Trump's 25% Steel, Aluminum Tariffs: A Double-Edged Sword for U.S. Investors

President Donald Trump is set to unveil 25% tariffs on steel and 10% tariffs on aluminum imports on Monday, a move that could have significant implications for U.S. investors. While the tariffs aim to protect domestic industries and reduce the U.S. trade deficit, they also pose potential risks to the broader economy and specific sectors, such as manufacturing and defense.

The U.S. defense industry, a significant consumer of steel and aluminum, is expected to face headwinds due to the increased costs of these metals. A study by Jeroen Klomp (2025) titled "Trump tariffs and the U.S. defense industry" found that investors perceived the introduction of these tariffs as detrimental to U.S. defense companies. The negative abnormal stock returns in the days around several key tariff-related events evidence this. The study also revealed that the height of the imposed tariff exceeded investors' expectations, further reinforcing the negative sentiment after the official announcement by President Trump.

Moreover, the U.S. defense industry ranks among the largest consumers of both steel and aluminum, and having unfettered access to these metals is pivotal for producing U.S. military systems. The outstanding capabilities of many U.S. weapons systems depend upon exceptionally strong and highly engineered materials, including nuclear-powered aircraft carriers, submarines, tanks, armored vehicles, and advanced fighter jets. Therefore, any increase in the cost of these metals due to tariffs will likely lead to higher production costs for defense contractors, which may negatively impact their equity returns.

Additionally, a report by the U.S. International Trade Commission found that the tariffs increased the average prices of steel and aluminum by 2.4 percent and 1.6 percent, respectively, disproportionately hurting "downstream" industries that use steel and aluminum in their production processes. This includes the defense industry, which relies heavily on these metals for its products. The increased costs may lead to reduced employment in these industries, as well as higher prices for consumers, and hurt exports.



However, the national security justifications for these tariffs have been called into question, as they appear to violate WTO rules and multilateral trade agreements. The WTO's General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), are based on principles of freer and fair trade, predictability, and non-discrimination. The core of the WTO system is the agreement that members work together via negotiation to lower tariffs through binding and transparent means.

However, the U.S. tariffs on steel and aluminum represent a clear break with this economic orthodoxy. The U.S. has invoked national security as a justification for these tariffs, but this has been called out as a clear violation of WTO rules. The WTO's national security exception allows for tariffs only in cases where there is a genuine threat to national security, and the measures taken must be necessary and proportionate to address that threat. The U.S. tariffs on steel and aluminum, which affect a wide range of trading partners and have been used as a negotiating tactic rather than a genuine national security measure, do not meet these criteria.

In response to the U.S. tariffs, several U.S. trading partners have retaliated with their own tariffs. Canada, for example, has announced retaliatory tariffs on $155 billion of U.S. goods, affecting steel and aluminum products in two stages. Mexico has authorized reciprocal trade measures, and China has announced intentions to file a WTO complaint. These retaliatory responses indicate a change to more combative behavior from states in the firing line, a marked shift from the more cautious behavior seen during Trump's first term.

Moreover, the U.S. tariffs have been criticized for abandoning the rhetoric that international trade should serve mutual benefit. Trump's declaration that America will no longer be the "stupid country" and his dismissal of Canada as ceasing to exist as a "viable country" without U.S. trade reflect a zero-sum worldview that sees international commerce as a battlefield rather than a foundation for shared prosperity.

In conclusion, the proposed 25% steel and aluminum tariffs are expected to have a negative impact on the U.S. defense industry's equity returns due to their significant metal consumption and the increased costs associated with the tariffs. The national security justifications for these tariffs do not align with WTO rules and multilateral trade agreements, and they have led to potential retaliatory responses from U.S. trading partners. Investors should be aware of these potential risks and consider diversifying their portfolios to mitigate the impact of these tariffs on their investments.