Trump is staring down a deadline that could spark a trade war -- and no one's sure what is going to happen

  • President Donald Trump has until midnight to extend steel and aluminium tariff exemptions that were handed out to several US allies.
  • According to administration officials, Trump has still not made up his mind on whether to extend the exemptions.
  • If they are not extended, the currently exempted countries would likely retaliate.
  • Removing the exemptions would be a negative for the US economy, businesses, and financial markets according to economists.

President Donald Trump is facing a critical decision regarding recently announced steel and aluminium tariffs, and the choice could determine whether or not the US throws itself into a trade war with some of its closest allies.

Trump has until midnight to determine whether to extend steel and aluminium tariff exemptions for a handful of nations. The exemptions allow several US allies – including the European Union, Canada, and Mexico – to avoid a 25% duty on exports of steel to the US and the 10% duty on exports of aluminium.

The Trump administration granted the exemptions shortly after the president’s decision to impose the tariffs, but the move was only temporary and predicated on the promise of talks to reduce trade imbalances between the US and other countries. Currently, five of the US’s 10 largest sources of imported steel are exempted from the tariffs.

Most administration officials are pushing for Trump to at least extend the exemptions to continue talks on trade remedies, Jonathan Swan of the news website Axios reported. But a handful – most notably top trade adviser Peter Navarro – are pushing Trump to impose the tariffs on everyone.

Commerce Secretary Wilbur Ross sounded a hopeful tune in an interview with Bloomberg on Saturday. He suggested that most countries – but not all – will see their exemptions extended.

But Treasury Secretary Steven Mnuchin said Monday that Trump had not made a decision on the exemptions despite the looming deadline .

“The president has not made any decision yet,” Mnuchin said during an interview on Fox Business. “We’ve been having lots of discussions internally, we’ve been having lots of discussions with our counterparts.”

Allowing the exemptions to expire would likely lead to retaliation from those nations and possibly trigger a broader trade war.

In a statement released Sunday, German Chancellor Angela Merkel said that after discussions with French President Emmanuel Macron and UK Prime Minister Teresa May, the leaders “agreed that the US ought not to take any trade measures against the European Union.” Merkel also threatened retaliation if the tariffs kicked in.

“The European Union should be ready to decisively defend its interests within the framework of multilateral trade rules,” Merkel said.

According to multiple reports, negotiations to stall the tariffs‘ imposition have stalled and while some countries currently exempted are confident an extension is on the way, nothing is guaranteed.

The Trump administration is seeking concrete plans from exempted countries on methods to reduce the bilateral trade deficit with the US.

For instance, South Korea received a permanent exemption to the tariffs by agreeing to a quota for steel products, which limits the amount of metals the country can send the US in a year. The quota deal came as part of a broader renegotiation on the US and South Korea’s bilateral trade deal, KORUS.

Ross said at a conference Friday that the administration is offering the exempted countries a binary choice.

“We are asking of everyone quotas if there isn’t a tariff,” Ross said.

Gregory Daco, chief US economist at Oxford Economics, warned of financial shocks if the tariffs go into effect.

“The risk is that we could see a major supply chain shock with negative spillovers to financial markets,” Daco wrote in a note to clients. “As a reminder, on the day of the tariffs announcement, stocks prices fell nearly 2% while the 10-year Treasury yield slipped 10 basis points and the dollar weakened 0.5%.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.