Leaders of the world’s biggest advanced economies will meet in Canada this weekend, for a G7 summit like no other.
As trade tensions continue to escalate, German Chancellor Angela Merkel predicts it will be a “contentious” meeting.
The trade conflict began in March, when US President Donald Trump put tariffs of 25 per cent on imported steel and 10 per cent on imported aluminium, citing “national security”.
But the conflict ramped up last week, when an exemption for close allies Canada, Mexico and the European Union ended and retaliatory tariffs on American products worth billions of dollars — including cars, bourbon and ketchup — followed quickly.
It has resulted in one of the biggest trade conflicts since the Depression era.
“We’ve been in trade war territory for some time,” said Dr Stephen Kirchner, the director of trade at the United States Studies Centre.
“I think President Trump fundamentally misunderstands the nature of trade and the fact that trade is mutually beneficial.”
The trade conflict has had a devastating impact on US markets.
JP Morgan’s top strategist Marko Kolanovic said President Trump’s tough talk on trade has wiped $US1.25 trillion off the US stocks since March.
It has not done anything for political relationships either.
French President Emmanuel Macron described the US tariffs as “illegal” and a “mistake”.
The Canadian Prime Minister said it was a low-point in North American relations, calling the deal “an insult” to Canadian soldiers who had fought and died next to Americans.
The European Union launched a challenged to the tariffs with the World Trade Organisation (WTO).
“This is further weakening trans-Atlantic relations and increases the risk of severe turbulence in the markets globally,” said European Commissioner for Trade, Cecilia Malmstrom.
“Protectionism can never be a solution.”
Tariffs, combined with US sanctions on Russian companies, have already had a big impact on costs, with domestic US steel and aluminium prices going up.
“The beneficiaries here are the US domestic producers of both aluminium and steel. They enjoy those higher prices and gain that rent,” said CLSA’s head of resources Andrew Driscoll.
“The big losers here are the domestic manufacturers and the consumers who have to absorb that higher cost.”
For now, Australia is keeping out of the trade conflict.
As just a small trading partner with the US in steel and aluminium, Australia successfully lobbied for an exemption from the tariffs.
Listed company BlueScope Steel is one of the few big winners, with production here and in the United States.
“Any exports from Australia are exempt from these tariffs and will enjoy that higher price environment,” said Mr Driscoll.
“It’s really its US business, called North Star, a best-in-class 2.1-million-tonne mini-mill that is getting the full benefits of the higher steel prices.”
But mining giant Rio Tinto, which has Canadian smelters, will be slightly worse off despite the higher prices offsetting the tariff.
“Rio sells about 1.4 million tonnes, some 40 per cent of their aluminium production, into the US from those Canadian smelters and it will be subject to that tariff,” said Mr Driscoll.
But everyone will lose if there is a global economic downturn.
A bigger front is brewing in the trade war — the US also plans to hit China with more than $US50 billion worth of tariffs in an attempt to decrease its trade deficit.
Trade talks in Beijing last weekend failed, despite China reportedly offering to buy $US70 billion worth of US products.
The US tariffs will be announced next week, with Beijing likely to retaliate with $US50 billion worth of its own tariffs.
There are predictions trade relationships will only get worse from here.
“The risk here is, at some point, the US walks away from the WTO and at that point the world trading system implodes because it won’t work with the largest economy outside of it,” warned Mr Kirchner.