Market Insider

Tariffs on washing machines and solar panels not 'declaration of war' and don't spell end of trade deals

Key Points
  • Tariffs on imported washing machines and solar panels smack of protectionism, but the markets will not be worried about U.S. trade policy unless the White House takes aim at something broader, such as NAFTA.
  • The announcement came just as the sixth round of NAFTA talks began, but trade experts see the talks in a more optimistic light and Trump's stance more flexible.
  • The peso sold off as investors worried about NAFTA, but the currency recovered after the country's economic minister made positive comments.
Cohn: The tariffs went through a very rigorous process

The Trump administration's new tariffs on imported washing machines and solar panels smack of protectionism, but they are not signaling the U.S. is willing to take the kind of broad-brush trade actions that would upset the stock market, such as killing NAFTA.

While the actions in themselves did not cause much of a stir, they sent a shudder through the foreign exchange market and raised concerns about the NAFTA talks, in their sixth round this week. But trade experts said the NAFTA talks appear to be in a better place than they were in the last round between the U.S., Canada and Mexico even though there are a number of difficult issues yet to be resolved.

"I think it plays in nicely to the administration's plan on being tough on enforcing trade rules and fighting out against the Chinese and other Asian countries that are clearly trying to circumvent the normal trade rules," said Welles Orr, senior international trade advisor with law firm Miller & Chevalier and a former U.S. trade official on the NAFTA negotiating team for President George H.W. Bush and President Bill Clinton.

In addition to the new tariffs, an "affirmative decision" on aluminum and steel is expected soon, Orr said.

"This all fits with the administration's play to be tough trade negotiators. This comes in nicely just before or during the sixth round of negotiations on NAFTA. The administration shows its muscle. It's not backing down from its campaign pledge," Orr said.

The dollar was sharply higher against the peso early Tuesday, signaling concerns about the North American Free Trade Agreement negotiations. Mexico, which has a more than $60 billion-a-year trade deficit with the U.S., is the country with the most to lose if NAFTA is dissolved.

However, the peso reversed much of its losses later, after Mexico Economy Minister Ildefonso Guajardo told Bloomberg News in Davos, Switzerland, that the Mexican government is willing to negotiate changes to NAFTA, through the runup to July's Mexican presidential election. He said the administration of President Enrique Pena Nieto wants an agreement before he leaves office in December.

Fears of protectionism and trade wars have hung over the markets since President Donald Trump's election, but so far no sweeping actions have been taken.

"When these issues are discussed, there is always a threat to what it means to NAFTA. It's an indication of what the stance of the U.S. government is going to be and what the trade representative is going to be when it comes to negotiating and it comes to tariffs," said Juan Carlos Hartasanchez, senior director at Albright Stonebridge. "This is going to be a difficult round as it relates to making or arriving at definitions."

Armand de Mestral, professor emeritus at McGill University's faculty of law, said, "I'm not sure you have to read this as a declaration of war."

On NAFTA, trade representatives see some promising signs since Trump has moderated his stance, telling farmers recently he would like to improve the trade deal.

Trump has also said he would be more flexible with Mexico because of its presidential election July 1.

"The president has backed off on that threat of pulling out until after the Mexican election. I think going into this sixth round, there's a more positive temperament from all three sides," said Orr.

While the stock market did not respond to the tariffs, the solar industry immediately blasted them as a major negative. Both China and South Korea criticized the import tariffs, and Seoul said it would take its complaint to the World Trade Organization.

"I think the perception is that something was going to happen sooner or later and these probably are not as extreme as they could have been," said Robert Sinche, chief global strategist at Amherst Pierpont. "It looks like the economic impacts are relatively minor. The bigger fear would be retributions, and so far that's been relatively muted."

The stock market would react if NAFTA were to be terminated, but the current trade actions are not a worry, according to James Paulsen, chief investment strategist at Leuthold Group. "Stocks are not likely to be concerned. So much is bantered and thrown about particularly by this administration and president and a lot of nothing comes of it. People are going to severely discount this discussion until it takes a more concrete form," Paulsen said.

Hartasanchez said sticking points in the NAFTA talks continue to be U.S. efforts to change the rules on disputes so that problems no longer have to go to a panel made up of NAFTA countries. There is also disagreement over the rules of origin, which could be one area of compromise. The U.S. would like to see rules changed so that cars would contain 50 percent U.S. parts and be 85 percent NAFTA-made, from the current 62.5 percent level.

The Solar Energy Industries Association forecast the tariffs will cost 23,000 U.S. jobs and cause investments to be delayed or canceled. Companies also complained. Duke Energy, for instance, said its customers will feel the impact of higher costs and it will have to re-evaluate the economics of each project.

"We are planning a significant number of projects across our commercial and regulated businesses. The imposition of this tariff will increase customer costs and hurt our ability to deliver on that promise," said Duke Energy in a statement.

China has long been criticized for undercutting other manufacturers with its low-cost solar panels.

Samsung and LG both protested the tariffs on washing machines. The administration slapped a 20 percent tariff on the first 1.2 million imported large residential washers in the first year and a 50 percent tariff on additional machines. Goldman Sachs analysts forecast that the cost per machine could rise by anywhere from 8 percent to 20 percent for consumers in the first year.

But analysts also said new plants being opened in the U.S. by Samsung and LG could take away some of the sting.

Credit Suisse analysts say the two have a combined 33 percent share in the U.S., suggesting 3 million washers are imported annually. "That said, both have commenced construction of US-based capacity, which is expected to come on line over the next 12-18 months. As such, we expect this decision to become less impactful in time," the Credit Suisse analysts said in a note.

The stock market, meanwhile, rewarded U.S. appliance maker Whirlpool with a 3.5 percent pop in its stock.

WATCH: Trump says tariffs won't start trade war

President Trump: New tariffs won't cause a trade war