The US President has said he will impose new tariffs on imports of steel and aluminium, fuelling fears that the US is about to start a trade war with China and other major trading partners.

On Friday, Asian markets fell to multi-week lows. Similarly, European shares opened sharply lower as investors sold off shares in steel and aluminium manufacturers and exporters.

Three consecutive drops of more than 1% in the US stock market in the last three days makes already nervous investors even more jittery. Investors did not take news of Trump's threat of a trade war well, mainly concerned about how it may affect the US economy.

The news obviously boosted steel and metal company stocks but heavy users of steel and aluminium including John Deere and Ford were all down. The impact of the tariffs means that steel prices in the US will rise, making the cost of the raw material more expensive for domestic users. The fear is that this price rise will be recovered in the cost of the finished goods. Anything that makes machinery or tractors more expensive will reduce demand.

The other impact is of course that tariffs could, ironically, raise the incentive for those manufactures to move production offshore to avoid the tariffs – undoing Trump’s intended boost to keeping US jobs at home.

The threat of retaliation by trade partners is also a concern. It could potentially create a spiral that could undercut global economic growth, widely seen as a key ingredient in the rally of the stock market last year.

The US Federal Reserve has also started to tighten its ultra-loose monetary policy. The Fed has implied that it could deliver four US rate rises this year. This has also triggered the stock sell-off and pushed up bond yields.

If the taxes come in, it could mean more expensive prices for machinery no matter where they are produced. It is unlikely the EU manufacturing industry will take this without a fight.

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