US Dollar to Benefit as Europe Hits China With Steel Tariffs

European Union international trade officials caved to pressure from steel producers including ArcelorMittal, the world’s largest steelmaker by volume, to impose punitive tariffs on Chinese imports of the metal into the regional bloc, which they alleged were unfairly underpriced. The key difference between this step and other similar measures in the past is its pre-emptive nature: before, European firms had to first prove that unfair practices of other countries were hurting their business before any action would be considered. The tariffs, which range from 17.7% to 39.2%, will take effect in October and last for five years.

Policymakers’ willingness to oblige the steel sector will open the door for other manufacturers to ask for similar treatment, opening the door for China to retaliate with protectionist measures of their own targeting EU products. This dynamic is sure to crush the booming trade between the south Asian giant and the European continent, which has surged since China joined the World Trade Organization in 2001 and has been growing at a rate of about 18% per year according to the European Commission.

The US Dollar stands to benefit from the EU’s protectionist posture. China ranks second behind the States among Europe’s top trading partners, a fact that may not continue to hold true going forward. This makes China even more dependent on US demand than previously and adding to existing incentives for the Chinese government to buy US Dollar-denominated assets (i.e. Treasury bonds), thereby boosting the greenback and securing a favorable environment for Chinese exporters. Further, the timing of the EU’s announcement could not be worse for the Euro, coming just as China is holding bilateral talks with the United States on a range of issues including trade relations and opening the door for US officials to easily strike a contrast between the States and Europe.