ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed

City Journal

search
Close Nav

Whither Trump’s Steel Tariffs?

eye on the news

Whither Trump’s Steel Tariffs?

Looming economic pain and mounting political pressure will force the administration to make an accommodation of some kind—whether sooner or later. August 13, 2018
Economy, finance, and budgets

For the time being, President Trump’s tariffs stand. As of June 1, he imposed levies of 25 percent on steel and 10 percent on aluminum imported from Canada, Mexico, and the European Union. U.S. steelmakers have gushed with praise, as has organized labor, which has long sought import restrictions. Trump has basked in the approval, most recently in Granite City, Illinois, where he attended the reopening of a long-shuttered blast furnace. “The days of plundering American jobs and wealth—those days are over,” he told an enthusiastic crowd.

But the tariff saga has only begun. Because these levies will hurt many more than they will help, the pressure for relief will become overwhelming. The number of workers using steel—in automobiles, appliances, component parts, transportation, and aerospace, among other industries—exceeds those producing it by a factor of 46 to one. The demand will build still further as other American businesses and workers suffer from the retaliatory tariffs that America’s trading partners have already begun to impose on U.S. products. Those same foreign governments have also filed complaints at the World Trade Organization. History—in this case, the experience of past presidents—suggests that such an onslaught will eventually force the White House to make an accommodation.

Trump’s mercurial style makes it hard to know what he hopes to achieve with the tariffs. The electoral politics seem clear enough: he can help the GOP and himself by showing his constituency that he will make good on his promises. Otherwise, his objectives remain obscure. The tariffs may just serve as a negotiating tactic to get, in Trump’s words, “a better deal” within existing trade arrangements. Singling out Canada and Mexico may well suggest that his aim is renegotiation of the North American Free Trade Agreement (NAFTA). Alternatively, the White House may seek a broader change in the structure of global trade, something that Trump hinted at when he left the G-7 meetings some weeks ago, saying that he wanted to see all tariffs and subsidies removed, everywhere. Including in that formulation the EU—hardly a major steel supplier to this country—may reflect such an objective.

Whatever the president hopes to achieve, the domestic blowback has already begun. The Kansas City Federal Reserve’s quarterly survey of manufacturers noted a singular anxiety among respondents about tariffs and trade. Some 45 U.S. trade associations have already objected to the measures. Steel producers ensured that the pain would be acute by leaping to take advantage of the protection even before the tariffs went into effect. They increased user costs by raising prices so that by June, American steel cost 50 percent more than it did a year ago domestically and more by that same margin than it currently does abroad. Steel users, already facing higher costs, worry further whether the domestic industry is large enough to meet needs. They note that until recently, the United States imported four times the amount of steel that it produced. Many users also doubt whether domestic sources can produce to required specifications. Some 21,000 steel-using firms have already applied to the Commerce Department for tariff exemptions on this basis. One industry observer noted that the department is “drowning” in paperwork. Some steel users have announced production and employment cutbacks.

Industry specifics make the pain even clearer. Electricity production and transmission relies heavily on steel, particularly for solar and wind power. The industry reports that it takes ten tons of steel to build a tower and a ton per mile to transmit power. Steel amounts to 50 percent of the material cost of a car and 25 percent of its total cost. Little wonder that the Alliance of Automobile Manufacturers, a trade group consisting of 12 firms that build cars in the U.S., has already warned that auto prices will rise. Can manufacturers, meantime, are more vulnerable to aluminum costs than steel costs, but commercial containers use lots of steel and expect double-digit price increases by the time all the effects work through the production chain. Steel constitutes 100 percent of the material cost of pipelines, which until now imported 77 percent of what they use. Many firms, especially those that operate pipelines under the Gulf of Mexico, point to safety concerns connected to the ability of U.S. producers to meet specifications.

Economic problems will extend beyond steel users. Not all those that the Labor Department identifies as involved in steel production will benefit. The tariffs will even hurt some steel producers—those that depend on imported “slab steel” as an input to their more refined products. Many steel-using firms that have always made their purchases domestically now face obstacles because of the price increases that the tariffs have permitted. Other steel users have indicated that they will avoid the high price of American steel by discontinuing their former practice of buying metal as an input and producing the final product here. They plan instead simply to end domestic production and buy the finished goods overseas. Still others have decided to avoid the high price of American steel by shifting their operations overseas.

