The Strange Way Trump's Metal Tariffs Will Hit Oil Profits
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The Strange Way Trump’s Metal Tariffs Will Hit Oil Profits

by | published December 6th, 2019

Years ago, during an assignment in which I had some responsibility for structuring and applying economic initiatives as an element of coordinated U.S. policy, we started using a particular phrase: “asymmetric sanctions.”

This referred to elements of economic warfare that have a disproportionate impact.

Simply put, “asymmetric sanctions” reflected the ability of the U.S. to inflict heavier damage on an opponent than it as likely to experience in response. In that sense, it shared several common elements with broader asymmetric conflicts where the outcomes were not experienced at the same level on both sides, or tended to have a larger result than what was committed to achieve it.

Usually, “asymmetric” would be used when discussing terrorist attacks where a single attacker could inflict multiple casualties, or the fear that the next suicide bomber would result in dramatic changes in lifestyle.

But when it came to economic applications, it was usually a binary view: a sanctions regimen would inflict more damage than it would produce in response from the target.

Of course, the corollary problem was that practitioners would almost always believe the sanctions would produce a greater result than what happened. There has been no conflict decided by economic sanctions. These are tools to be used with others, not stand-alone weapons.

After all, if a total oil embargo against Japan could not prevent World War II (and probably hastened Tokyo’s move south into Indochina), all others must be looked at more realistically.

Fast forward to today and we begin to see more pronounced consequences.

Take the current example of supposedly asymmetric sanctions…

The Newest Member of the Tariff Family

In his most recent trade move, President Donald Trump has threatened to impose 100% tariffs on steel and aluminum imports into the U.S. from Argentina and Brazil.

These comprise the latest examples of what has become a favorite White House device in dealing with all manner of foreign problem: apply tariffs and claim the recipient will shoulder the bill.

On this occasion, the excuse for tariff threats lies in both Buenos Aires and Brasilia having recently revalued their domestic currencies, reducing the advantage dollars have held in foreign exchange. But I have been told by regional contacts that the opinion on the streets views this Trump move as a response to elections in both countries bringing in governments less amenable to American influence.

When it comes to the tariffs themselves, reasoning follows from what is still the main “asymmetric” element of tariffs; if the other guy needs the revenue generated by trade with us more than we need theirs, they will have to cry uncle.

In the current application, both Argentina and Brazil are more dependent on trading with the U.S. than the U.S. is with them (There is a similar situation with the Chinese tiff. Beijing is exporting more goods to America than receiving in return).

Hence, “asymmetrical sanctions.”

Normally, this means the more heavily dependent trading partner is likely to experience the more pronounced pain.

Well, not so fast.

The Result of These Tariffs Could Be Different

There is an odd reversal taking place in this instance.

As experienced by American farmers in the wake of tariffs against China, the economic blowback can have some serious consequences back home.

This time around, it will surface in the added cost of products requiring steel and aluminum.

This is not a result of any U.S. shortage of either metal. Other foreign sources (especially India and Canada) are still available as is internal production.

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True, the White House on occasion has attempted to jawbone both New Delhi and Ottawa on steel trade, occasionally threatening tariffs there as well, but a blanket application on imports is not in the cards.

It can’t be for one simple reason: the reliance on domestic metals production would significantly increase the prices charged to domestic end users.

This would once again impact rural America, as the replacement of all farm equipment – tractors, combines, harvesters, etc. – will require a hefty markup with reliance on U.S. metal sourcing. Initial projections put the added expense from the Brazilian and Argentine tariffs alone at some 7%.

But a more extended impact may be experience in the energy sector.

The Potential Backlash on Energy

In this instance, operating costs have already been rising at the wellhead as U.S. crude oil production approaches an unheard of 13 million barrels a day. It is currently at 12.9 million barrels. Given the concerns over global demand and the ongoing limits on American port and infrastructure capacity, this level is unsustainable.

But the inflation in production costs is already underway.

Once again, relying on American-based production, or, just as likely, absorbing the tariff charges via increased prices on imported metals, will further reduce already tight profit margins in the oil patch.

Industry sources are already suggesting spot shortages in replacement parts and refurbished rigs will appear in those basins where extraction rates are expanding. There are no estimates yet here, but the impact will be pronounced.

Of course, the entire tariff threat may simply be – once again – another Trump diversion, but only time will tell.

Sincerely,

Kent

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