The Trump Tariffs: Potentially devastating to US manufacturers

By: | Issue #665 | at 07:35 AM | Channel(s): International Trade  

The US may become an island of high steel and aluminum prices

We finally know what President Donald Trump is going to do with the Department of Commerce’s recommendations for steel and aluminum tariffs and quotas under Section 232 of the Trade Expansion Act of 1962. Apparently, he’s going to exceed them.

The Commerce Department released reports in mid-February resulting from its Section 232 investigations, with three alternative courses of action each with respect to steel and aluminum imports, all of which would have involved new tariffs and/or quotas on all such imports into the United States. The first option in each report would have imposed a 24% global tariff on steel imports and 7.7% on aluminum. The Trump tariffs are reported to be 25% on steel and ten percent on aluminum for all imports into the U.S. Section 232 authorizes the US government to examine the harmful effects of imports on strategic industries that are deemed essential to national security and to take measures to restrict imports.

Domestic steel consumers anticipated that the president would impose some sort of import restrictions and took action to protect themselves against that eventuality. The AJOT reported last November that steel imports during the first three quarters of 2017 were way up, by close to 20%, over the same period in 2016, in apparent expectation of trade restrictions. Since that time, the Commerce Department made public its recommendation to the President on the Section 232 investigation, and a different species of data emerged.

January 2018 data from Thomas show that sourcing for steel is up 46% month over month in its network, sourcing for steel pipe is up 48%, and sourcing for aluminum sheets is up 40%. Thomas tracks North American demand signals, so what this data means is that U.S. steel consumers were looking for domestic sources of supply in anticipation of Trump’s action.

Although understandable, it’s questionable how much relief domestic manufactures can buy with such a strategy. In any event, the window for such a strategy will close once the new tariffs come into effect and the bottom line is that steel and aluminum is going to cost a lot more in the United States for the duration of the Trump tariffs. Trump’s move to impose broad import restrictions on steel and aluminum will also negatively affect other U.S. industries, as foreign governments will retaliate against the Section 232 measures.

Steel Spikes

“We’ve seen some spikes in steel sourcing a couple of times over the last 12 months,” said Tony Uphoff, Thomas President and CEO. “A spike in June of last year followed initial discussions of Section 232 tariffs. We think without question that the market was reacting to the proposed tariffs. U.S. manufacturers like Boeing and the auto companies are scrambling to find different suppliers because their margins could not sustain the cost differential of the tariffs.”

Now that Trump is imposing tariffs on imports, domestic steel may very well be cheaper than its foreign counterparts, but they would “would tighten supplies and raise prices significantly” on US manufacturers, according to former International Trade Commission Chairman Daniel Pearson. That, in turn, “would lead to substantial job losses in U.S. manufacturing firms that use steel as an input” as domestic manufacturers “would basically be paying the highest steel prices in the world.”

That worries Roy Hardy, president of the Precision Metalforming Association, who said that imposing steep tariffs on steel will “devastate downstream U.S. steel consuming manufacturers.” The last time the U.S. imposed steel tariffs in 2002, he added, more than 200,000 American jobs were lost.

“If these tariffs are imposed,” Hardy concluded, “the US will become an island of high steel prices.”

The Motor & Equipment Manufacturers Association has also expressed concerns, calling on the administration not to impose blanket quotas or tariffs. The organization, which represents over one-thousand U.S. vehicle suppliers, believe the Trump tariffs will cause “disruptions in supply chains and increased production costs” and those “will not contribute to the national security of the United States.”

That’s why MEMA urged Trump in a letter “to take a country- and product-specific approach to this issue rather than imposing blanket quotas or tariffs on all steel and aluminum imports.” That’s the Commerce Department’s usual approach: placing narrowly tailored punitive tariffs on specific products from individual countries, not blanket tariffs and quotas against all product categories from all countries.

“While these tariffs are meant to protect American manufacturing, they do just the opposite,” said Thom Dammrich, president of the National Marine Manufacturers Association (NMMA). “U.S. manufacturers, like those in our industry, which use American-made aluminum, depend on a competitive global market and fair pricing. What’s more, U.S. aluminum manufacturers are at capacity and unable to supply the wide-width aluminum sheet used by our members, forcing them to seek it overseas.”

The aluminum tariffs, Dammrich added, will drive up the costs of the aluminum used to manufacture the 111,000 aluminum boats that make up 43% of new U.S. powerboat sales each year. The decision “to implement new tariffs,” he concluded, “severely harms the $37 billion U.S. recreational boating industry and the 650,000 American workers it supports.”

Retaliation Against Tariffs

Retaliation against the Trump tariffs is almost inevitable, with officials from around the world already on the record on this point. (See sidebar on page 6) There would be no point to impose punitive measures on U.S. steel, since the industry doesn’t export much, so they will take action against other sectors. The one most likely to face retaliation is agriculture, and U.S. farmers are concerned that Trump’s actions will impact them negatively. The American Soybean Association (ASA) has noted the potential for retaliation by China, which purchases one-third of the soybeans grown in the United States at a value of more than $14 billion.

“China is not only our largest customer, it purchases more than all our other customers combined,” said ASA President and Iowa farmer John Heisdorffer.

The Chinese have already identified U.S. soybeans as a target for retaliation and officials have disputed the notion that imports represent a threat to U.S. national security. “Without a clear definition, it could easily be abused,” said a statement from Wang Hejun, an official of China’s Commerce Ministry. “If every country followed the U.S. on this, it would have serious ramifications on the international trade order.

“If the United States’ final decision hurts China’s interests,” he added, “we will take necessary measures to protect our rights.”

It’s not clear at this point what specific rules the White House will adopt with respect to the new trade restrictions, but the Commerce reports suggested in passing the possibility of issuing exemptions to Section 232 measures for certain countries or products, and excluding from restrictions products not available in the U.S. That may provide an out for the U.S. domestic industries, if Trump adopts that procedure, as it’s pretty certain there will be a lot of U.S. companies applying for exemptions.

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American Journal of Transportation

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Peter Buxbaum has been writing about international trade and transportation, as well as security, defense, technology, and foreign policy, for over 20 years. Besides contributing to the AJOT, Buxbaum’s work has appeared in such leading publications as Fortune, Forbes, Chief Executive, Computerworld, and Jane’s Defence Weekly. He was educated at Columbia University.