IAS Prelims and Mains New Batch starts from September 20th 2018 & KAS prelims & Mains New batch starts from 27th September 2018 - For registration Contact: 9686664983/9845512052.

Impact of US tariffs on steel and aluminum import

Impact of US tariffs on steel and aluminum import

Context:

The Trump administration has announced a 25% tariff on steel imports and 10% on aluminum. Canada and Mexico, the top two overseas suppliers of the metals to the US, were exempt. The European Commission reacted with outrage, which included implied threats of a retaliatory trade war.

Impact on India:

The decision, made under a section of a rarely used American federal Act of 1962, may not have any immediate or direct impact on the Indian metals sector. Only about 4% of Indian steel exports and 2% of aluminium exports are headed to the US. A greater worry for India could be the indirect impact: the potential cascading inflationary impact of the decision in the US itself.

Impact on India’s metals sector

  • A Morgan Stanley report pegged India’s steel exports to the US at less than 1% of the total Indian production, and about 4% of India’s steel exports.
  • According to Kotak Institutional Equities data, India’s aluminium exports are just 2% of the total US imports of the metal.
  • A bigger concerns that extends beyond the immediate concern from a commodity/export good perspective for India would be if the Trade Expansion Act of 1962, Section 232(b), which gives the US the right to investigate whether certain imports, or high levels of certain imports, pose a threat to its national security, is expanded to products other than metals, which constitute a bigger share of India’s export basket.

Impact on interest rates and debt market in India

  • The US is the world’s largest steel-consuming nation, and higher tariffs on imports are likely to push up its domestic inflation.
  • For India, the impact will be significant through the channel of interest rates. Yields in the US market have been inching up since mid-2016, and have risen from a low of around 1.5% per year to 2.88% now.

Impact on equity markets

  • Rising interest rates in the US could mean a potentially rough ride for the Indian equities market.
  • While a surge in domestic inflows, especially mutual fund money, is a reassuring factor for Indian equities, higher interest rates do make the option of investors borrowing cheap money in the US and investing in Indian equities significantly less attractive.

 

Comment