"Nobody wins a trade war."
"These government trade policies are picking winners and losers."
We've heard both of these statements ad nauseum over the past few months as the Trump administration pursues hardline negotiations with both China and the European Union over trade agreements and all sides have been imposing tariffs, retaliatorily tariffs and threatening more to come.
So which statement is correct? Well, actually both.
In a general sense, any restrictions on trade lower overall economic output. Economists almost universally agree that if producers and consumers are not free to trade their goods and services, the whole world ends up poorer in the long run.
On the other hand, at least in the short term, some U.S. companies do stand to benefit from barriers to foreign competition and the pricing power that tariffs on imported goods affords them.
It's common knowledge that the U.S. has imposed tariffs of 25% on steel imports and 10% on aluminum. Reviving the steel industry has been a headline goal of the Trump administration since the 2016 campaign and the president has made personal appearances at newly active U.S. manufacturers to highlight the success of these tariffs.
What's less well-known is that the Commerce Department allows individual purchasers to apply for an exclusion from paying the tariffs on imported products that they cannot reasonably procure in the domestic market. Other companies can also file an objection to these exclusions on the grounds that the product in question can actually be purchased domestically - usually if they themselves sell that product - or if the application contains omissions or inaccuracies. An objection can also be filed if the applicant believes that there is a compelling national security reason to deny the exclusion.
Currently the commerce department has its hands full with thousands of requests for exclusions and subsequent objections. It's been rumored that to clear the backlog, they have been basically rubber-stamping exclusions unless there's an objection, in which case they tend to grant the objection - and deny the exclusion.
The New York Times reported on Sunday that the Commerce Department had denied requests for exclusion from tariffs on steel products a total of 639 times so far since May. They also reported that in roughly half of those cases, an objection had been filed by U.S. Steel, Nucor or both. Both of these companies understand the system and how to make it work for their interests.
U.S. Steel beat the Zacks Consensus Estimate by 26% in Q2, reporting net earnings of $1.46/share versus an expected $1.15/share. Nucor recorded a slight miss in Q2, turning in $2.07/share against expectations of $2.10/share, but analyst estimates for full year 2018 have risen more than 25% over the past 60 days from $6.00/share to $7.54.
U.S. Steel and Nucor both carry a Zacks rank #2 (Buy).
However you may feel about tariffs and the Commerce Department's exclusion/objection process from an economic or political standpoint, as an investor, it's difficult not to respect they way these two companies have become adept at navigating the current climate and making it work to their benefit.
It may be true that in the long run, nobody wins a trade war, but U.S. Steel and Nucor certainly seem to be winning right now.
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