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Investors grapple with whether steel tariffs spell trade skirmish or war

President Donald Trump signed proclamations on steel and aluminum tariffs on March 8. He said the order could spare certain countries if they have strong trading and military ties with the U.S.

Asia, a region that's relied on exports to turbocharge its growth in the postwar era, has as much at stake as any corner of the world in ensuring President Donald Trump's decision this month to impose tariffs on U.S. imports of steel and aluminum doesn't set off a global trade war.

Analysts say the best hope now for ensuring the U.S. president's gambit ends up being more skirmish than global conflagration is for cooler heads to prevail — in Europe as well as Asia.

The best-case scenario would be for political leaders in countries affected by Mr. Trump's 25% tariff on U.S. steel imports and 10% tariff on aluminum to retaliate just enough to placate domestic audiences without setting off a tit-for-tat volley, said Richard Koo, chief economist with the Tokyo-based Nomura Research Institute, in a March 8 interview.

That's likely to prove the case — at least for this opening salvo of Mr. Trump's pursuit of a better trade "deal" for the U.S. — with China, a country he's singled out as the U.S.' bÍte noire when it comes to trade.

With China accounting for only 1% to 2% of U.S. steel and aluminum imports, Andrew Rothman, investment strategist for San Francisco-based Matthews International Capital Management LLC, in a March 7 report, predicted the Asian giant, the locomotive of global growth in recent decades, is likely to respond to Mr. Trump's metals tariffs in a "measured and proportionate manner," stopping short of any action that could escalate trade tensions.

If key trading partners such as China and Germany don't overreact, taking this as a "one-off, crowd-pleasing move by Trump ... there is a strong possibility that this ends with steel and aluminum," a March 8 analysis from Lombard Odier Investment Managers contends.

Stock markets in Asia appear to be betting on that positive outcome, seemingly confident for the moment that Mr. Trump's trade maneuvers won't derail the long-running global expansion that has followed the 2008 financial crisis. As 2018 began, analysts predicted a second wind for that expansion for at least the coming year or two, helped by business-friendly tax reform legislation in the U.S. and expectations of a boost in infrastructure spending there.

Following an initial sell-off after the president announced his tariff plans on March 1, markets in Asia, and around the globe, have bounced, in line with a rebound by U.S. stocks.

A number of analysts say that sanguine market response represents an outsized bet that the more protectionist stance being signaled now by the U.S. — the hegemon architect and backer of the post-war global trading system — won't spawn a lot of collateral economic damage.

Analysts pointed to the back-and-forth between European Union leaders and Mr. Trump, who over the past week responded to European threats to impose tariffs on imports of U.S. motorcycles and agricultural products by threatening to boost tariffs on imports of European cars, as an example of how quickly things could go from bad to worse.

"It's no longer clear what's coming next," noted Michael J. Kelly, global head of multiasset with PineBridge Investments, in a March 6 commentary. "The new trade environment could have profound effects on markets and investments, or not; it's premature to say, although the issue may affect a broader swath of the economy than thought," he wrote.

Analysts say the U.S.' broader trade relationship with China may yet prove the fly in the ointment.

Moves afoot now by U.S. Trade Representative Robert Lighthizer, under Section 301 authority of the U.S. Trade Act of 1974, to investigate whether Chinese trade practices "may be harming American intellectual property rights, innovation or technology development," could be a much bigger stumbling block, wrote Mr. Kelly.

"That's where the risk lies," agreed Charles St-Arnaud, London-based senior investment strategist with Lombard Odier Investment Managers, in a March 9 interview, warning the issue of intellectual property rights could set the stage for a "clash of the titans" between the world's two biggest economies.

The fallout from U.S. sanctions on China over that issue could be "far more destructive than tariffs," said Mr. St-Arnaud. The likelihood of U.S. consumers and U.S. companies having to pay 15% to 20% more for locally produced products or inputs that China has been supplying would result in a material hit to purchasing power, he said.

Meanwhile, the uncertainty unleashed by a more aggressive U.S. stance on trade, at a moment when governments everywhere are facing growing populist pressures, will extend more broadly.

Canada and Mexico, even though they've been exempted from tariffs while the president pushes for better terms under the North American Free Trade Agreement, face the daunting challenge — along with U.S. allies in Europe, Korea and Japan — of figuring out "the price" the Trump administration will ask for to avoid tariffs or other trade sanctions, and whether they're willing to pay it, said Mr. St-Arnaud.

Richard Nuzum, New York-based president of Mercer's global wealth business, in a March 5 interview, predicted the U.S. economy would suffer the quickest setback from that uncertainty as domestic business leaders become less confident about plowing the tax windfalls coming their way from U.S. tax reform into new plants and equipment.

For markets in Asia, Mr. Nuzum said it's too early to review the general enthusiasm analysts had at the start of 2018 for Japan and emerging markets in Asia – citing a combination of equity market valuations and earnings growth more attractive than what U.S. equities were offering investors.

Amid vocal domestic push back from allies of Mr. Trump, warning him that a tariff war could harm the president's core supporters, if Mr. Trump's tariff policy gets rolled back in the short term, analysts will only have to tweak their forecasts for companies in Asia, rather than do a wholesale revisit, said Mr. Nuzum. "If the policy doesn't get rolled back, then you change your earnings estimates," he said.

Some analysts said the U.S. — after decades of making concessions to trading partners — is simply finding it can no longer sustain the political costs of doing so.

Mr. Koo, speaking in Singapore on the sidelines of the Investment Management Association of Singapore's annual conference on March 8, said even if the U.S. president could be more diplomatic in pursuing his goals, there should be room for U.S. trading partners to make concessions to a Trump administration that can be seen as the personification of populist rage at how the trading system has disadvantaged large swaths of the country.

When, for example, European car exports to the U.S. face tariffs a quarter of what U.S.-made cars exported to Europe face, there'll be a receptive audience when someone asks, "How did we allow this to happen?" he said.