President Donald Trump's plan to slap tariffs on foreign aluminum and steel could help U.S. producers, but it could also fuel inflation, slow the economy and trigger other retaliatory actions against U.S. industries, analysts said.
These fears weighed on stocks and the market sold off sharply after initially flip flopping amid confusion over whether there would be an announcement or not. But stocks sold off sharply when Trump surprised the markets and announced a 25 percent tariff on steel and a 10 percent tariff on aluminum.
"One of the largest fears we have is we've got tariffs. We could have trade wars and it could blow up NAFTA negotiations and nobody wins a trade war," said Art Hogan, chief market strategist at B. Riley FBR.
The Dow was down more than 500 points and the S&P 500 slid well below the key 2,700 level. The move was viewed as one of the most protectionist actions from the Trump administration, and it is one of his policies that has most worried markets, even as stocks have rallied on tax reform and his other pro-growth policies.
"
Tariffs would probably have the unfortunate affect of both slowing growth and accelerating inflation, and that's not a good thing," said Ward McCarthy, chief financial economist at Jefferies. "For this economy, this is the worst possible time to be doing that."
While strategists said the possible tariffs on steel and aluminum did not signal a full-blown trade war, they could have the affect of creating trade skirmishes that could accelerate.
Dana Peterson, a Citigroup economist, said the use of tariffs for national security reasons is a centerpiece of Trump's trade policy and the use takes trade disputes into a new territory. "It certainly opens the door for other countries to claim the same thing," she said. "That's when trade wars begin."
The tariffs
could result in higher prices for consumers on things like automobiles, as manufacturers pass on the higher costs of raw materials from abroad.
"It's going to take time to rebuild these industries," Peterson said. "You just can't reopen a smelting factory, especially if it was closed for years. It's going to cost something. You're going to have to hire people, pay them a competitive wage...it could be inflationary."
Connect With Us