President Donald Trump, on Mar 8, signed proclamations imposing steep tariffs on steel and aluminum imports in a major move to protect the domestic producers of these metals, rebuild the long-struggling U.S. steel and aluminum industries and safeguard American jobs. The highly controversial tariffs, which the President believes are necessary to protect national security, are set to go into effect today.

The Trump administration has slapped a 25% tariff on steel imports and a 10% tariff on aluminum imports. The tariffs, which have drawn criticism from major U.S. trading partners and some members of the Republican Party, are the result of the U.S. Department of Commerce’s investigation that was carried out under Section 232 of the Trade Expansion Act of 1962 to determine whether the imports pose a threat to national security.

The tariffs would also fulfil one of President Trump’s key election promises of bringing down America's massive trade deficit. The tariffs are, in particular, are targeted at countries with which the United States has significant trade deficits.

Let’s take a quick look at the impacts of the highly criticized trade tariffs on the U.S. steel industry.

What’s Good?

The President’s move is aimed at protecting the domestic steel and aluminum industries which had long been reeling under the onslaught of cheap imports and has suffered significant reduction in production and employment.

U.S. steel makers struggled to cope with the renewed tide of cheap steel imports last year. Imports of cheap steel continue to flood American shores despite a string of punitive trade actions and threats of further future measures. These imports have hurt the selling prices and margins of U.S. steel makers.

According to the American Iron and Steel Institute (AISI), an association of North American steel makers, total steel imports shot up 15.4% to around 38.1 million net tons in 2017. While positive rulings in trade cases (resulting in levy of heavy tariffs) against China last year led to a decline in steel exports to the United States from that country, imports from other countries remain at above historical levels.

As such, the trade tariffs would provide a much-needed reprieve to the U.S. steel makers. The tariffs would provide a boost to steel prices, give American steel makers more pricing power and help to level the playing field. U.S. steel prices are on an uptrend following the trade tariff announcement, reflected by a spike in hot-rolled steel prices. The tariffs are expected to lead to lower imports into the United States, which would in turn boost demand for American steel and drive profitability of U.S. steel makers. All these are likely to help in creating hundreds of new steel jobs in the country.

On prospects of higher steel demand as a result of the latest U.S. trade measures, U.S. Steel Corp. (X Quick QuoteX - Free Report) said recently that it will restart one of its Granite City Works blast furnaces and steelmaking facilities. U.S. Steel expects to call back around 500 employees starting this month. Both the blast furnaces of Granite City Works and its steelmaking facilities were idled in December 2015 in response to challenging market conditions, including unfairly traded imports.

Another U.S. steel major, Nucor Corp. (NUE Quick QuoteNUE - Free Report) also recently said that it will build a rebar micro mill in Florida. This $240-million investment will be Nucor’s second rebar micro mill.

Moreover, the tariffs are expected to boost production capacity of domestic steel makers amid lower imports. The U.S. Department of Commerce earlier said that the trade actions are aimed at increasing domestic steel production to roughly 80% operating rate from its present 73% capacity.

What’s Bad?

Just after the tariff announcement, President Trump softened his stance by excluding Canada and Mexico — two major sources of steel imports to the United States — from the tariff orders. Moreover, the orders have provisions for other countries to apply for exemptions provided their imports do not hurt the U.S. economy, leaving some wiggle room for U.S. allies to seek concessions.

The President noted that Canada and Mexico represent “a special case,” and will continue talks with them to address concerns. The exclusions of these countries are dependent on the outcome of the North American Free Trade Agreement (NAFTA) renegotiation talks that are underway.  

Canada is the largest steel exporter to the United States, accounting for roughly 16% of total U.S. steel imports in 2017, per the U.S. Census Bureau data. Mexico is the fourth-largest exporter of the metal with around 9% market share. They together represent roughly a quarter of U.S. steel imports.

The exclusion of two main sources of U.S. imports, while leaving room for other nations to negotiate exclusions from the tariffs, marked a significant concession from the President’s initial plan of an across-the-board tariff on steel and aluminum. Shares of major U.S. steel makers including U.S. Steel, Nucor, AK Steel Holding Corp. , Steel Dynamics, Inc. (STLD Quick QuoteSTLD - Free Report) and Commercial Metals Company (CMC Quick QuoteCMC - Free Report) tanked after Trump signed the tariff orders.

To make the matter more complicated, the Trump administration said yesterday that it would temporarily exempt more countries from steel and aluminum tariffs, according to a proclamation released by the White House. The list includes the European Union, Argentina, Australia, Brazil, Canada, Mexico and South Korea, many of which have been in talks with the U.S. to win an exemption. However, the administration may impose import quotas on these countries to protect the domestic industries.

The United States trade representative, Robert Lighthizer yesterday said that "The idea that the President has is that, based on a certain set of criteria that some countries should get out". He added that "There are countries with whom we're negotiating" and there will be "a pause in imposition of tariffs with respect to those countries".

The news sent stocks of American steel makers tumbling with shares of U.S. Steel, Commercial Metals, Nucor, AK Steel and Steel Dynamics crashing roughly 11%, 12.3%, 6.5%, 8.7% and 7.5%, respectively.
 
The Trump administration’s gradually softening tariff stance is bad news for the domestic steel makers. More countries may seek exemptions for steel imports in the future that cannot be made in the United States. This may thwart the administration’s efforts to curb the influx of cheaper imports and eventually hurt steel prices.

While Commercial Metals currently sport a Zacks Rank #2 (Buy), U.S. Steel, Nucor, Steel Dynamics and AK Steel each have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

And Finally, The Ugly

Concerns over a full-blown international trade war gripped the markets since the declaration of the metal tariffs in early March. The U.S. trade actions are likely to trigger a potential backlash from the affected countries and major foreign trade partners. The tariffs risk tit-for-tat retaliation measures on American exports, hurting the U.S. economy.

While no one wants to enrage the dragon, the first retaliation may come from China. Reportedly, China's commerce ministry is planning tariffs on a range of American products (with U.S. export value of $3 billion in 2017) that include a 15% tariff on steel pipes. China had earlier warned that it is ready to take an "appropriate and necessary response" in any trade war with the United States. While China only accounts for 2% of U.S. steel imports, it is the world’s biggest producer of steel accounting for around half of the global production.

Beijing has been repeatedly accused of dumping excess steel capacity into global markets. Trump has a record of attacking China for unfair trade practices. This is well reflected in his recent plans to impose sweeping tariffs on imports from China worth as much as $60 billion.

Japan, the six-largest exporter of steel to the United States, is also currently not on Trump’s temporary exemption list. Japan's Minister of Economy, Trade and Industry, Hiroshige Seko earlier said that the United States’ move to levy trade tariffs is “extremely regrettable” and could significantly unsettle global trade.

The EU had also threatened to impose tariffs on Harley-Davidson motorcycles and other iconic U.S. brands in retaliation to the Trump administration’s tariff move. The 28-nation bloc recently published a list of U.S. products worth around $3.4 billion on which it plans to impose trade penalties. Brazil, which is the second-largest exporter of steel to the United States, with roughly 13% share of total imports last year, has also pledged to take “all necessary actions” to protect its interests.

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