President Donald Trump’s abrupt announcement of steep tariffs on steel and aluminium caused seismic market reactions sending the Dow plunging over 400 points at close on Thursday while sparking a sell off in Asian and European equities on Friday.
News that the US would set tariffs of 25% on steel and 10% on aluminium imports was delivered abruptly on Thursday rattling the US market and pushing the dollar lower as worries heightened that a global trade war would ensue.
In early trading, Asian and European equities slipped and Lukman Otunuga, research analyst at FXTM expects that the negative vibe “could find its way back in to Wall Street by afternoon.”
The order which will be signed next week by Trump came following the US Department of Commerce's recent investigation between April 2017 and January 2018 under Section 232 of the US Trade Expansion Act of 1962 and recommendations were compiled in a report released in February.
The investigations concluded that steel and aluminium imports were a threat to US national security and recommended the imposition of trade restrictions.
The announcement was all in a week's work for an embattled White House which is accused of delivering the news (with details about which countries are exempt still to follow) in a chaotic fashion and causing potential ruptures not only in the financial markets but also transnational relations.
The Atlantic magazine's David Frum said that at 9pm on Thursday, the administration was still undecided whether it would make an announcement on Friday and that "key congressional committee chairs were unconsulted and uninformed".
Frum contends that the recent firing of staff secretary Rob Porter played a part in the decision making as Porter worked to prevent the "harms of protectionism".
The tariffs are plainly divisive with the anti-tariff camp which includes Gary Cohn, Trump's chief economic advisor and a wide spectrum of economists saying that the tariffs are merely protectionist and not a national security threat as depicted by the Commerce Department reports.
Not only are there worries about a domestic impact such as loss of jobs in other sectors but also increased prices on a range of consumer goods and services dependent on aluminium and steel such as soda, beer, vehicles and airplanes just as inflation begins to rise.
Critics says that in essence the measures are less about national security and more about protecting the US industry from competition.
The Department of Defense (DoD) is among those critics. US Secretary of Defence, James Mathis, has said that US military requirements represent no more than 3% of US production and it is able to meet steel and aluminium US national defence requirements.
The DoD is also worried about the strain placed on the current US alliance with Canada, the leading exporter of both steel and aluminium, and another major exporter of steel, South Korea.
The latter's alliance is of ever greater strategic importance given the sabre rattling from the US administration against North Korea. Indeed, a domino effect was inevitable as countries affected by the imposition of tariffs released statements vowing to retaliate. China is reportedly considering placing tariffs on soybeans from the US which totalled more than $12.4bn in 2017.
Jean-Claude Juncker, president of the European Commission warned:
"We strongly regret this step, which appears to represent a blatant intervention to protect US domestic industry and not to be based on any national security justification. Protectionism cannot be the answer to our common problem in the steel sector. Instead of providing a solution, this move can only aggravate matters."
Juncker added: "The EU will react firmly and commensurately to defend our interests."
The financial markets are reacting to the threat of a global trade war ahead of the US market open on Friday. Futures are lower. The S&P 500 Futures are down -0.92% to 2656.25 and DJIA Futures, -1.09% to 24,353.
Steel company share prices are plunging as ArcelorMittal dropped-3.18% and Thyssenkrup fell -1.95%.
The eddies from the Trump Administration's tariff decision has the potential to spread, creating a whirlpool that is counter-productive according to its dissenters. The fallout for US consumers and importers of steel and aluminium are clearly increased costs but other industries that export may well suffer blowback if retaliatory measures such as what the soybean tariff China is considering.
The American Chamber of Commerce in Germany said in the Wall Street Journal that its members fear "a downward spiral in which everyone loses."
As countries defend their interests they may well take up a cudgel for retaliatory measures and as EU Commissioner for Trade Cecilia Malmstrom argues, "This go-it-alone action by the US will not help.