22 May

Could President Trump Get a Headache from Japan Soon?

WRITTEN BY Mohit Oberoi, CFA

President Trump

President Donald Trump has exempted several regions from the stringent Section 232 tariffs that were imposed on national security grounds.

While countries such as Canada, Mexico, Brazil, and Germany managed to get exemptions, Japan was a notable exception.

Could President Trump Get a Headache from Japan Soon?

Japan

Previously, Japan had indicated that it was seeking a Section 232 exemption. According to a Reuters report quoting a news conference by Hiroshige Seko, Japan’s Minister of Economy, Trade, and Industry, Japan’s steel and aluminum exports “are not at all affecting U.S. national security but rather are contributing to U.S. employment and the economy.”

U.S. Steel Corporation (X) and Nucor (NUE) have joint ventures with Japanese companies, whose plants produce steel products to cater to automotive companies. Automotive companies have been turning to advanced high-strength steel products (or AHSS) to reduce vehicle weight. AHSS products are expected to help steelmakers tackle the challenge of higher aluminum usage by automotive companies such as Ford Motor Company (F) and Tesla (TSLA).

A new worry?

Now Japan has also reportedly threatened to slap tariffs on US products. We saw a similar tit-for-tat approach from China, which slapped tariffs on $3 billion worth of US products after President Trump hit the country with Section 232 tariffs. The subsequent escalation in US-China trade frictions triggered a sell-off in risk assets, with the SPDR S&P 500 ETF (SPY) turning negative for the year at one point in time. While SPY has now turned positive for the year, it’s still off its 2018 highs.

As the Trump administration is trying to engage China to reduce trade frictions, Japan could open a new trade battleground with the United States. However, it remains to be seen whether Japan moves forward with its threat of retaliation. In the meantime, India has taken the United States to the World Trade Organization over the Section 232 tariffs.

In the next and final article, we’ll look at the recent trend in steelmaking raw material prices.

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