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Will U.S. Steel and Aluminum Tariffs Damage Trade Relationships and the U.S. Economy?

Will U.S. Steel and Aluminum Tariffs Damage Trade Relationships and the U.S. Economy?

In January 2018, under Section 232 of the Trade Expansion Act of 1962, the Department of Commerce delivered two reports that concluded excessive levels of steel and aluminum imports could weaken national security by reducing domestic production capacity, creating a possible scenario where the U.S. would not be able to make enough steel and aluminum should a national emergency arise.

In response to the reports,  the White House implemented a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports coming from Canada, Mexico and the European Union (EU). Steel and aluminum agreements with South Korea, Australia, Argentina and Brazil had already been renegotiated.

As many experts predicted, Canada, Mexico and the EU quickly retaliated with their own tariffs. Canada imposed C$16.5 billion worth of tariffs on American products. Mexico announced tariffs on about $3 billion worth of U.S. goods and is actively seeking substitutes for these American products from other countries. The EU approved a 25 percent tariff on about $3 billion of U.S. imports, including Harley-Davidson motorcycles, Levi Strauss & Co. jeans and bourbon whiskey. The EU has also indicated it may enact more tariffs on U.S. products if needed.

Threat of a 25 percent tariff on European cars has also been teased, establishing a pattern for what many fear could become a damaging trade war.

Economic backlash a big concern

The Trump administration reasons that it can strengthen U.S. steel and aluminum markets by compelling U.S. manufacturers to use domestic steel. However, a report by the economic consulting firm Trade Partnership Worldwide claims that for every steel and aluminum job protected by the tariffs, another 16 jobs in other industries will be lost. The report also indicated that the retaliatory fallout from the tariffs would reduce U.S. gross domestic product (GDP) by 0.2 percent annually.

In another study, the U.S. Chamber of Commerce stated that the tariffs could put up to 2.6 million American jobs at risk. “We have expressed our concerns to the administration and to Congress about the economic damage that an escalating back-and-forth series of tariffs would have on our country,” states Tom Donohue, president and CEO for the U.S. Chamber of Commerce.

Harley-Davidson has already responded to the tariffs: it plans to shift some production overseas to avoid the EU tariffs, which would add about $2,200 to the average cost of exporting its motorcycles to Europe, where it sold about 40,000 bikes last year. Another U.S. manufacturer, Mid-Continent Nail, has already laid off workers and may go out of business if the tariffs on steel from Mexico and Canada are not lifted. An increasing number of companies such as Campbell’s, Tesla, Toyota and Schnitzer Steel are voicing opinions about the economic impacts of these tariffs as well.

Companies can apply for exemptions from the tariffs; however, this is a slow and arduous process. According to CNN, companies have filed more than 20,000 exemption requests, arguing that they depend on imported steel and that domestic producers cannot fulfill their needs. Yet, the Commerce Department has only announced final decisions on about 100 exemption requests. In addition, large steel companies like U.S. Steel and Nucor are trying to block these requests, further complicating and delaying the process.

An uncertain future

According to the International Trade Association, the U.S. is the world’s largest steel importer and has maintained a persistent trade deficit in steel products for over a decade. Steel imports have grown by 176 percent since Q2 2009, so this deficit is nothing new.

There is also debate whether the national security argument for tariffs is valid. After Defense Secretary James Mattis read the Commerce Department report before it went to the President, he wrote that “the U.S. military requirements for steel and aluminum each represent only about 3 percent of U.S. production. Therefore, the Department of Defense (DoD) does not believe that the findings in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.”

Over 50 trade groups have joined the U.S. Chamber of Commerce and 222 state and local chambers in signing a letter to U.S. senators in support of a bill that calls for Congress to approve or reject any new tariffs the president imposes based on national security concerns. Groups include the National Retail Federation, Alliance of Automobile Manufacturers and Computer and Communications Industry Association. Leading economists Donald J. Boudreaux and Robert Schiller both agree that the recent tariff policy is unsustainable and overall will harm the U.S. economy.

Perhaps the greatest risk of imposing these tariffs is destabilizing long-standing trade relationships with key allies and deeply eroding their faith in the U.S. as a trusted partner, as well as disrupting supply chain relationships in the U.S. In matters of national defense, quick response and alignment by allies is paramount—ironically, the tariffs could make allies less eager to do so, putting the U.S. at greater risk.

Some opinions expressed in this article may be those of a contributing author and not necessarily Gray Construction.