Picking Alpha has addressed to Dan Gramza – globally renown market analyst and educator, who has presented trading courses in over 35 exchanges, four regulators and 35 countries, to understand how traders can approach markets during the trade wars.
How has so-called “trade wars” threats have affected aluminum, steel and related industries markets in USA ?
D.G.: Besides an immediate knee jerk reaction, it is really too early to tell because no one knows the true impact of potential changes.
Which industries in USA could benefit the most from these “wars”? Who would lose?
D.G.: Theoretically the biggest beneficiaries will be the US producers of aluminum and steel. There are a number of operations that have been idle because of low cost of global prices for aluminum and steel that could be brought back on line. Winners are the nations that are not involved in the tariffs because of potential increase in demand for their products that do not have the tariffs to overcome.
The potential losers would be the producers that utilize aluminum steel in their products. It must be kept in mind that some of the early studies indicate that the actual impact on the finished product may be relatively small.
The American plane maker Boeing is a target for retaliation. It employs 137,000 people in the US, almost as many workers as the major companies in the steel and aluminum industries. Their aluminum and steel material costs could increase and potential foreign orders could go to other non-US companies like Airbus as a form of retaliation.
The US is the world’s biggest importer of steel and aluminum. Both metals are crucial raw material for variety of goods, such as, autos, airplanes, appliances, construction, oil and utility industries for beams, pipelines and wires and the food industry for cans for food and drinks.
Steel imports are about 33% of the 100 million tons of steel used by US industry every year. Aluminum imports are about 60% of the aluminum supply, according to the Aluminum Association, citing 2017 data. Direct import of steel from China is less than 2%.
China could still feel the impact of protective US measures. A lot of China’s steel comes to the United States indirectly. China sends unfinished steel products to South Korea and Vietnam, to add final touches before the finished product is sent to the U.S. under another country’s label.
There is high degree of confidence that China sells its steel at unfairly low prices. Previous administrations have imposed trade sanctions against Chinese steel imported into the US with no lasting changes.
Farmers in particular are concerned that China might retaliate. The U.S. is one of the world’s top producers of soybeans, and its number 1 customer for soybeans is China. China could shift more of its soybean business to other major producers like Brazil and Argentina.
Soybeans could be targeted for another reason. Eight of the biggest soybean exporting states voted for Trump in 2016. Targeting soybeans might inflict economic pain in states where part of Trump’s voting base lies and put Trump under pressure to halt stiffer trade actions in exchange for political support in the 2020 election. It is hard to see this swaying Trump, if he has his mind made up.
China is the world’s largest producer and consumer of pork. Changes in the supply and cost of soybeans could raise the costs of feeding the hogs needed for Chinese consumption.
The expectation is China will surrender rather than retaliate in order to preserve access to the US market. China is dealing with internal issues like large corporate debt and decreasing jobs in basic manufacturing industries, it probably does not want to deal with disruption in its muti-billion dollar economic relationship with its largest trading country the US.
With USA tariff war threats, EU readiness to implement symmetrical actions and China ready to answer with the war to USA actions on tariffs what can you say about gold futures markets now?
D.G.: Gold futures have not really reacted to the tariffs and the uncertainty they cause, primarily because trade impact is not a reality at the moment.
EU in turn announced that if USA will implement their intentions in regard to the tariffs on steel and aluminum they will respond with the raise of tariffs on some iconic USA goods also by 25%, could you comment how markets in USA and Europe responded to this news?
D.G.: Volatility was seen in US and European markets when the tariff announcement was made. There is a market tenseness waiting to see how this will play out. The markets are reacting to the anticipation of what may happen not the resulting reality which has not occurred yet. China’s reaction to tariffs has been subdued.
With what preceding Trade Wars can we compare today’s situation?
D.G.: It must be kept in mind that the domestic and international political climate, economic strength of involved countries and trade balances are different than in the previous trade wars.
This is not the first time an US president has used tariffs. William McKinley, who later became president, got his Tariff Act of 1890 passed, which increased the average tariff on imports to almost 50%. The act was generally considered a failure and was repealed in 1894.
Trade tariffs were used after World War 1, in the late 1920’s, which some say contributed to the Great Depression. Ronald Reagan, Bill Clinton, George W. Bush, Barack Obama imposed trade tariffs with what appears to be no appreciable result.
More important than the steel and aluminum tariffs is how the president deals with the Chinese typical practices of investing in US companies to steal technology, lifting technology from US companies that invest in China and penetrating US data networks.
Trade disputes verses trade wars are common. A trade war has not occurred in more than 80 years because countries realize the havoc that can result. The narrow focus of higher tariffs on steel and aluminum are not expected to trigger a trade war.
The president promised in the 2016 campaign to get tough with trading partners whose “unfair” policies, in his view, have caused huge trade imbalances.
Is also appears that tariffs are a Trump tactic to use as a negotiating point. If there is a wide disparity in economic strength between two countries, the stronger country will probably prevail. Trump seems to be thinking the large size of the U.S. domestic market provides a lot of bargaining power in negotiating a trade dispute.
The White House talks tough but it has also sent signals it’s willing to deal. Trump said he doubts we’ll “have a trade war” and he suggested the tariffs are a negotiating tool to pressure Mexico and Canada into a quicker rework of the North American Free Trade Agreement. He has also hinted he’s open to joining the Trans-Pacific Partnership which he pulled out of in his first year in office.
Is there a particular futures market situation during trade wars that traders should focus on?
D.G.: Remember 45% of the income for S&P 500 companies come from overseas sales. A trade war could put downward pressure on these companies but also upward pressure on the production companies protected by the tariffs. Other US stock indices may benefit, such as the Russell 2000 futures or the NASDAQ 100 futures contracts traded on the CME Group. In Europe the Euro Stoxx 50 or a country not involved with the tariffs such as the Swiss index the SMI which are traded on the Eurex exchange may present trading opportunity.
Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains at dangramza.com.
Gramza is a widely traveled consultant and market educator. He has presented trading courses in over 35 exchanges, 450 countries, four regulators and 35 countries.
He has published works in Australia, Europe, Japan, and the United States. He has appeared in the media on CNN‘s “Moneyline” program, Reuters TV, Bloomberg TV, ROB TV in Canada, WCIU-TV in Chicago and as a market analyst for the CME. Additionally, he has given expert testimony in Federal court.
Previously, Gramza was a member of the Chicago Rice and Cotton Exchange, which was merged into the former MidAmerica Commodity Exchange. Also, he was an adjunct faculty member of the Illinois Institute of Technology master’s program in Financial Markets and Trading.