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Trump take an aggressive stance to protect domestic steel and aluminium industries

  • Is Trump trying to repeat the history by imposing stiff tariffs?
  • Can the US afford expensive steel and aluminium imports?
  • How are exporting nations reacting to Trump’s aggressive stance?

 

President Donald Trump recently announced the imposition of tariffs on steel and aluminium imports. This was in adherence to his 2016 election campaign for the protection of the US industries, particularly the steel. On 1st of March 2018, Trump declared that from 23rd (March) onwards the US will levy a 25% tariff on steel and 10% tariff on aluminium imports except from Canada and Mexico. This proclamation was an attempt to protect the American economy and ‘national’ security.

The President claimed that America has been a dumping ground for surplus steel and aluminium manufacturers around the globe and especially by nations which deliberately increased the production capacity more than the demand. This threatened the US economic security as the use of cheap and imported steel provided lack of opportunities for the growth of domestic steel industry. Similarly, he intends to protect the national security through the use of locally produced steel and aluminium for tanks and warships.

The immediate reaction to the announcement had a cascading effect as stock markets around the world tumbled along with a steep fall in the share prices of the big US manufacturers such as Boeing and Caterpillar. 

Furthermore, global stock indices fell around 2% on 1st of March due to the announcement. Likewise, the share prices of the US manufacturers (steel consumers) like Caterpillar and Boeing plummeted by ~3% as mentioned above. On the contrary, stock prices of the US steel players; US Steel and AK Steel surged by 6% and 9% respectively.

The falling stock prices were a reflection of the international outrage, which was triggered by the trading allies’ governments as well as economists. These people and institutions fear that the aggressive stance will initiate a ‘trade-war’, this, in turn, will hamper the global economy. Hence, apart from criticising the decision, American trade allies started listing the US products that can be taxed. The European Union listed imports of cranberries, orange juice, peanut butter along with Kentucky bourbon, Harley-Davidson motorcycles and Levi’s jeans as possible products and brands for retribution on Trump’s tariffs. China also indicated that it will hit the imports of agricultural commodities such as soybeans since America is the largest supplier.  

Trump’s argument to boost the domestic economy was countered by various economists, who stated that benefits to steel industry will be hurt through a rise in input costs of major steel consuming industries as their overall cost base will increase. Besides, America’s steel and aluminium demand cannot be met through the current domestic capacity, neither can this be enhanced instantly to replace the imports. This will create a skewed demand-supply situation, thereby, increasing the domestic steel prices (implying increased raw material cost for the manufacturing sector).  

  

The domestic steel production in the US was 77% of the total demand and the remaining 23% was met by imports in 2017. If imports turn expensive then the domestic steel prices are bound to shoot up as the present production is way too short of the current demand.

Moreover, for aluminium the situation is even worse as the gap between demand and production is much wider. The current domestic production in the US can only meet 13% of the demand and the rest of the 87% is to be met by imports. This includes aluminium alloys, further, the US imports have more than doubled since 2011.

Hence, with such a high dependence on imports for the fulfilment of the domestic demand, the country is in no position to afford expensive imports as this will have a significant dampening effect on the manufacturing sector.

In addition, with increasing raw material costs, the pressure to maintain/improve margins will increase significantly in the manufacturing sector. However, the growth and job prospects in the steel and aluminium sector may improve. This will be offset by degrowth and job losses in (steel consuming) manufacturing sectors. Thus, the overall economic growth and the employment rate in the United States isn’t expected to benefit from the move.

Historically, there were consequences on similar moves as in 2002, the then US President George W. Bush imposed 30% tariffs on steel imports in order to boost the domestic steel industry. However, this resulted in a loss of 2,00,000 jobs in the manufacturing sector from March 2002 to December 2003. Effectively, each job which was saved in the steel sector costed roughly $400,000. Further, a study mentioned that the tariff resulted in a damage, exceeding a revenue of $30 million.

The present sanctions were implemented with a strict note with ‘no exemption’ clause. Although, the government soon become more ‘flexible’ and promptly exempted Canada and Mexico. It was also decided that other countries can be exempted on the basis of negotiations with the US Trade Representatives (USTR). Hence, as soon as the US administration declared the relaxation, the EU and Japan lined up for negotiations. European Trade Commissioner Cecilia Malmström said ‘We are friends, we are allies. We are counting on being excluded’.

In a nutshell, the move has divided the world into 3 categories; (1) the US, which is justifying that these tariffs would protect the local industry, (2) global economists and critics, who are of the opinion that the move will raise costs for the industries and the President might fail to deliver on the campaign pledge on boosting domestic jobs and (3) the government officials of trade allies, which are warning a trade war.

Although, the overall intention of protecting and encouraging domestic steel and aluminium industries seems fair. The question arises; is this the only option available given the devastating consequences? The world would witness the precise repercussions of this bold move after 23rd of March when the tariffs will come into full force.

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