A Year Later: How Are Those Steel Tariffs Working?

How Are Those Steel Tariffs Working?

Let’s look at the evidence a year later in jobs and trade flows.

WALL STREET JOURNAL

By Editorial Board 

3/17/2019

President Trump declared steel imports a national security threat last March and vowed to fight the metallic menace with a 25% tariff. As the President mulls a new tariff on European cars, it’s worth examining how his steel tariff policy is faring a year later by the standards of its own professed protectionist goals.

Trade deficit. “We need and we will get lower trade deficits, and we will stop exporting jobs and start exporting more products instead,” Commerce Secretary Wilbur Ross said last March after the President announced his steel tariffs. We disagree with the President’s preoccupation with trade deficits, which are affected more by capital flows and currency values than trade policy.

But it’s worth pointing out that the trade deficit in steel increased last year by $1 billion as exports (measured in dollars) fell 7% and imports rose 1%. Imports ton for ton fell more than exports did. But the average price of steel per ton increased more for imports than exports, perhaps due to shifts in currency values and product deliveries—e.g., businesses importing more expensive specialized steel grades.

Retaliatory tariffs by Canada and Mexico contributed to a $650 million drop in American steel exports. At the same time imports increased from Mexico and Canada, which are deeply integrated into U.S. supply chains. In many cases manufacturers paid the tariff and passed on the cost to customers.

Mr. Trump’s tariffs had a de minimis impact on Chinese imports, which were already subject to 28 dumping duties. They principally reduced imports from Turkey, Russia and South Korea, which turned around and shipped more steel to other countries.

For example, U.S. imports from Turkey fell by 930,000 tons last year. But Turkey exported 330,000 more tons to Canada and 780,000 more tons to Italy. European steel makers have complained that a flood of imports is driving down prices. But lower prices have made European manufacturers more competitive. Some U.S.-based manufacturers like Harley-Davidson have also moved production to Europe to dodge retaliatory tariffs and take advantage of lower steel prices.

Jobs. While domestic steel production rose 5% last year, the tariffs had little impact on employment in the industry. Steel makers added 2,200 jobs in 2017, but just 200 in the last year. One reason is that steel makers ramped up production at highly-efficient minimills with electric-arc furnaces that employ few workers.

The main impetus for increased production is a strengthened economy, not tariffs. Domestic steel production dropped in 2015 and 2016 even as imports fell because business investment sagged. During the last two years of the Obama Administration, investment in structures—which account for nearly half of domestic steel consumption—fell 4% annually. Equipment investment grew a paltry 0.8%.

Deregulation and tax reform unleashed faster growth and a rebound in U.S. steel production. Over the last two years, investment in structures and equipment has risen by an average of 4.8% and 6.8%, respectively. But note that while American manufacturers have been adding jobs at a rapid clip, wage growth for the 1.4 million workers employed in fabricated metals directly downstream from steel mills has slowed as steel prices have soared.

Negotiating leverage. The Trump Administration argued that it was using steel tariffs as a bargaining chip in negotiations with Mexico and Canada for a revised Nafta. “The president’s view was that it makes sense that if we get a successful agreement, to have them be excluded,” U.S. Trade Representative Robert Lighthizer said last March. “It’s an incentive to get a deal.”

Mexico and Canada signed a revised North American trade pact last year, but the U.S. still hasn’t exempted the two countries from steel tariffs. The retaliatory tariffs by Mexico and Canada therefore remain in effect and are hurting American farmers and manufacturers. Tariffs lose their credibility as leverage for trade deals if negotiating partners assume they won’t go away after a deal is struck.

This is all in addition to the overall economic cost of tariffs in 2018, which reduced U.S. growth momentum. A new study from the National Bureau of Economic Research finds the net economic loss was $7.8 billion, or 0.04% of GDP. That doesn’t include the lost investment due to policy uncertainty.

One group of Americans has benefited from tariffs: steel companies, which are making more money as they benefit from their ability to raise prices in a protected market. Government can always help a politically connected few at the expense of the many. But on every other measure, the steel tariffs have been a bust.