What Do Tariffs on Aluminum and Steel Mean for Institutional Traders?

The institutional investment landscape is facing unprecedented challenges as tariffs on aluminum and steel prompt widespread uncertainty for firms seeking to uncover opportunities in the age of Trump 2.0. 

Recent changes to the US aluminum and steel tariffs, known as Section 232 rules, have carried an uneven impact throughout global supply chains and trade. Although Trump’s tariffs have been known to change at a moment’s notice, a 25% tariff rate is now in place universally and challenges industries to adapt quickly to avoid severe penalties. 

Worryingly for institutional traders, the tariff on metals has formed the catalyst for retaliatory measures from affected countries. Canada announced swift countermeasures, imposing a 25% retaliatory tariff on $20.95 billion worth of US goods, including steel and aluminum. 

Additionally, tariffs on goods such as computers, servers, display monitors, water heaters, and sporting goods have been imposed by Canada to cloud the outlook for more industries. 

The European Union also announced retaliatory tariffs targeting around $28 billion worth of US goods like motorcycles, peanut butter, and jeans, among other heavily imported products, that will roll out throughout April. 

Notably, the announcement of a 50% tariff by the EU on bourbon imports prompted Trump to threaten a 200% countermeasure targeting imported alcohol from Europe as an example of how quickly fears over trade wars can be stoked. 

But what does the threat of a trade war focusing on aluminum and steel tariffs mean for institutional investors and US markets as a whole? Let’s take a deeper look at how to navigate heavy tariffs on metals and their implications for Wall Street:

Navigating US Markets in the Age of Tariffs

The United States is dependent on its trading partners for much of its aluminum supply. With American firms buying around half of their stock from abroad while relying on imports for special aluminum products, it’s clear that tariffs affecting the metal will have significant ramifications on the economy. 

With around two-thirds of primary aluminum coming from Canada, a 25% tariff could have a massive knock-on effect for industries like defense, where building and maintaining military aircraft and armor plating becomes more expensive. 

To add to the complications arising from metal tariffs in 2025, importers will need to contend with the European Union’s Carbon Border Adjustment Mechanism (CBAM) in 2026. This initiative will require importers to disclose emissions data on their products, with charges for higher polluting firms. 

The expected arrival of CBAM could have major implications for US trade, with metals from Europe becoming even more expensive next year. 

As a result, we’re likely to see the Trump administration push more heavily to promote domestic production, particularly for import-heavy metals like aluminum. Whether domestically produced aluminum will be the subject of government incentives and grants remains to be seen, but it falls in line with the President’s protectionist agenda. 

How Can Institutional Traders Keep Up? 

The challenging part of metals tariffs for institutional traders to keep up with is the uneven impact of a trade war and the ways it can confound market trends. 

Industries like automakers, construction firms, and manufacturers are all seeing rising input costs as a result of their collective dependence on steel and aluminum. While some firms will be capable of absorbing the impact of higher import costs, others will either opt to squeeze their profit margins or pass the extra costs onto the consumer. In the case of the latter, the inflationary impact could see the consumer price index (CPI) begin to run away and cause a wider cost-of-living squeeze. 

If the cost of finished products rises uncontrollably, demand for downstream products may weaken, slowing job growth in affected sectors. 

This calls for institutional traders to become more nuanced with their market insights. While volatility is generally a good thing for discovering fleeting investment opportunities throughout different sectors, it will boil down to a hawkish monitoring of how industries adapt to aluminum and steel tariffs. 

Evidence of diversified supply chains, long-term supplier contracts, cost reduction strategies, and importing alternative materials can all help industries to mitigate the impact of tariffs, and traders can expect plenty of upsides associated with the firms pioneering the most effective means of bypassing the costs of an ongoing trade war.  

Institutions should look to Tier 1 Prime Services that can offer access to global markets and low-latency trading tools as an essential consideration to take advantage of the unpredictability of markets in the midst of a far-reaching trade war. 

In the current climate, factors like the monitoring of inventory levels, consumer sentiment, and evidence of geopolitical policy changes are the best way to steal a march on other traders and to act faster to capitalize on fleeting opportunities. 

Investing in companies with domestic supply chains will invariably offer more resilience during periods of higher tariffs. These firms will generally have lower exposure to direct tariff costs, retaliatory measures, and currency fluctuations amid geopolitical disputes. Likewise, utility industries, banking, healthcare services, and certain consumer discretionary businesses can offer outperformance should trade wars hinder growth in 2025. 

Adaptability is Key

Institutions that can react faster to emerging trends are likely to be best positioned to maximize their profit margins trading in 2025. 

Areas like social listening, sentiment analysis, and even satellite imagery to monitor the state of global metal inventories can be an excellent tool in your trading armory over the months ahead. 

Trump 2.0 may be punctuated by tariffs at present, but this doesn’t mean that institutional traders need to turn bearish. Taking a proactive approach to look for industry resilience can be a great strategy in the year ahead. Although the future is increasingly uncertain, it can still be a prosperous 2025 for forward-thinking institutions.