Leibowitz: Steel producers need imports too—especially of pig iron

The US economy is inextricably intertwined with the global economy. And the tariff policy of three presidential administrations (two Trump, one Biden) gave special protection to steel and a few other industries.

Textiles, footwear, sugar, and shipbuilding are four other examples of special tariff protection that has lasted a long time—shipbuilding since the 1920s, textiles and footwear since the ‘40s, and sugar since the ‘30s. With the exception of sugar, these industries shrank, sometimes to insignificance in this country, despite heavy doses of protectionism. The lesson: protective tariffs don’t work for industries in decline.

The steel industry is not in decline. But it has protection unprecedented in modern times: Section 232 tariffs, Section 301 tariffs, antidumping and countervailing duties, Buy American protection, etc. Steel is no different from any industry. It wants protection against competitors and open access to suppliers.

No tariffs on pig iron was the right call

Pig iron is a huge need for electric-arc furnace (EAF) steel producers. They rely almost exclusively on imports for pig iron. Blast furnace steel producers (Cleveland-Cliffs and U.S. Steel) make their own pig iron. But they do not typically sell to third-party EAFs.

With imports of pig iron at competitive prices, EAF producers have captured three-fourths of the US market. With tariffs on pig iron, they would not be nearly as competitive.

The recent decision by the US Trade Representative to exclude pig iron from the 25% tariffs on imports from Brazil was, in my view, the right one. But EAF producers have succeeded for other reasons too. Namely, a plentiful supply of domestic scrap steel and cheap electricity.

The US has cheap electricity. But for how much longer?

Electricity is not imported in substantial quantities. It must be made at home. Up to now, electricity supplies in most of the country have been plentiful and costs have been relatively low. Why? Because the US has the most competitive electricity market in the world.

Also, the US regulates electricity to maximize savings for consumers (including EAF steel producers). And the country is blessed with huge advantages in natural resources. Coal back in the day. Today, it’s nuclear plants, natural gas (thanks to fracking), as well as increasing supplies of renewable energy.

That cheap, abundant electricity is a main reason EAF steel production in the US is the highest in the world compared to blast furnace production. Three quarters of total steel production in the US comes via the EAF route. Compare that figure to 40% in the EU and only 10% in China.

Other industries—including paper production, aluminum and other metals, automotive, food production and chemicals—require large amounts of electricity. And all benefit from relatively low costs. But now, electricity prices are steeply on the rise in the US. Data centers and AI are a big reason for the increased demand.

There are other causes too. A deteriorating electric transmission network that must be rebuilt and expanded, for example. The country needs more electricity supply and transmission networks to distribute power more efficiently. Steel and other industries will benefit from increased production, which requires investment and imports of key components (such as transformers) where domestic production lags dramatically the increase in demand.

In fact, electric pricing is key in all metal production that relies on electricity. (It’s especially critical in primary aluminum production.) It’s also key for chemical production and food supply. If electricity prices continue to increase, the competitive advantage EAF mills have enjoyed will fray. Blast furnaces, much less reliant on electricity and producers of their own pig iron, will be relatively better off. (Perhaps Nippon Steel knew what it was doing when it acquired U.S. Steel.)

Steel consumers lack political clout

As I’ve noted many times, the steel industry is important to America. But it is far less important than it once was.

Nobody wants steel to disappear. But it will never be able to meet all the needs of its domestic customers in industries like transportation, nonresidential construction, capital equipment, energy production, and fabricated metals. Not only is production well short of demand, but it is not in the right places to meet the needs of steel consumers.

Take the Western US. The Bureau of Economic Analysis reports that, in the West, manufacturing output is about 22% of the US total. But steel production in the West accounts for only 4% of the national total. Also, the cost of transporting steel from East to West in the US is several times the cost per ton of moving steel from Asia to the West Coast. Without imports of steel, Western manufacturing would suffer. In short, the Western US needs steel imports.

Let’s also consider downstream consumers of steel more broadly speaking. They are no less vital to the economy. And they account for many times the employment in steel production. Yet the tariff manufacturers in the federal government have paid scant attention to the needs of these actual manufacturers. This needs to be rectified, or the consuming industries will shrink, and many will disappear.

That would be a tragedy for the 99% of US industrial production that does not make steel. Steel-using manufacturers in the US produce about half of total US manufacturing output, according to the Commerce Department’s Bureau of Economic Analysis. They employ about 60 times as many workers as steel producers. But the tariffs on imported steel, even products not made in the United States, simply shift burdens to steel-users rather than easing them.

The nature of steel-using manufacturers changes constantly, reducing their political power, which is the function and eternal advantage of capitalism and free enterprise. But current tariff policy does not respect the needs of those thousands of companies and millions of workers. Yet they are faced with the same forces as steel producers. They like free trade for their inputs and protection against competitors. Unfortunately, they do not have the ear of the government.