Trump makes moves to protect steel and aluminum, but at what cost?

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Yesterday, President Trump announced plans to enact new tariffs on foreign imports of steel and aluminum, with the intent of protecting these domestic industries and boosting manufacturing activity in the overall economy. Details on the tariffs are expected to be formalized next week, but the President’s remarks call for a 25% tariff on steel imports, and a 10% tariff on aluminum.

In doing so, President Trump will effectively be circumventing rules established by the World Trade Organization, acting unilaterally by designating steel and aluminum as critical to the nation’s national security.

Domestic steelmakers responded positively to the news, as they have been under pressure for years as growth in US imports of steel have surged. Stocks for US Steel and AK Steel Holding surged following the announcement yesterday as prospects for increased domestic demand boosted their outlook. Markets overall, however, plunged in the immediate aftermath, as this move complicates the view for many other industries and raises a number of challenges going forward.

Sacrificing manufacturing for other manufacturing

Once implemented, these tariffs will lead to price increases for steel and aluminum, as consumers and businesses can no longer import cheaply from abroad. This should lead to a shift toward domestic steel producers, boosting jobs and revenues in the domestic steel industry.

The most obvious side effect of this is that all who use imported steel now face higher prices and bear much of the burden of the tariff. The US is the largest global consumer of steel, and much of that imported steel (and aluminum) goes into the production of other goods. Many of the country’s largest aluminum importers, including Coca-Cola and PepsiCo, reached out to President Trump via letter at the start of February in an effort to alert the President on the impact such a tariff would have on these downstream manufacturing businesses. Anheuser Busch InBev and MillerCoors also weighed in immediately following yesterday’s announcement, signaling that this move would likely lead to large job losses in the food and beverage industry.

This move also comes at a particularly difficult time for the auto industry. Sales of light vehicles have been on a general downward trend for the past couple of years, and price hikes on steel will likely lead to higher car prices and reduced demand from consumers. Heavy trucks likely will also see price increases as a result of the move, raising transportation costs for trucking companies and encouraging the purchase of used vehicles.

Prospects for retaliation

The impending tariffs also raise the prospects that this move is the beginning of a trade war with many of our largest trade partners, where other countries respond to the US tariffs with tariffs of their own. President Trump seemed to encourage this practice in tweets early this morning.

Needless to say, engaging in a trade war with other countries could significantly impact the outlook for the economy overall. The US spent the better part of the past few decades pushing for increased interconnectedness of global economies. Consumers and businesses have benefitted by the ability to import finished goods and raw materials cheaply from other countries, and domestic manufacturers have increasingly benefitted from the opening up of large export markets such as China and India. Any prolonged escalation of protectionist policies would reduce overall trade for the US economy. International logistic providers such as DHL and UPS would likely feel the squeeze from this type of behavior, as transborder and port volume decline in favor of domestic manufacturing.

A dangerous precedent

In addition, this unilateral action by the President in effect makes it easier for trade wars to escalate quickly. Many of the guidelines set by the WTO are intended to make it difficult to restrict global trade for the sole purpose of protecting a domestic industry. By claiming a national security concern as it relates to steel and aluminum, President Trump is in effect exploiting a loophole in WTO regulations and setting a precedent for the kinds of arguments that can be used to circumvent global trade agreements.

Steel and aluminum are certainly import components of many of the processes that make our economy run. But the supply of steel and aluminum is not in particularly short supply. Moreover, these tariffs appear to be applied to all countries, including allied nations such as Canada and Japan. As such, these tariffs feel like a way of addressing a serious national security concern, and more like a general tool of trade negotiations. Once the US takes this type of step, it opens the door for other countries to do the same thing, undermining the various agreements set by the WTO and making protectionism more likely.

History’s lesson

The US underwent a similar type of experiment in 2002 under the Bush administration. Again, the steel industry was the focus, as the US implemented tariffs of up to 30% on steel imports in an effort to resurrect the struggling industry.

As expected, domestic production of steel improved following the implementation of the tariffs. However, these tariffs had negative implications for downstream manufacturers, resulting in a negative overall impact. The tariffs were rescinded in 2003 under threat of sanctions from the WTO.

In many ways, the tariffs of 2002 were far less severe than the ones proposed by the President yesterday. Mexico and Canada, who is the single largest exporters of steel to the US, were exempt for the tariffs because of provisions set forth in NAFTA. In addition, the 2002 tariffs had a sunset clause and were set to expire in 2005, while Trump’s proposal is for open ended tariffs.

Overall implications

So where, then, does this leave the US economy and the transportation space going forward? It is a bit tough to tell until details are known and scenarios on the global front play out, but the obvious winners in this move are domestic steel and aluminum manufacturers. Demand should naturally increase following the tariffs, so steelmakers, associated industries like coal which assist in steelmaking, and companies that transport these products domestically should see the biggest gains here.

Manufacturers of machinery, motor vehicles, food and beverages and other downstream manufacturers that use steel or aluminum as an input will likely feel the immediate impacts from the tariffs. And of course, much of the burden will be felt by US consumers, as companies pass down the rising cost of steel and aluminum in the form of higher prices to US households.

Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.