President Donald Trump reignited fears of a trade war by imposing 25% tariff on steel imports and 10% on aluminum imports on America’s biggest allies — European Union, Canada and Mexico. These countries were previously exempted from the duties since its announcement in March. The current exemption will end on Jun 1 (read: Trump, Tariff & Geopolitics Lead May: 10 Top ETF Stories).
The move has prompted retaliatory measures from its trading partners targeting American products worth billions of dollars. The European Union is seeking to hit back with $7.5 billion of levies on U.S. exports, including motorcycles, denim, cigarettes, cranberry juice and peanut butter, as early as Jun 20 and launch a case against American measures at the World Trade Organization.
Canada announced punitive measures with 25% tariff on steel imports from the United States and a 10% tariff on aluminum. It will also impose duties on other goods including playing cards, inflatable boats, yogurt and toilet papers. The total value of American goods subject to tariff is $12.8 billion and will be effective from Jul 1.
Mexico also plans to retaliate by targeting products from congressional districts that Trump’s Republican Party is fighting to retain in November elections. In addition, it would impose levies on a wide range of U.S. goods, some steel and pipe products, lamps, berries, grapes, apples, cold cuts, pork chops and various cheese products “up to an amount comparable to the level of damage” linked to the U.S. tariffs.
The trade tensions seem to be a major setback to the ongoing negotiations between the United States, Canada and Mexico on modifications to the North American Free Trade Agreement (NAFTA). Since the European Union, Canada, and Mexico are America’s first, third, and fourth-largest trading partners, respectively, the trade friction will no doubt hurt the world’s largest economy.
The latest developments came after the tensions between the United States and China intensified again with Trump’s intention to impose a hefty 25% tariff on $50 billion worth of Chinese goods. The final list of goods subject to new import taxes is expected to be announced on Jun 15. Trump also plans to restrict Chinese investment in U.S. companies and limit the number of goods that these can sell to China. The news came after both sides reached an agreement and vowed not to launch a trade war against each other (read: U.S. Auto Tariff Risk Put These ETFs and Stocks in Focus).
Additionally, Trump administration is also considering slapping tariffs on U.S. auto imports, which could hit top suppliers from Mexico, Canada, Japan and Germany. Adding to the trade worries was a report that the United States aimed to target German carmakers, having launched a probe last week into car and truck imports.
All these events have intensified worries about a global trade war. According to the International Monetary Fund, growing trade tensions have clouded a benign outlook for the global economy, which is on track to grow at its fastest pace since 2011 this year and next.
That said, the trade spat would lead to just a few winners but a number of losers from various corners of the investing space. Below, we have highlighted some of the ETFs targeting those areas:
VanEck Vectors Steel ETF SLX: This fund provides global exposure to the steel industry with U.S. companies accounting for 34% of the total assets. The shares of the five biggest steel producers gained nearly $700 million in market value on May 31, as their foreign rivals will face higher costs to ship steel to the United States. Moody's Investors Service raised its outlook for the U.S. steel industry from stable to positive as Trump’s tariff boosted confidence in the growth of the American steel industry.
SPDR S&P Metals & Mining ETF XME: As this fund has 50% allocation to steel companies and 10% to aluminum companies, it could be a big beneficiary.
SPDR Dow Jones Industrial Average ETF DIA: This ETF includes mega-cap companies, which have large exposure to international markets, which are likely to suffer from the rising trade tensions (read: Top and Flop ETFs as Trump Calls Off North Korea Summit).
iShares MSCI Canada ETF EWC: This fund targets Canadian companies. Canada is the largest exporter of steel to the United States, according to data from Wood Mackenzie.
iShares MSCI Mexico ETF EWW: This fund offers exposure to a broad range of companies in Mexico and thus would be hurt by the trade friction as Mexico is the third largest exporter of steel to the United States.
Vanguard FTSE Europe ETF VGK: This ETF tracks the performance of the companies located in the major markets of Europe (read: How to Short Europe With ETFs as Political Crisis Worsens).
Vanguard Consumer Staples ETF VDC: This product has 17.3% allocation to packaged foods and meats while distillers & vintners, and brewers collectively account for 4.4% of the assets.
Industrial Select Sector SPDR Fund XLI: This ETF has large exposure to aerospace & defense (28.2%) and machinery (18%) companies, which are heavy users of the metals. Additionally, companies included in this fund roster do a lot of business abroad and would be negatively impacted by higher costs and less trade.
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SPDR-DJ IND AVG (DIA): ETF Research Reports
VANECK-STEEL (SLX): ETF Research Reports
SPDR-INDU SELS (XLI): ETF Research Reports
ISHARS-MEXICO (EWW): ETF Research Reports
ISHARS-CANADA (EWC): ETF Research Reports
VIPERS-CONS STA (VDC): ETF Research Reports
VANGD-FTSE EUR (VGK): ETF Research Reports
SPDR-SP MET&MIN (XME): ETF Research Reports
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