- Policymakers in Washington announced plans for potential new tariffs on steel and aluminum imports, triggering concerns about reprisals that could slow growth and boost inflation.
- Protectionist trade policies could hurt export-oriented economies, some multinationals, and consumers and businesses reliant on imports.
- On the plus side, the move comes amid a synchronized global economic expansion.
On March 1, officials in Washington announced preliminary plans for potential tariffs on steel and aluminum imported into the US. The short-term market reaction came quickly—a boost in the stock prices of US steel companies, and losses for importers of steel, including aircraft manufacturers.
The market as a whole moved sharply lower in the wake of the announced tariff proposals, though the exact details of this proposal are still not final. No one knows what will happen next; the short-term reaction could quickly fade in the wake of other news, or it could be the start of a new trend. But these policies, along with renegotiations of existing trade agreements, create concern among some investors. The broader issue is the potential of escalating anti-trade policies globally, which could slow, or even reverse global economic growth and spur inflation.
There is a wide range of potential changes to trade policies, and it is too early to know how the Trump administration will proceed and what the results may be. However, given the interconnected nature of the global economy, the potential impact of greater restrictions will be a growing risk across a variety of economic and market sectors.
China and the United States at the epicenter of trade risk
Statements from the Trump administration and the recently announced intention to raise tariffs suggest a more confrontational approach to trade relationships for the US. While China is not at the center of the steel import issues, that nation has been cited as a target for new US measures due to its large trade surplus with the US and perceived questionable commercial practices.
Over the long term, trade generally raises productivity potential because it facilitates the international transfer of knowledge and technology, allowing local companies to access global markets and benefit from economies of scale, and forcing greater specialization by exposing firms to more intense competition. In the short term, an abrupt disruption of trade flows can create a negative cyclical shock to global growth.
From a systemic standpoint, a protectionist shock would likely reverberate throughout the global economy more easily if it was transmitted through a country or region of great importance to global trade. China and the United States are squarely at the center of a global system of bilateral trade connections (see chart). A trade war between China and the US would be a worst-case scenario, a potentially devastating blow for global trade that might be powerful enough to provoke a global recession.
Winners and losers if protectionist risks continue to rise
Even if there is no explicit trade war, the creeping rise of protectionist rhetoric has begun to impact the global economy and the financial markets. During the past several decades, rising globalization has facilitated free trade and cross-border flows of capital and labor. Most countries, including the vast majority of the world's major economies, experienced an increase in trade openness. While this generated benefits for the global economy, it also had negative by-products and created relative winners and losers across countries, industries, and companies. If protectionism rises, entities most at risk include:
Export-oriented economies: Countries most dependent upon exports as a primary source of growth would be directly and negatively impacted by import tariffs or other protectionist policies. In particular, smaller economies more open to trade may have more at stake (e.g., Asian Tigers such as South Korea, European exporters such as the Netherlands), while larger, more closed economies (e.g., US, Brazil, India) may be relatively insulated from protectionist trade pressures (see graph). Emerging markets that have benefited from developed-country demand for manufactured goods over the past few decades, such as Mexico and China, may be more squarely in the crosshairs of US policymakers, while commodity exporters may be somewhat more insulated due to the relatively less elastic nature of these goods.
Industries with foreign revenue exposure: Within economies, industries that are more exposed to global trade have more to lose from protectionist policies. For example, half of the revenues for the US information technology sector come from abroad. The utilities and financials sectors, however, earn 80%–100% of their revenues domestically, and are less likely to be impacted by anti-trade policies (see chart).
Multinational companies with global supply chains: Even within an industry, some companies are more externally oriented in their businesses than others. Larger, multinational companies are more likely to sell goods abroad and be dependent on access to foreign markets. Many have global supply chains that could be disrupted by measures to discourage offshore production, which may also pressure profit margins by raising labor costs. Smaller companies tend to be more domestically oriented, and would be more insulated from protectionist measures.
Consumers and businesses reliant on imports: As companies took advantage of cheaper labor abroad in recent decades, US consumers and businesses benefited from less expensive imported goods. If more restrictive trade policies were to make imported goods costlier, it would at least initially put upward pressure on the prices of consumer goods.
Part of a bigger picture
It is important to note that overall, the global economy continues to experience a synchronized global expansion and that US recession risk remains low. At the same time, tighter labor markets and stronger global growth are supporting inflationary pressures that are giving global policymakers confidence to shift away from monetary accommodation.
Next steps to consider
Get industry-leading investment analysis.
Find investing ideas to match your goals.
See how the cycle has impacted performance.