And then there is the pain that will emerge from retaliation. America’s trading partners, in addition to filing complaints at the WTO, are putting their own tariffs in place. The three partners most affected by the steel duties—Canada, Mexico, and the EU—have tried to match, dollar-for-dollar, the burdens that the U.S. tariffs have imposed on them. For Canada, which does the most trade with the United States, the figure is largest: $16.6 billion. The EU and Mexico have placed tariffs on $3 billion in goods each. These are all significant amounts. The list of products at first seems random. Canada has burdened inflatable boats, yogurt, whiskeys, candles, and sleeping bags. The EU has also singled out boats along with clothing, footwear, washing machines, and cosmetics. Mexico has aimed at agricultural products. These selections target products from regions that helped put Trump into office and that consequently are especially important to Republicans. Politics aside, though, the new burdens will be felt across the country.

As that pain grows, so also will the political pressure. It promises to become relentless. There is clearly a huge economic, and hence lobbying, disparity between those for and those against tariffs. Steel production in the U.S. employs about 140,000, compared with 6.5 million making their living using the metal. Steel users constitute some 5.8 percent of the economy, whereas steel producers make up barely 1 percent (and, as is already clear, not even all of this 1 percent will benefit from the tariffs). The Coalition of American Metal Manufacturers & Users has already formed to press the tariff-lifting effort on Capitol Hill and elsewhere. Trump has already modified his behavior in response to pressure from agriculture. He not only has allocated $12 billion to defray the burden of retaliatory tariffs on farmers but has also already met with the EU to sidestep the whole issue by finding ways to lower tariffs across the board.

While it’s still too early to predict how matters will play out, ample precedent exists. Presidents Ronald Reagan, Bill Clinton, and George W. Bush all tried to impose steel tariffs and failed. President Barack Obama met the same fate with his tire tariffs. The Bush experience might be most instructive. On March 5, 2002, Bush announced tariffs of 8 percent to 30 percent on imported steel. Canada and Mexico received exemptions, no doubt in deference to NAFTA, but the levies fell on most other U.S. trading partners. Just as now, the affected nations filed complaints with the WTO and retaliated with tariffs on U.S. goods and services. It took until November 11, 2003, for the WTO to rule against the United States, authorizing more than $2 billion in sanctions— the largest penalty ever imposed. At first, Bush seemed unmoved. He declared that the tariffs would remain in place until at least 2005. But domestic pressure had a greater effect. Not only were steel-using businesses lobbying, but the United Auto Workers also broke with the AFL-CIO to oppose the tariffs. Rising costs had hurt auto sales and production so much that the UAW could see the danger to its dues-paying members. By December 2003, after trying to defy the WTO and the world, the Bush White House bowed to overwhelming domestic pressure and rescinded the tariffs.

In many ways, Trump appears tougher than Bush. He may hold out for longer than the 22 months Bush did. At the same time, Trump has already shown willingness to compromise, which Bush resisted throughout his tariff experience. Perhaps Trump stated his true objective when he left the G-7 meeting: that he wants all tariffs and subsidies erased, and that he saw an opportunity to advance that agenda through a compromise with the EU. If this is the case, then the tariff pain may end sooner than it did under Bush. There is no way to know at this stage, but one thing is certain. The pressure to lift the tariffs will continue to build, leaving even the most stubborn of administrations with little choice but to make some accommodation—whether it’s under the cover of “better deals,” through a movement toward global tariff reduction, or simply by giving up the game, as Bush finally did. One way or another, Trump’s tariffs seem destined to go.

Photo by Whitney Curtis/Getty Images

Up Next
eye on the news

Closing the Skills Gap

America must get serious about worker training—and retraining—to stay competitive. Milton Ezrati July 31, 2018 Economy, finance, and budgets

Contact

Send a question or comment using the form below. This message may be routed through support staff.

Saved!
Close