The President is, so far, sticking by his plan to enact massive tariffs on all imports of both steel and aluminum, in spite of strong opposition from within his own party. I have previously written about how the new tariffs may backfire in terms of international trade, but they are also likely to have significant domestic consequences, as well.
Supporters of the 25% tariff on steel and 10% tariff on aluminum have made the rounds on TV this week, arguing that a few cents per can of soup and a few hundred dollars per car would be negligible to the average consumer, but reality is likely to be far different not only for consumers, but also for small and large businesses.
Right off the bat, importers of steel would pay an extra $9 billion per year for their raw materials at current rates of consumption. Not all of this can even be replaced by domestic supply, either; oil pipelines require a higher grade of steel that meets very exacting standards, able to withstand decades of high-stress use. But since steel used in pipelines represents only 3% of the domestic market, most domestic steel manufacturers simply don't bother investing in the facilities that would be required to produce this quality of steel. Over three quarters of all steel used in oil pipeline in the US is imported, with minimal capacity to shift some of that to domestic production. Oil, gas, and shale would be among the first industries hit as a by-product of the steel tariffs, and would be forced to choose between paying the steeper import prices then passing on those added costs to consumers, or shelving plans to scale up domestic crude production, which just last month surpassed OPEC and had been on-track to overtake Russia by the end of the year.
Manufacturing and construction which does not rely on high quality steel but still relies upon low-cost materials nevertheless - particularly fabricated metals, autos and auto parts, transportation, and large-scale building - would also be hit hard, causing these industries to both increase prices for consumers and lay off workers. Some estimates put the number of jobs lost due to the tariffs at around 146,000, or over five jobs lost in steel- and aluminum-adjacent industries for every one job gained in domestic steel or aluminum manufacturing.
At this point, the ripple effects of tariffs spread rapidly. Some highlights include:
- Companies may decide not to invest in new or expanded operations due to fears over increased costs or decreased demand; some are already putting existing plans on hold (external link).
- Under WTO rules, foreign governments would be entitled to enact their own equivalent retaliatory measures if a legal ruling finds that there is no compelling national security rationale for the tariffs. This would entitle Canada to $3.2 billion in permissible retaliation, along with $2.6 billion for the EU, $1.1 billion for South Korea, and $1 billion for Mexico.
- China, the supposed target of the tariffs, would only be entitled to $689 million in permissible retaliation under WTO rules, but is nevertheless expected to investigate whether the US is violating anti-dumping laws in regards to its soybean exports if the tariffs are implemented. US soy exports to China are worth $14 billion per year, far outstripping the value of US steel imports from China annually.
- With both import tariffs and retaliatory duties in place, industries which had relied on the import of cheap steel in order to produce high-value goods for export will be hit twice over, first when bringing in the raw materials, and then again when attempting to export the finished products.
- For decades, the US has benefited from its international reputation as a safe and reliable trade partner. Foreign governments used to give the US the benefit of the doubt on trade agreements, reasoning that reliable access to US markets outweighed some of the drawbacks from being over-reliant a single market with disproportionate ability to decide the terms of trade. The consequences of losing this reputation are incalculable, and the effects could easily persist long after the current President is gone.
As the President continues to fight with his own party over whether or not to impose the tariffs, volatility will likely persist, opening up opportunities both domestically and internationally for knowledgeable investors.