A new trade war opens up with Brazil, Argentina over steel, aluminum

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President Donald Trump said last week that he would impose import tariffs on steel and aluminum from Brazil and Argentina, accusing them of manipulating their currencies and hurting American farmers.

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“Therefore, effective immediately, I will restore the Tariffs on all steel & aluminium that is shipped into the U.S. from those countries,” Trump tweeted — taking both countries and the markets by surprise.

Both Brazil and Argentina had been exempted from the 25% steel tariff and 10% aluminum tariff imposed in March 2018 following negotiations that settled in May of that year, which resulted in a quota system to limit imports to the previous year’s level.

The gist of the president’s case is both countries have devalued their currencies and, as a result, undercut American farmers looking to export agricultural products like soy beans to China and elsewhere.

It’s true to say both the Brazilian real and the Argentinian peso have fallen relative to the dollar, but Brad Setser, a senior fellow for international economics at the Council on Foreign Relations, is quoted in The New York Times as saying neither Brazil nor Argentina was manipulating its currency. In fact, both countries had been selling foreign exchange reserves to prop up the value of their currencies.

He added Argentina was in a “full-blown” economic crisis and was close to running out of such foreign exchange. The Argentinian peso has lost nearly 60% of its value against the dollar this year, the Financial Times reported, following the failure of populist politics and investor worries in the face of a rising debt burden.

To suggest either Brazil or Argentina have any control over their currencies is laughable.

Argentina faces debt repayments that it will struggle to pay, with more than $60 billion coming due in 2020, an earlier Financial Times article noted. The article reports the markets are rattled over concerns that Mr. Fernández may resort to printing money to cover some of the government’s spending commitments and to stimulate an economic recovery, with the country mired in recession.

The fear is that could fuel what is already one of the highest inflation rates in the world, running at around 50%. While the loss of steel and aluminum sales to the U.S. would be serious, the two products make up some 3% of Argentinian exports, paling in comparison to the agricultural sector, which dominates Argentina’s exports.

Like Brazil, Argentina is caught between a rock and a hard place.

Both economies are struggling. The Brazilian real recently fell to a record low against the dollar as the economy tries to tackle high unemployment and weak growth, while Argentina is in an outright recession.

Both countries need all the export dollars they can earn, but in many ways they need China more than the U.S.

Weaker currencies do help them win export business; it is true they have benefitted from the U.S.-China trade war, but it was not of their making.

As The New York Times states, China is a major purchaser of American pork, soybeans and other agricultural goods. As the U.S. and China have slapped tariffs on each other’s products, China has shifted to purchasing products from Brazil and Argentina instead, annoying Washington in the process.

Quite what they expect the two South American countries to do, though, is unclear. Both countries have been trying to support their currencies all year, to no avail.

Maybe Washington is hoping both countries will voluntarily limit sales to China? Would the U.S. do that if the roles were reversed?

Nor would the imposition of tariffs be a win-win for the U.S. steel industry.

Brazil exports some $2.2 billion of steel products to the U.S., but much of it is as semi-finished material, such as rolling slabs, the U.S. Department of Commerce reported this year. Raising costs for U.S. steel companies that import Brazilian slab and other semis will be the price for supporting American farmers — if this action is followed through as expected.

Nor has a grace period been suggested to allow material on the water to arrive and be cleared, as is normally the case with the imposition of such tariffs. The announcement said the tariff would be applied immediately, potentially imposing massive fines on companies with hundreds of millions of dollars of material on the water or in manufacture.

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No doubt the tariff announcement is intended as a negotiating tactic to force parties to come to the table.

Similar moves elsewhere have met with mixed success — let’s hope this case is resolved sooner rather than later.

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