On Monday, American President Donald Trump announced the decision to-reinstate tariffs of 25% on steel and 10% on aluminium coming from Argentina and Brazil, a proposal which failed to materialise last year for the two countries due to the ardent frustration of many domestic consumers at the idea of having to pay higher prices.
Nonetheless, the reasoning behind the implementation of the tariffs this time is fuelled by collective concern over the state and direction of the US farming industry. According to the American Farm Bureau Federation, in the 12 month period leading up to October of 2018, a 24% rise in farm bankruptcies occurred. This startling figure appears less anomalous when it is considered that over a dozen major US manufacturing industries have seen contractions in the last year; creating significant doubts over the stability of the whole US economy. The question now is over whether the downturn in manufacturing and agriculture is a symptom of a surreptitiously ailing economy or the result of dogmatic trade foreign policy, riling up global instability in markets?
President Trump claims that the tariff policy is in response to the ‘massive devaluation’ of the currencies in both Brazil and Argentina, as this has vastly increased the two countries export competitiveness when it comes to the production of agricultural goods. As a result, US food producers have struggled to compete domestically and on international markets. Consequently, the implementation of tariffs on steel and aluminium will not help to improve the competitiveness of US agricultural producers, but with metal manufacturing to the US representing 9% of Brazils total exports and the general production of steel and aluminium equating to 3% of Argentina’s total global exports, the move will certainly function as an effective form of retaliation, to hurt their economies.
Speaker of the House of Representatives, Nancy Pelosi has condemned the tariff decision made by Trump, as the Mercantilist and unilateral nature of such an approach will have far-reaching negative economic consequences on both Argentina and Brazil. In spite of President Trump’s comments that the currency devaluations were a calculated economic move, both countries have in fact made attempts to strengthen the Peso and Real respectively. In Brazil, the implementation of these tariffs will come as a significant blow to the GDP of a country already struggling to recover from a recent severe recession. With an unemployment rate of over 10%, the country is in dire need of stability to encourage investment and FDI; the opposite of what Trump’s tariffs offer.
In Argentina, the situation appears even more volatile, as the inflation rate lingers around 50% and one third of the population live in poverty. The country is in desperate need of export-led economic growth which is helped by the weak peso, however their inflation problem has resulted principally from this same phenomenon, as the low exchange rate has caused a sharp rise in the price of Argentinian imports. Therefore, it is arguably in the best interest of Argentina to increase attempts at appreciating the peso, as this may satisfy President Trump enough to remove the tariffs, whilst simultaneously reducing the rate of inflation.
There are significant implications of the tariffs on the US also. To the detriment of Argentina and Brazil, American agricultural producers will be able to compete to a greater extent in domestic markets, helping to reduce years of degradation in the industry. Nevertheless, many Americans purchase Argentinian and Brazilian steel for use in the construction of capital projects. Combined with the ongoing steel tariffs on China, it’s evident that US importers face massively higher prices for the good than they would otherwise, without President Trump. If this effect is significant enough, the US may begin to see subtle signs of cost-push inflation, felt across the whole country.
Bolsonaro, the Brazilian President, alongside many, sees the tariffs as a step in the wrong direction for the future of trade relations between Brazil and the US. If the US, is to resolve trade issues in the future, President Trump may find it preferable to adopt a more pragmatic solution that considers more than just one singular domestic US market.
By Joshua Chapman
Sector Leader: Maro Sohn