A Steel / Aluminum Tariff is a Disaster Waiting to Happen

If you haven’t heard, President Trump has been talking about implementing a broad tariff on imported Steel and Aluminum. The idea is to tax imported raw materials at 25% and 10% respectively, in order to allow US producers to better compete. Since I work directly with these materials, this action concerns me greatly.

The Problem – Global Overcapacity and Dumping

First, let’s explain WHY they need the help.

In certain countries, the government gives private industries a bunch of money to build factories. They build a huge amount of capacity, then are able to produce steel very cheaply because they aren’t burdened by the high startup costs of the facilities, etc. And they will even make and sell steel at a loss while being propped up by their governments, who are – wait for it… afraid of losing manufacturing jobs.

USNews reports:

Over the past two decades, China and other countries have made huge investments in excess steel and aluminum capacity, and used massive subsidies to drive down prices below cost, driving many producers, especially in the United States (which has the world’s most open markets), out of business. Dozens of U.S. steel mills and aluminum smelters have closed, eliminating more than 100,000 good jobs.

Worse yet, China and other countries are using that artificially subsidized metal to take over world markets in a wide range of downstream industries ranging from auto parts to washing machines and wind mills. So, the first step in ending unfair trade is to get rid of excess capacity in steel and aluminum.

In February the Secretary of the Department of Commerce advised putting these exact tariffs in place in this report. Excerpts below:

Secretary Ross has recommended to the President that he consider the following alternative remedies to address the problem of steel imports:

1. A global tariff of at least 24% on all steel imports from all countries, or

and

Secretary Ross has recommended to President Trump three alternative remedies for dealing with the excessive imports of aluminum. These would cover both aluminum ingots and a wide variety of aluminum products.

1. A tariff of at least 7.7% on all aluminum exports from all countries, or

What ISN’T Being Addressed

The second part of the supply problem is that countries, like China, are using their incredibly cheap steel to also build cheaper consumer products and flood the market. So not only are they driving US materials producers out of business, they are killing manufacturing jobs because the products come in cheaper than they can be made here.

A tariff on raw material, without also addressing the broader problem of cheap imported goods may bring back some jobs on the production side, but it won’t matter if prices for steel equalize 25% higher (or just under) and the cost of goods manufactured in the US also increase. Those goods will be less competitive, so they will die off along with the NEED for US made steel and aluminum!

You don’t need US Steel if you can’t competitively make US products to sell!

Ok, So Tariff Anything Made With Steel or Aluminum!

Wanna keep things fair? Then put a tariff on anything involving these products! That should give US producers a huge leg up and lead to increased jobs, right? Wrong.

When we start implementing trade barriers, other countries retaliate. For example, according to the BBC:

EU trade commissioner Cecilia Malmstrom set out plans to retaliate against the proposed US tariffs.

These include higher import duties on bourbon, peanut butter, cranberries, orange juice, steel, and industrial products, she said.

So, lets say the US brought back 100,000 steel and aluminum jobs (which IS NOT going to happen, but anyway), in Florida alone the Orange Juice industry employs 45,000. The US is the world’s second largest producer, and we export a bunch of it. How many of those jobs will be lost?

NYTimes reports:

If the back-and-forth stopped there, the American economy would lose 0.1 percent of its output this year, said Mark Zandi, the chief economist at Moody’s Analytics. That loss would cost the country 190,000 jobs.

There is precedent for this too. It’s not speculation:

Former president Barack Obama put a tariff on Chinese tires in 2009, but it backfired, many economists say. Obama touted the 1,000 jobs saved, but the Peterson Institute says that more than 3,000 jobs were lost in other industries.

And President Bush’s results were similar:

A study of similar trade actions taken by the George W. Bush administration found that they cost the economy an estimated 200,000 jobs, including roughly 11,000 in Ohio, 10,000 in Michigan, 10,000 in Illinois, and 8,000 in Pennsylvania.

Well, What Should We Do?

First we should figure out if we should do anything at all. The Steel industry dynamically expands and contracts as needed, more than other industries. For example, the Gold industry doesn’t vary that much, because you can’t just mine some more gold and ramp up production. But you can with steel.

Between 1974 and 1999 the steel industry globally shed 1.5 million jobs! This was not due to unfair competition. It was due to demand for the product. And since 2000, further job loss has occurred due to technological improvements that enabled steelmakers to make more metal with far fewer workers.

As far as US national security is concerned, the argument that we need more production capacity is ludicrous. First because we can ramp up production whenever needed. Secondly because when you look at imports, almost all of it comes from our allies.

If the US steel and aluminum producers really need help, they should do exactly what the banks, car companies, and just a shitload of others have done by appealing to the government for financial assistance.

The Proposed Tariff Also Violates the Law

In addition to being financially problematic, the proposed tariff also violates international trade agreements and U.S. compliance with the World Trade Organization’s rules.

In Summary – We Are All Screwed

There are many remedies available to the US Government to come to the aid of the metal producers that don’t involve starting trade wars, harming small businesses through increased cost of goods, and generally hitting every US consumer as those price increases are passed down the line.

If President Trump goes through with this tax increase it will likely backfire in the same way others have in the past. In short – nobody wins a trade war.

Then again, this could all just be another Trump-style fire drill designed to shake things up as a “negotiation tactic“. The only thing we know for sure is that you can’t take anything the man says 100% at face value. We may never know what the real intentions are.