President Trump has just signed an executive order enacting protective tariffs on aluminum and steel. Shipments originating from Mexico and Canada are temporarily exempt while new a new framework for the North American Free Trade Agreement (NAFTA) is hammered out. All other imports will be subject to duties of 10% and 25%, respectively.
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The decision was made under the auspices of national security, as the United States doesn't want to be overly dependent on foreign sources of strategic metals. Still, the move drew swift condemnation from free-trade advocates, even some within Trump's own inner circle. On March 6, chief economic advisor Gary Cohn, architect of the tax reform package, announced his resignation.
As the world's largest steel importer, the U.S. sanctions will be directed at many suppliers, particularly South Korea, China, Brazil and Japan. This bold chess gambit could help struggling homegrown steel manufacturers, whose business fortunes have faded amid a flood of cheap imports. However, it also invites the possibility of retaliation with products that we ship abroad, such as soybeans and liquified natural gas.
Tensions are already running high, and it might only take a spark to ignite a trade war. In fact, the European Union has already fired back a warning shot, indicating that it could impose tariffs on U.S.-made goods such as Kentucky Bourbon and Harley Davidson motorcycles.
The industries involved could certainly use some friendly intervention. With capacity utilization of 40%, the nation's aluminum facilities aren't even running at half-speed. Steel utilization is a little better at 78%, although the workforce is only a fourth of what it used to be.
You can see why Century Aluminum (Nasdaq: CENX) commended the President for "acting swiftly and boldly to save the American aluminum industry." The company intends to ramp up operations at its smelter in Hawesville, Kentucky, putting 300 people back to work. In Illinois, US Steel (NYSE: X) is restarting a blast furnace that will employ at least 500 new workers.
With idle facilities coming back on line, American producers of key raw materials such as bauxite and iron ore could also benefit.
But we've tried this experiment before with dubious results. President George Bush pushed through steel tariffs of up to 30% in 2002, but they were canceled less than two years later, with studies showing more jobs lost than created.
That could well happen again. Ironically, even some in the steel business are grumbling. There are companies in Pennsylvania and other states that purchase semi-finished steel slabs from overseas and then turn it into coils, sheets and other products. As it stands, these companies will see rising costs, and their products aren't classified as American-made.
Automakers such as General Motors (NYSE: GM) aren't enthusiastic supporters either. Aluminum and steel account for roughly 65% of the weight of an average vehicle. Goldman Sachs calculates that tariff-related price increases for these key building blocks could wipe out up to $1 billion from the company's annual profits.
Heavy machinery makers such as Manitowoc (NYSE: MTW) and Caterpillar (NYSE: CAT) are also nervous. And Boeing (NYSE: BA), too, could see a negative impact, not just from higher costs to assemble a 737, but from potential retaliation should foreign customers start placing more orders with European rival Airbus.
American consumers will also feel the pinch as these higher costs are absorbed and passed through, putting upward pressure on everything from washing machines to soft drink cans.
In short, this is a complicated mess for investors. As with any big decree from Washington, there will be both winners and losers. Nucor (NYSE: NUE) bolted to near $70 per share on the announcement before profit-taking set in. But others could see rising costs or falling demand. Midstream energy companies, for instance, are already seeking exemptions, as imported steel accounts for nearly 80% of U.S. oil and gas pipelines.
I'll be keeping a close eye on the many ramifications for pitfalls and opportunities in the weeks to come.
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