Steel and Aluminum Tariffs
In the U.S., the history of tariffs is almost as long as the history of the country. One of the first laws ever passed by the first U.S. Congress was the Tariff Act of 1789, which imposed a 5 percent tax on any goods imported into the fledgling country.
Until recently, though, tariffs weren’t something that made a lot of news, at least in modern times. At the start of the 20th century, tariffs made up about 30 percent of the total value of goods imported into the country. By 2016, that number had fallen to just 1.5 percent of the total amount of goods imported into the U.S. The decline in tariffs was, in many ways, connected to the rise of free trade and to agreements that incentivized globalization. Additionally, the introduction of a federal income tax in the early 20th century proved to be a better source of revenue for the government than taxing imported goods.
Thanks to the recently introduced U.S. steel and aluminum tariff, tariffs are back in the limelight and are a source of debate and concern across multiple sectors.
What Are the Steel and Aluminum Tariffs?
In the summer of 2017, President Trump announced he and his administration were considering restricting imports of aluminum and steel into the country. The potential restrictions seemed to divide the country. Some were against the idea of imposing a tariff on imported steel and metal. Companies in the auto manufacturing industry, for example, were generally against the tariffs. Meanwhile, companies that produced steel domestically were mostly in favor of the potential tariffs, believing steel import taxes would improve business for domestic producers.
Around eight months after the idea of restricting imports of steel and aluminum into the U.S. was introduced, the president announced a tariff would go into effect. Steel products imported into the country would be subject to a 25 percent tariff, while aluminum would be subject to a 10 percent tariff.
Initial reaction to the tariffs wasn’t particularly positive, at least in some quarters. The Dow Jones, S&P 500 and Nasdaq all saw drops or declines on the day the tariffs were announced. Stock values didn’t fall across the board, though. While auto companies such as Ford and General Motors and other companies that use a lot of steel saw a drop that day, companies such as U.S. Steel saw considerable gains.
Public opinion about the steel and aluminum tariffs wasn’t particularly positive, either. One poll found that half of Americans opposed the tariffs. More than 60 percent of the people polled disagreed with the president’s assertion that a trade war as a result of the tariffs would be good for the country.
Despite the negative response from certain parties and industries, the tariffs went into effect on March 23, 2018.
What Countries Are Affected By the Tariffs?
It’s worth pointing out not every country that imports steel and aluminum into the U.S. is affected by the tariffs, at least not initially. Mexico and Canada are both exempt from the duty, pending renegotiation of the North American Free Trade Agreement. Currently, Canada is one of the top suppliers of aluminum and steel to the U.S. About 16 percent of steel imports and 41 percent of aluminum imports come from Canada.
The Trump administration later announced several other countries would also be exempt from the tariffs. The countries exempt from the tariffs include the European Union, Australia, Argentina, Brazil and South Korea. Countries that didn’t get an exemption included China and Japan.
The exemption was slated to continue through May 1, 2018, at which time the president will decide whether or not to continue to exempt those countries.
How Did the Steel and Aluminum Tariffs Come Into Existence?
What was behind the decision to impose a tariff on imported steel and aluminum, after many decades of free trade? To understand that, it helps to know how the rules governing tariffs work.
Although tariffs were common through the early part of the 20th century, the president wasn’t in a position to impose them. The Reciprocal Trade Agreement Act of 1934 was the first law giving the president power to create tariffs on imported goods.
Section 232 of a later law, the Trade Expansion Act of 1962, gave the president the ability to impose a tariff on items imported into the U.S. that are a threat to national security. The argument in favor of the steel and aluminum tariffs states the import of metal into the U.S. puts our nation at a distinct disadvantage, as a country that can’t produce its own steel and aluminum is a country that can’t defend itself.
Although Section 232 has been in existence since the 1960s, it hasn’t been used since 1995, when the World Trade Organization was created.
Past Steel and Aluminum Tariffs
The 2018 steel and aluminum tariffs — sometimes known as the “Trump Tariffs” — aren’t the first time in recent history a U.S. president has imposed tariffs on imports of the metals. In 2002, then-President George W. Bush put a tax on steel imports. The tariffs took effect in March of that year and were scheduled to last until 2005. Bush ended up lifting the tariffs in December 2003.
Then, as now, there was a negative response to the steel tariffs. Some countries threatened retaliation. The World Trade Organization believed the Bush tariffs violated its global rules.
Additionally, the U.S. economy suffered as a result of the import taxes. While the tariffs did help create jobs in the steel industry, it also led to job loss in other sectors. One estimate is that it cost $400,000 for every job saved or created in the steel industry as a result of the tariffs.
The Effect on the Global Market
So far, the impact the new U.S. steel and aluminum tariff policy will have on the world steel market remains to be seen. One of the most significant concerns is the possibility of a trade war with countries affected by the tariffs, such as China. Although the EU is currently exempt from the tariffs, there is justifiable concern a trade war will erupt between the U.S. and the EU if that exemption does expire.
Let’s take a closer look at what trade wars with either China or the EU could mean for the U.S.
A Trade War With China?
