Stocks fell after worries of a trade war mounted following a proposal from the U.S. to introduce import tariffs of 25 per cent on steel and 10 per cent on aluminum. Bart Melek, Global Head of Commodity Strategy, TD Securities, explains what the proposed tariffs could mean for commodity prices, Canada and global growth.
Last week, stocks fell after President Trump proposed tariffs of 25% on steel and 10% on aluminum, sparking worries of a global trade war. Joining me to explain what this means for Canada, commodity prices, and global growth is Bart Melek from TD Securities. Thanks for being here.
Great to be here.
So when this announcement came out, Bart, investors really had two questions. The first one-- was this a trade move really against the US or even Russian, and we're caught in the crossfire? And if it is, are we exempt or will we face those same rules? What's your take?
Well, at this point, we don't know. We have been given a temporary, apparently 30-day reprieve, and that is contingent on negotiating a NAFTA agreement that I am presuming President Trump would like to see favour the United States. But aside from that, it seems very much that the US has been targeting China with these tariffs, but very much hitting Canada, as Canada is the biggest supplier of both steel and aluminum to the United States.
In terms of the direct impact we have, we have a chart which we're going to put up on the screen. And in your analysis, it shows the countries that would be most prone to tariffs based on US aluminum, steel, and steel imports. The chart on the left shows that Canada is the most affected country for aluminum imports at 44%, and the one on the right shows that Canada is the most affected for steel at 15%. In terms of the impact this could have on prices, what do you think should happen there?
Well certainly for domestic prices in the United States, there would be upward pressure. You would think that the higher prices, because of the tariff, would displace some demand and that would be taken over by domestic production in the United States. And almost by definition, that would be higher cost material. Globally, we would see a crowding out effect. So essentially, material that is not going to the United States now will be looking for a market outside, and that means there is more metal chasing a fixed amount of demand. Those would be the first order effects. So lower prices internationally and higher prices in the US. Canada, sadly, would get the lower prices. We would not benefit from the tariffs. That would be taken by the United States government.
In terms of the impact this could have on industries-- understanding that we're the biggest supplier to the US for both steel and aluminum-- how much of a hit do you think we could be looking at?
Well they are relatively small in terms of the entire value added for most of these manufactured goods. Something like a car only has a small amount of metal in it relative to the total value. But I think the important thing to look at is not so much in aggregate, what it does to price, but it really matters on the margin. On the margin, it makes US-manufactured goods, and quite often they are exported, less competitive than they would be otherwise. Essentially, it means you might start losing market share in the rest of the world. And the goods produced in the United States would go up in price, potentially triggering more inflation and potentially prompting the US Central Bank, the Federal Reserve, to be more aggressive on interest rates.
So it could actually be a very bad situation-- higher prices that trigger more monetary policy restrictions, which could slow things down and hit equity markets and other markets around the world. So those are only the order one condition. We could also face a situation where there is retaliation.
And I just want to touch on that a little bit. So you talk about in your report that bad news for commodity prices. Bad news for global growth. But the retaliation piece being the real thing that investors should pay attention to. Why is that?
Well, because the tariffs alone would be important and would be negative, but it wouldn't be a huge impact. The bigger impact would be-- experience has shown-- is from retaliatory measures that would have the potential to slow global growth and therefore slow global demand and global activity. The European Union, for example, has already drafted a product list that they will be targeting. I believe it's motorcycles—Harley-Davidson-- blue jeans, and other products. That ultimately means that the US doesn't sell those in the same quantities as before.
President Trump has rebutdtaled and said that he would impose hefty tariffs on autos imported from the European Union. And we could imagine that the Europeans would react to that. And we're not quite sure where that would end. At this point, it's a lot of talk, but the risk certainly is there.
And in terms of that trade protectionism talk, you think there's one commodity that could benefit, and that's gold.
Why is that, and what's your price target?
Well, at this point, we're looking at 1,350 by year end-- not a huge rally, but this is under normal circumstances. At this point we are only expressing this as a risk. You know, we are very hopeful-- perhaps not 100% confident-- that cooler heads will prevail and this will end well. We're hoping that this is very much posturing and just to give a signal the US wants some sort of negotiated settlement and give a signal that they will try to improve their trade balance. Doesn't necessarily mean they go all guns blazing. This is our hope, but if it does get carried away, gold would be a very clear winner here-- if not in relative terms, potentially in actual terms.
And then why? Because chances are, the economy would slow, and the central banks around the world would be much less willing to remove the very strong monetary accommodation we have now. The ECB would likely not be very enthusiastic in ending its super stimulative program. The Federal Reserve would think twice before acting on with interest rates. If the economy slows down, we would see lower real interest rates, and that, typically, is a very good story for gold.
You've given us lots to think about. Sounds like you're hoping for the best, prepared for the worst. And some trade ideas, as well. Thanks very much, Bart.
Thank you so much.