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How Trump’s tariff tantrum will hit ASX investors and Rio Tinto Limited (ASX:RIO)

The share prices of our mining stocks are likely to come under pressure today as the US slaps steel and aluminium tariffs on three of its allies from the start of this month.

Rio Tinto Limited (ASX: RIO) will be the highest profile casualty from US President’s Donald Trump’s erratic decision to impose a 25% levy on steel imports and a 10% duty on aluminium from Canada, Mexico and the European Union.

Rio Tinto’s dual listing on the London Stock Exchange and its Canadian aluminium smelters puts our mining giant in the crosshairs of Trump’s tariff tantrum, although Australia won’t be impacted by the trade spat with the three countries imposing tit-for-tat taxes on certain US imports.

Australia’s exemption means that our other aluminium-exposed miners South32 (ASX: S32) and Alumina Limited (ASX: AWC) will be unaffected by Trump’s tariffs, which kick in later today.

There is also a winner from the trade restrictions. Shares in BlueScope Steel Limited (ASX: BSL) are likely to find support as not only will the steel maker be spared from having to pay extra duties, it will benefit from rising US steel prices as the 25% levy on the metal will almost certainly force prices up.

But it isn’t what we know that should scare us. It’s what we don’t. While the overall economic impact from Trump’s tariffs and the reciprocal levies would be negligible, the risk of an escalation in the trade war could derail economic growth.

What’s more, Trump is now going after China and his trade attack on the allies of the US could be political posturing to give him the upper hand against the Chinese.

It is the uncertainty that will impact on the mining sector the most as commodities are highly correlated to economic growth. If the fear of an escalating global trade war persists, other sectors will also come under pressure.

Perhaps the biggest risk to markets is the rebalancing of the world order as the US becomes increasingly isolationistic. By putting some of its closest allies offside, it will be hard for Trump to win friends to support the US’s upcoming trade war with China and its embargo against Iran.

It’s hard to fathom but Trump may force some of the US’s traditional allies to become closer to Russia and China.

The economic impact from the change in the balance of trade and political power can’t really be worked out at this point, but it will be very significant for Australian investors.

The silver lining is that this is a slow-moving train wreck. The impact from trade tariffs will take time to flow through to the real economy and that will give time for governments and businesses to respond.

You also can’t rule out a late-night tweet from Trump declaring all this an April Fool’s joke in June and scrapping the tariffs. You only need to look at his track record in making sudden U-turns.

Trump’s decision not to extend the tariff exemptions for Canada, EU and Mexico reflects his administration’s inability to extract favourable changes to existing trade treaties with these nations.

Mexico and the EU will retaliate with duties on a wide range of US imports like Harley-Davidson motorcycles and cheese, while Canada will raise taxes on US$12.8 billion worth of US steel, aluminium and other US exports, according to Bloomberg.

This is only the opening salvo and Trump promises to make our FY19 an interesting ride.

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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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