Last week President Trump announced that the US will impose tariffs of 25 percent on imported steel and 10 percent on imported aluminum. Last year I disclosed in a Logistics Viewpoints article that I see the Trump administration’s trade proposals as posturing and rhetoric to set up future negotiations to leverage the US’s economic clout in an effort to extract trade benefits on the margin. I did not see a trade war resulting at that time and I still believe it is unlikely. However, I do believe that the administration will hold the line on its proposed tariffs.
Trade Tariffs, Metal, and Mettle
The Trump Administration used section 232 of the Trade Expansion Act of 1962 to invoke the tariffs on imported steel and aluminum. Section 232 authorizes the executive branch to adjust imports (impose tariffs) of a given article if it determines that the imports are threatening the national security. Examples of national security include defense systems, national infrastructure, and economic welfare. I can easily see the relationship between metals and national defense systems. The national infrastructure argument is a bit weaker. And the relationship between economic welfare and national security is a stretch, in my opinion, for a country with a free market economy. In fact, the Department of Commerce report indirectly provides support for imports as a more economical option with its finding that “imports are priced substantially lower than US produced steel.” Regardless of my opinion on the application of this law, the US Department of Commerce investigation reports provide some insights on the industry I found interesting:
- US domestic production of steel is roughly 70% of domestic demand. I thought it was lower.
- For certain types of steel, such as for electrical transformers, only one U.S. producer remains.
- Canada is the largest exporter of steel to the US. China is noted as a chronic over producer, but is only the 11th largest exporter to the US.
- Domestic prices of hot rolled coil/rebar steel are higher than those from China, ASEAN, Northern Europe and Southern Europe. Such higher domestic prices are attributed to higher taxes, healthcare, environmental standards, and other regulatory expenses. That argument doesn’t appear valid at first glance with respect to Northern Europe and Southern Europe. Do European countries subsidize the steel industry enough to account for price differential or is it simply a sign that the US isn’t cost competitive?
- The U.S. currently has only five aluminum smelters remaining, and only two smelters that are operating at full capacity. This is less than I expected.
- Only one of these five aluminum smelters produces high-purity aluminum required for critical infrastructure and defense aerospace applications, including types of high performance armor plate and aircraft-grade aluminum products used in upgrading F-18, F-35, and C-17 aircraft.
The proposed US tariffs on imported steel and aluminum are being justified as necessary for national security. Regardless of the reasoning behind the tariffs, these actions will cause an increase in costs for all domestic entities that purchase steel or aluminum. Steel and aluminum are raw materials in a wide-range of end products. A broad-based cost increase is likely to push through to businesses in many industries and consumer prices for numerous goods. Companies in industries for which steel and aluminum constitute a large percentage of costs may reduce domestic production volumes in favor of foreign production to avert the increase in cost of goods sold.
Interesting in learning more about policy changes and their impact on global trade? Check out The Great Trade Pivot: Changing Policies and Their Impact on Your Global Supply Chain