June 22, 2018
There's a New Tariff in Town: Implications of Trump's Steel Tariffs
By Ole Moehr
Economists consider tariffs a tax on consumers. Case in point, President Trump’s former chief economic advisor Gary Cohn. He recently warned that the administration’s twenty-five percent tariff on steel and ten percent tariff on aluminum combined with threatened duties on Chinese goods could cancel out the 2017 tax cut. This edition of the EconoGraphic provides an overview of how the Trump Administration’s steel tariffs might impact the US economy.
In our view, the US steel and aluminum tariffs and quotas will cause significantly more harm than good across the US economy. To be sure, the steel and aluminum producing sector is set to benefit, with employment in the sector rising accordingly. However, the modest employment gains of approximately 26,000 jobs among steel and aluminum producers are expected to be eclipsed by much larger downstream jobs losses among primary steel consumers. Companies, ranging from beer keg manufacturers to car makers and construction companies, which use steel and/or aluminum in their production processes, will face higher input costs. In turn, these downstream industries, which are often located in regions that voted for President Trump in 2016, will be forced to cut jobs. When taking into consideration the effects of retaliatory measures by US trading partners, such as the EU, Canada, and Mexico, net US job losses could amount to approximately 400,000 over the course of three years. The Trade Partnership estimates that “sixteen jobs are lost for every one steel and aluminum job gained.” To put these numbers into context, it is useful to look back to the steel tariffs imposed by the George W. Bush Administration. In 2002, the Bush Administration slapped duties between fifteen and thirty percent on different types of steel imports. A year later, the US administration removed the tariffs in the face of widespread job losses estimated at 200,000 and only minimal employment gains, which were, again, limited to steel producers.
The price of US-produced hot rolled bands – a type of steel used in automobiles, appliances, and many other durable goods – has increased by more than 17 percent, since President Trump announced the steel tariffs on March 1, 2018. This increase is mainly driven by higher prices for imported steel, which in turn allows US domestic producers to charge more for their steel products. Thus, the US tariffs on imported steel are ironically hurting the downstream steel-consuming companies that pride themselves on only using American-made steel. One example is the Pennsylvania-based American Keg Company. Finished steel products, including beer kegs, are currently not subject to US tariffs. As a result, the rising price premium that the American Keg Company must charge per keg, which was already significant before the tariffs entered into force, make it difficult for the company to compete with foreign beer keg producers and stay in business. Moreover, whole industries, such as American car manufacturers, will similarly feel the tariffs’ bite. A recent study estimates that even a slight price increase of 0.5 to 0.8 percent per car will put pressure on US auto manufacturers’ sales and threaten up to 40,000 jobs in the auto industry.
Predictably, the CEO of the American Keg Company, Paul Czachor, and others are suggesting the Trump Administration should impose tariffs on finished steel goods as a next step. This underscores how trade disputes can spiral out of control. There is no question that the US steel sector is facing great adversity. In our view, however, protectionist trade policies will not fix the problem. The type of basic steel US companies are producing requires a lot of manual labor. Consequently, countries with an abundance of cheap labor, such as China, have the comparative advantage to produce this type of steel.