Leibowitz on trade: Why I think steel tariffs are failing

The United States and other markets have spent a few decades trying to use tariffs to revive their steel industries.

We’ve had Section 201, Section 232, antidumping and countervailing duties, and quotas. And the rationale is always the same. Foreign producers, backed by governments, are undermining American industry through unfair competition (usually defined as “dumping” or subsidies supporting excess production or exports) or strategic excess capacity. Tariffs, supporters argue, will restore domestic production, create or preserve manufacturing jobs, and strengthen national security. The record indicates that tariff supporters are wrong.

These goals are understandable, especially from a political point of view. And yet tariffs on steel (and aluminum and autos too) have consistently failed to achieve those goals. More importantly, they are incapable of doing so.

Tariffs are sold as the way to raise domestic prices (there they succeed), allowing American producers to earn higher profits and invest in new capacity. Second, they are intended to preserve or increase employment in steel mills, aluminum producers, automakers, etc. Third, they reduce dependence on foreign suppliers, thereby protecting national security during times of war or international crisis.

For decades, steel and aluminum tariffs have promised revitalization, job growth, and industrial renewal. The evidence shows otherwise. They raise costs, distort markets, provoke retaliation, and encourage inefficiency. Most importantly, they fail to solve the fundamental challenges confronting the industries they are intended to protect.

The first reason is economic. Tariffs do not create competitiveness. They only shield domestic producers from competition. If an industry suffers from high labor and energy costs, inefficient facilities, or lower productivity, tariffs do not solve those problems. They only mask them, transferring costs from inefficient producers to consumers. And for “bottleneck” industries like steel and aluminum, the jobs are downstream.

Steel and aluminum are industrial inputs used by manufacturers of automobiles, appliances, machinery, construction equipment, aircraft, pipelines, packaging, and countless other products. When tariffs raise the price of steel and aluminum, downstream manufacturers face higher costs. Some pass those costs to consumers. Others absorb them through lower profits. Still others lose business to foreign competitors that can obtain cheaper inputs.

The result is a transfer of wealth from many steel- and aluminum-consuming industries to a relatively small number of steel and aluminum producers.

History repeatedly confirms this outcome. The steel industry employs, for example, only a fraction of the workers employed by industries that consume steel. Estimates are that steel-consuming industries in the United States employ more than 60 times as many workers as steel producers. Saving jobs in one sector by raising costs in larger downstream sectors is a poor bargain for the nation. Studies of steel tariffs in prior decades going back to the sixties have found that downstream industries often lose more jobs from protection than steel producers gain.

Last year, the Trump administration imposed tariffs on imports of downstream products, which has the effect of passing the pain down one more level to consumers of “derivative” products. The result is inflation. The International Emergency Economic Powers Act (IEEPA) tariffs have already been struck down, and judicial challenges proceed apace against other efforts.

The second problem: tariffs completely fail to address global strategic and economic forces affecting steel and other markets. Excess production and capacity, particularly but not exclusively in China, remains a central challenge. China produces more than half the world’s steel—more than the United States, Europe, Japan, and India combined. Tariffs cannot change that reality. Instead, global production simply shifts.

Indeed, the history of steel trade enforcement is one of constant adaptation. New tariffs are followed by new sourcing strategies, transshipment concerns, exclusion requests, quota arrangements, and product-specific disputes. The regulations become increasingly complex, but the underlying market conditions remain. And private businesses are able to adapt much faster than government policy.

The national-security argument has some truth to it. But it is much weaker than advocates acknowledge. The United States unquestionably needs viable steel, auto, and aluminum industries. National security requires specific capabilities, not blanket protection for every product and producer. Shipbuilding proves that, aside from naval ships, US shipbuilding has been uncompetitive for decades. And yet the US still can protect the nation on the seas.

The United States possesses substantial domestic steelmaking capacity, although it has been unable to supply domestic demand for more than fifty years. Moreover, many of its most important foreign suppliers are allies, including Canada, the European Union, Japan, and South Korea. They have their own national security issues. And those issues have become more urgent because of Trump administration demands that our allies do more to safeguard their own national security. Treating close allies as national-security threats distorts genuine security concerns. It also invites retaliation against American exports and poisons relations with our most important allies.

The experience of Section 232 tariffs illustrates the problem: tariffs generated years of litigation, diplomatic friction, exclusion requests, quota negotiations, and compliance disputes. While the courts have acquiesced in the Section 232 tariffs so far, they cannot fundamentally alter the long-term trajectory of steel, aluminum, autos, or copper. Production levels continue to fluctuate with business cycles, energy prices, technological changes, and global demand. Tariffs have shown that they are incapable of overcoming larger economic forces.

The steel industry itself demonstrates why. Modern steelmaking has transformed itself from a labor-intensive industry to a capital-intensive one. Even if tariffs succeed in increasing domestic production, they cannot generate large employment gains. The notion that tariffs can restore the industrial employment patterns of the mid-twentieth century is a fantasy at odds with modern manufacturing realities.

The lesson is not merely that steel and aluminum tariffs have failed in the past. It is that they are poorly suited to achieve the goals their advocates assign to them. Trade protection may temporarily raise prices, but it cannot create or restore competitiveness. The best way to improve competitiveness is competition.