steel and aluminum imports could be small, but when retaliatory measures are added up, it could well create a case for a mild cascade of events; at least its impact on the prices and interest rates cannot be ignored.

The financial markets are the first to raise the flag, a price signal leading to an uncontrolled spate of events globally cannot be left to the policy actions on several corners of the world; the invisible hand is disrupted for sure.

The global tariff order so far had oversight from the WTO, but not any more as multiple actions and counter-measures will take the better off any mediation effort. Some sections would be willing to take this as a negotiating leverage, pushing agenda for the specific lobbies they represent.

Disrupting the global tariff order has zero sum consequences, but some sectors could benefit at the cost of the others; same is true for some countries, who could gain from their competitiveness or logistics cost advantages.

Global institutions and watchdogs, EU & a host of other Trade Commissions, WTO and many other institutions will have a field day.