Jun 21 2018
In March, President Trump announced blanket tariffs of 25% on steel imports and 10% on aluminium products. Following a brief grace period, these tariffs were effected against the European Union, Mexico and Canada from 1 June. This presents significant difficulties for UK steel and aluminium producers, which have already endured a torrid past five-year period in the face of Chinese dumping and unproductive plants. Workers at the UK’s largest steelworks, Port Talbot, agreed to pension and benefit cuts to allow the plant to remain operational only 18 months ago, and with the United States the largest single market for the Iron and Steel Manufacturing industry (IBISWorld report C24.100), accounting for 13.2% of exports, the UK’s direct exposure to US tariffs is significant.
In response, the European Union published a list including a range of US products that are to be subject to retaliatory tariffs from 22 June. In total, these tariffs will affect €2.8 billion (approximately £2.5 billion) of US imports, with the additional duty on products as diverse as pre-cooked rice, garden umbrellas and precision tubes ranging from 10-50%.
In this special report, IBISWorld discusses the effects of US tariffs and EU retaliatory duties on a number of industries in the United Kingdom, with such unlikely industries as Spirit Production (IBISWorld report C11.010) finding themselves at the heart of trading tribulations.
UK steel and aluminium
The initial measures put together by the Trump administration effect a 25% tariff on steel imports and a 10% tariff on aluminium imports, a move that has been heavily criticised by UK producers, with UK Steel, a representative body, stating that the sector exports £360 million in high-value steel to the United States annually, accounting for almost 15% of exports. Given the troubles faced by the Iron and Steel Manufacturing industry over the past five years, for which revenue is expected to decrease at a compound annual rate of 5.1% over the five years through 2018-19, the tariffs are an additional and worrying burden. Indeed, Richard Warren, Head of Policy at UK Steel asserting that these measures ‘would seriously undermine our ability to compete in this market.’ With the United States the largest single export market for UK iron and steel manufacturers, accounting for 13.2% of export revenue, and the industry still reeling from Chinese dumping and high energy costs, US tariffs pose a significant threat to the industry’s tentative recovery.
The Aluminium Production industry (IBISWorld report C24.420) is less exposed than UK steel producers, as aluminium products are affected only by a 10% tariff, as opposed to the 25% levied on steel, and the industry’s primary export markets are EU countries. Nevertheless, US tariffs are an additional burden in an already highly competitive industry that exported just over £31 million of aluminium products to the United States in 2017. Perhaps equally pertinent is the indirect effect of global US tariffs on both steel and aluminium products. Both the Aluminium Federation and US Steel have emphasised the importance of the EU’s potential response with regard to redirected international trade flows, as aluminium and steel products originally destined for the United States seek new markets.
In response, the forthcoming EU tariffs target 116 different iron, steel and aluminium product subtypes, applying a 25% tariff to each. In 2017, the United Kingdom imported just under £70 million of these products, which range from flatrolled steel, through tanks casks and drums, to frying appliances. This accounts for 1.7% of total UK iron and steel imports, and a mere 0.3% of aluminium imports. EU producers are significantly more prominent exporters to the United Kingdom, with EU countries accounting for 53.5% of UK iron and steel imports. As a result, whilst UK firms that source steel and aluminium from US suppliers may face increased prices, the overall effect is likely to be more limited than the direct ramifications of US tariffs on UK steel and aluminium producers.
The UK Spirit Production industry is highly affected by international trade, with the growing global popularity of UK spirits and a significant inflow of foreign beverages making it a truly global endeavour. Indeed, in 2016, exports of single malt Scotch alone topped £1 billion, as markets have favoured quality, whilst the booming popularity of gin has further boosted British exports. The United States has long been a drinking companion and is by far the largest single export market for the industry, accounting for 25.7% of export revenue, whilst 17.5% of spirit imports are sourced from the United States. In this latter regard, the EU’s range of retaliatory tariffs are pertinent, with an additional duty of 25% on Bourbon and Whisky (other than Bourbon and Scotch) in containers both above and below two litres. In 2017, imports of these products from the United States to the United Kingdom accounted for just over £121 million, meaning that 55.7% of all whisky imports to the United Kingdom will be subject to the tariff.
In a letter to the Commerce Secretary, the Distilled Spirits Council, a US trade association, has expressed its concern regarding the negative impact of these tariffs on the US spirits sector and associated industries. For domestic producers, however, the tariffs could serve as a benefit. With competition high, this further bolstering of the moderate tariff protection industry operators receive could provide an opportunity for domestic whisky producers to expand their domestic market share, as consumers may be knocked back by increased prices for US whisky, particularly for low- to mid-range brands. With the retail market for all US whiskies in the United Kingdom topping £1 billion in 2016, buoyed by the popularity of Jim Beam and Jack Daniels, in addition to more niche marques, there is a substantial pool of consumers that would be hit by increased prices.
The opening shots of the trade war could also benefit UK whisky distillers selling to the Chinese market. From July, US whisky exports to China will face a 25% duty, in comparison with the 5% duty faced by Scotch producers. As demand from China continues to bounce back from the effects of an anti-corruption drive in 2013, this could offer a significant competitive advantage.
Although the UK spirits, steel and aluminium industries will be the most affected by the US and EU tariffs, owing to their exposure to international trade, the breadth of the EU’s measures mean that particular consumer items will also be hit by additional duty. From t-shirts and playing cards (which stand out with their lower tariff of 10%), peanut butter and cranberries, more than 200 product subsegments will be affected.
However, as these tariffs are narrowly targeted – with duties on orange juice aimed at Floridian production, for example – these products do not account for a significant share of consumer purchases. US-produced orange juice imports accounted for less than 1% of imports of orange juice into the United Kingdom in 2017. In a similar vein, imports of US clothes were also negligible when compared with the size of total clothing imports. As a result, the overall effect on high-street shelves is expected to be relatively limited. The effect on high-end showrooms may be more prominent, however, as Harley Davidson, which has already stated that it has been hit by rising steel prices following the implementation of US tariffs, will be hit by a further 25% duty at a problematic price point.
For a printable PDF of Trump and Trade, click here.
IBISWorld industry reports used in this spotlight report: