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Potential Fallout of Misguided Steel and Aluminum Tariffs

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Potential Fallout of Misguided Steel and Aluminum Tariffs

March 5, 2018

President Trump recently announced that his administration would impose tariffs on steel and aluminum. Such tariffs could have substantial effects on a range of American industries and the overall economy.

In a column for Economics21, Berenberg Capital Markets chief economist Mickey Levy explored the potential macroeconomic effects of the announced tariffs. Those insights are important in helping to analyze the broader ramifications of the new duties.

This column examines the justification made for the tariffs and what lessons can be gleaned from past experience.

The administration cited national security interests as justification for the tariffs. The Department of Defense (DoD) issued a memorandum in response to the Department of Commerce’s reports on the subject, noting that the U.S. military only requires about three percent of domestic steel and aluminum production. Due to this small share, the DoD reiterated that it “does not believe the findings in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.”

Even with the many factors affecting steel jobs and production, from trade to automation to the state of the global economy, domestic production of aluminum and steel has been fairly stable for decades, except for a substantial decline during the Great Recession. This is shown in the figure below, with the first quarter of 1990 indexed to 100. If national security concerns are indeed the animating force behind steel and aluminum tariffs, the U.S. military would already seem to have an abundant, reliable supply of domestic production.

Domestic Production of Raw Steel and Aluminum

 

 

Source: Board of Governors of the Federal Reserve System.

One reason to think the announced tariffs on steel are not likely to have a substantial effect on China is that the country is not in the top ten in terms of U.S. steel import sources. According to the IHS Global Trade Atlas, Canada, Brazil, South Korea, and Mexico were the top four sources for imported steel through September 2017. China came in at 11th, and imports from China were down 5 percent from the preceding year. Furthermore, the memo expressed concern about potential adverse effects for key allies, as the United States is the destination for the vast majority of steel exports for Canada and Mexico.

Looking at the effects of steel tariffs in the past provides an estimate of the effects of a new tariff, although the context and details differ. In March 2002, acting on the findings from a report by the U.S. International Trade Commission, the Bush Administration imposed tariffs ranging from 8 percent up to 30 percent on a range of steel products.

In a follow-up analysis, the USITC arrived at a central estimate of a welfare loss of $41.6 million, and an estimated annual GDP loss of $30.4 million. Steel-consuming companies shifted some of their sourcing of steel, and some faced higher prices. Steel product producers or distributors were more likely to benefit from the measures. Another report estimated that more jobs were lost in adversely affected industries than the total amount of people working in the steel production and distribution industry overall.

It remains to be seen how other countries will respond, although many of them have signaled or announced their own tariffs. Jean-Claude Juncker, president of the European Commission, said the European Union considering tariffs on products ranging from Harley-Davidson motorcycles, bourbon, and other agricultural products, although plans have not yet been finalized. 

Due to increases in steel productivity since the implementation of the Bush tariffs, any potential benefits for U.S. steel producers or distributors are likely to be smaller, while the costs to the economy could be greater.  

For a partial explanation as to why the job-protecting potential of the new tariffs will likely be muted, we need to look no further than the American Iron and Steel Institute, an association representing the North American steel industry. That group touts the industry’s significant labor productivity gains over the recent decades: the number of man-hours per finished ton of steel fell from 10.1 in the 1980s to an average of 1.9 in 2015.

Two potential avenues could help avoid the worst of the fallout resulting from these tariffs and whatever escalating countermeasures follow them.

The problems introduced by concentrated benefits and diffuse costs, here represented by steel producers and steel-consuming companies and other industries that could be affected by new tariffs from other countries, could be reduced by the new avenues companies have to quickly disseminate their estimates of how they would be harmed to the public via social media. This could make the diffuse costs more salient to the average American, although it is an open question as to whether negative reactions would have any effect on the administration’s determination to impose the tariffs.

Secondly, Congress could take some actions to help avert this scenario. More immediately, congressional Republicans are attempting to dissuade the president from following through with the imposition of the tariffs. A more transformative action would be to consider a bill such as Senator Lee’s Global Trade Accountability Act that would subject Executive Branch trade actions to congressional approval. So far, the bill has only been referred to the Committee on Finance, and passage would be a steep uphill journey.

The recently announced steel and aluminum tariffs are likely to have negative effects on the American economy. They are unlikely to increase steel-producing jobs. From a national security perspective, the Department of Defense has indicated it does not think the tariffs are necessary, and domestic production of both aluminum and steel has remained strong.

American companies that use aluminum and steel as inputs will be harmed, and significantly more Americans work for those companies than in steel or aluminum production. More domestic industries would be harmed by any tariffs imposed by other countries in response. The American economy and workers would be better off without the tariffs.

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.

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