Pretty much ever since President Trump took office, the potential for a trade war with China has been brewing. Twice in 2017, Trump launched investigations into whether or not imports of steel from China and other countries were a threat to national security. While the first investigation targeted multiple countries, the second one, in August 2017, specifically looked at China. The goal of that investigation was to determine whether U.S. intellectual property was under threat.
Then came the tariffs. Along with the steel and aluminum tariffs, Trump also announced a duty on the import of solar panels, many of which come from China, and a 20 percent tariff on certain types of washing machines.
China wasn’t about to take the new tariffs sitting down. In April 2018, it announced it would be taxing certain goods imported from the U.S. Around 120 products from the U.S., such as fruit, wine and steel pipes, would receive a 15 percent tariff. Several other products, such as pork imported from the U.S., would be subject to a 25 percent tariff.
In response to China’s new tariffs, the U.S. announced it would be taxing a range of other imported products from the country. All told, the list had more than 1,000 items on it.
China then responded by stating it would tax several other imports from the U.S., among them soybeans.
And so the back-and-forth has continued, with each country announcing a new list of taxed items in response to tariff announcements from the other.
A Trade War With the EU?
Unlike China, the EU is currently exempt from the steel market tariff. So far, it hasn’t imposed tariffs of its own on items imported from the U.S. But that could change if the exemption isn’t renewed in May.
The EU has created a list of potential items it could tax if the steel tariff exemption expires. The list — which is about 10 pages long — includes items such as cigarettes, sinks, lipstick and sailboats. All told, the value of U.S.-imported goods that could be taxed totals around $7.8 billion, which is about the same as the amount of steel the U.S. imports from the EU each year.
Although the EU’s tariffs haven’t materialized yet — and there is a chance they won’t — the U.S. has already threatened to strike back by taxing European-made cars if the EU tariffs are put in place.
Beyond threatening the U.S. with tariffs, both China and the EU have opened a dispute with the World Trade Organization over the U.S. China created the dispute, and the EU asked to join it.
The Tariffs’ Effects on Domestic Producers
Steel is one industry that seems perfectly poised to benefit from the tariffs on steel and aluminum. When the tariffs were initially announced, U.S. steel companies were among the only ones to see considerable gains, while the value of other companies’ stock dropped.
However, analysts expect the tariffs won’t be that much of a help to companies that currently produce steel in the U.S. As mentioned above, past attempts at taxing steel imports might have led to job creation in that industry, but those jobs came at a significant cost.
Compared to steel companies, domestic aluminum producers are a bit more pragmatic. They’ve argued the U.S. needs imports of the metal, as demand outweighs supply. There isn’t enough aluminum mined in the U.S. to satisfy the need for it.
It’s also worth taking a look at how the tariffs will affect companies that don’t produce steel or aluminum, but that use it when manufacturing products. For those companies, it’s very likely the increased tariffs would come at a high cost.
Industries that depend on imports of both steel and aluminum, such as car manufacturers, construction companies and other manufacturers, could see an increase in the price of imported aluminum and steel. That increase in price could then lead to a decrease in the number of jobs available or a decline in the number of goods made and sold.
The U.S. Car Industry and the Steel Tariffs
One of the stated goals of the tariffs on steel is to revive the U.S. steel industry. However, it’s very likely the attempt to revive the steel industry would adversely affect another major industry in the country: car manufacturing.
Industry experts estimate with the tariffs in place, the cost of a new passenger car of average weight and size could increase between 0.5 and 0.8 percent. That might not seem like much, but it could then lead to a drop in global sales from anywhere from 1.6 to 3.6 percent. Again, that might seem negligible, but the decline in sales of just 3 percent or so could mean 40,000 workers in the auto industry lose their jobs. The expectation is that the losses suffered by the auto industry will not be made up for by any benefits or gains in the domestic steel industry.
The Effect on the Steel Market in the U.S.
One of the potential adverse effects of the steel and aluminum tariffs on the market in the U.S. is that the tariffs will lead to an overall decline in the production of goods primarily made from steel or aluminum. While cars come to mind first when you think of things made from metal, that list also includes items such as soda and beer cans, kitchenware, appliances and computers.
It’s also worth noting that the tariffs won’t necessarily “bring back” the steel industry, in part because imported steel isn’t the only thing that has a led to a decline in the U.S. steel industry. There’s also less demand for steel overall. Since the 1970s, consumption of steel in the U.S. has been nearly halved.
The Effect on the Steel Market in Other Countries
So far, steel manufacturers in countries other than the U.S. have been mostly optimistic about the tariffs. One reason for that might be that the U.S. isn’t a particularly significant importer of steel. In 2017, the U.S. imported some 36 million tons of steel, which works out to less than 8 percent of the total world steel market.
It’s also expected the new tariffs won’t divert sales of steel, or at least not in a particularly meaningful way. About 18 million tons of steel might be purchased elsewhere as a result of the tariffs, but that’s still less than 4 percent of the total global market. Countries that produce a high volume of steel for export, such as China, will still be able to freely trade their steel with other countries that haven’t imposed a hefty tariff.
Although the total impact of the steel and aluminum tariffs on the U.S. and global steel market remains to be seen, demand for steel products still exists and U.S. companies, such as Madsen Steel Wire, are there to meet that demand. No matter what your wire needs are, contact us for a quote today.