On March 8, 2018, Pres­i­dent Trump imposed a glob­al tar­iff of 25% on steel imports and 10% on alu­minum imports.1 A tar­iff is a tax on a par­tic­u­lar class of import­ed goods or ser­vices that is designed to help pro­tect domes­tic indus­tries from for­eign competition.

The met­als tar­iffs have not been well received by U.S. allies or U.S.- based com­pa­nies that oper­ate inter­na­tion­al­ly. Many econ­o­mists out­side the admin­is­tra­tion think there could be unin­tend­ed eco­nom­ic con­se­quences, pri­mar­i­ly because steel and alu­minum are used in many oth­er prod­ucts that are made in the Unit­ed States.2

For sev­er­al decades, much of the world — includ­ing the Unit­ed States — has sup­port­ed the expan­sion of free trade and glob­al­iza­tion, a posi­tion that the pres­i­dent has open­ly reject­ed. The met­als tar­iffs are an impor­tant com­po­nent of the pres­i­den­t’s trade­mark “Amer­i­ca First” pol­i­cy, which could con­tin­ue to take cen­ter stage in the com­ing months.3

Stated goals

To jus­ti­fy the tar­iffs, the White House has invoked Sec­tion 232 of the 1962 Trade Expan­sion Act, a U.S. law that allows restric­tions on imports for nation­al secu­ri­ty rea­sons. The pres­i­den­t’s procla­ma­tion con­tends that excess steel capac­i­ty is flood­ing into the coun­try at below-mar­ket prices, harm­ing U.S. met­al sup­pli­ers and putting facil­i­ties out of busi­ness. The pres­i­dent and his Sec­re­tary of Com­merce, Wilbur Ross, have sug­gest­ed the tar­iffs are nec­es­sary to ensure the avail­abil­i­ty of domes­tic met­al sup­plies that could be need­ed for defense or in the event of a nation­al emer­gency.4

Bargaining chip

The met­als tar­iffs were sched­uled to take effect on March 23, 2018. Argenti­na, Aus­tralia, Brazil, Cana­da, Mex­i­co, South Korea, and Euro­pean Union nations were grant­ed tem­po­rary exclu­sions until May 1, pend­ing con­tin­u­ing trade talks.5 Still, the pos­si­bil­i­ty of per­ma­nent exclu­sions could be used to extract spe­cif­ic con­ces­sions from some trad­ing part­ners.6

For exam­ple, Cana­da is the largest source of U.S. steel imports, and Mex­i­co is the fourth largest. Togeth­er they account for 25% of for­eign steel and 43% of alu­minum.7 When nego­ti­a­tions end, Cana­da, Mex­i­co, and South Korea may face quo­tas to cap export lev­els and pre­vent them from using exemp­tions to import and re-export cheap steel to the Unit­ed States.8

The tar­iffs were specif­i­cal­ly set to lev­els that should slow imports enough to allow U.S. indus­tries to boost pro­duc­tion to 80% of capac­i­ty. Grant­i­ng exemp­tions, even to close allies, could defeat that goal and/or result in a heav­ier tar­iff bur­den on oth­er nations. It’s like­ly that the tar­iffs will large­ly apply to the remain­ing three major steel exporters: Chi­na, Rus­sia, and Japan.9

Through a sep­a­rate process, com­pa­nies can apply for exemp­tions on met­al imports used to man­u­fac­ture spe­cif­ic prod­ucts in the Unit­ed States, although the details are murky for which types of busi­ness­es may qual­i­fy.10

Potential problems

The met­als tar­iffs should offer relief to the strug­gling steel and alu­minum indus­tries and ben­e­fit some work­ers in the regions where they oper­ate. But if the price of import­ed met­als increas­es by 10% to 25%, the price of domes­tic met­al is also like­ly to rise, and so could the cost of U.S. goods that must com­pete in inter­na­tion­al mar­kets. By one esti­mate, the met­als tar­iffs could add $300 to the price of a new car sold in a U.S. show­room.11

Sig­nif­i­cant infla­tion could hurt con­sumers, reduce sales, impact cor­po­rate prof­its, and result in job loss­es, espe­cial­ly for indus­tries that depend heav­i­ly on steel or aluminum.

Ongoing issues

This is not the first time the Trump admin­is­tra­tion has used tar­iffs to restrict import­ed goods, and it prob­a­bly will not be the last. In Jan­u­ary 2018, tar­iffs were placed on import­ed wash­ing machines and solar pan­els in response to com­plaints by U.S. man­u­fac­tur­ers.12

When Trump first took office in 2017, he pulled the Unit­ed States out of the Trans-Pacif­ic Part­ner­ship (TPP), a trade agree­ment that was ini­ti­at­ed in part to counter Chi­na’s grow­ing influ­ence in Asia. With the U.S. out of the pact, a new agree­ment was signed in March 2018 by 11 key U.S. trad­ing part­ners includ­ing Japan, Aus­tralia, Cana­da, and Mex­i­co, cre­at­ing a unit­ed front that could put the Unit­ed States at a dis­ad­van­tage in the future.13

The pres­i­dent has also threat­ened to with­draw from the North Amer­i­can Free Trade Agree­ment (NAFTA) if it is not recon­fig­ured in favor of the Unit­ed States.14 Fail­ing to reach a new agree­ment with Cana­da and Mex­i­co could be quite cost­ly: One eco­nom­ic analy­sis con­clud­ed that ter­mi­nat­ing NAFTA would result in the net loss of 1.8 mil­lion U.S. jobs with­in the first year and reduce the annu­al pur­chas­ing pow­er of U.S. house­holds by about $654 each.15

The admin­is­tra­tion is also plan­ning puni­tive mea­sures that could make it more dif­fi­cult for Chi­nese firms to acquire U.S. tech­nol­o­gy and invest in U.S. busi­ness­es. The pack­age includes about $50 bil­lion in tar­iffs direct­ly tar­get­ing more than 100 types of Chi­nese prod­ucts. Experts warn that Chi­na is like­ly to strike back, pos­si­bly by restrict­ing imports of auto­mo­biles, air­craft, com­put­er chips, and/or soy­beans and oth­er agri­cul­tur­al prod­ucts, if ongo­ing nego­ti­a­tions do not pro­duce an accept­able out­come.16

Anoth­er seri­ous con­cern is that these and oth­er pro­tec­tion­ist poli­cies may strain rela­tion­ships with our allies, some of which have threat­ened to respond pro­por­tion­al­ly if tar­iffs are applied to them. The eco­nom­ic impact in the Unit­ed States and glob­al­ly will like­ly depend on whether a hard U.S. stance and/or the break­down of trade nego­ti­a­tions esca­lates into a larg­er trade war. For now, you might see some mar­ket volatil­i­ty in response to trade concerns.

1, 4–5, 10) The White House, 2018
2–3, 6–9) The Wall Street Jour­nal, March 8, 2018
11) The Wall Street Jour­nal, March 12, 2018
12) Unit­ed States Trade Rep­re­sen­ta­tive, 2018
13) The New York Times, March 8, 2018
14) The Wall Street Jour­nal, Jan­u­ary 23, 2018
15) Busi­ness Round­table, Jan­u­ary 23, 2018
16) Bloomberg.com, March 22, 2018
Con­tent pro­vid­ed by: Broad­ridge Finan­cial Solu­tions, Inc.
April 2018