The Economic Impact of Steel & Aluminum Tariffs

The Economic Impact of Steel & Aluminum Tariffs

Brett Halsey, SVP, Credit & Surety and Mills Ramsay, VP Credit Risk Underwriting Manager
QBE North America

President Trump’s imposition of tariffs on steel and aluminum imports from the EU, Canada and Mexico will have a significant impact on the US economy. As with recent trade tensions with China, this round of trade fallouts with America’s key trading partners further increases the commercial risks and uncertainties faced by American companies. 

The US is far from being self-sufficient in steel and aluminum, and imports over 30% of the amounts consumed of both metals. Given the industrial importance of these metals, tariffs imposed on imports will significantly increase the production costs for American manufacturers across a variety of industry sectors. Soon after the tariffs were announced, the price of steel in the US jumped to levels far above most countries around the world — a 50% premium over European prices and 80% over Chinese prices. 

As of the first quarter of 2018, there are about 80,000 people in the United States employed in the steel industry and 56,800 people employed in the aluminum industry. Concurrently, over 3.4 million people are employed in steel- and aluminum-consuming sectors, such as fabricated steel products, machinery, and transportation equipment. These sectors will experience a direct increase in costs of production because of the tariffs. 

Even though prices are likely to drop slightly over the long term as domestic mills expand production, it is likely that prices will remain well above international levels. The tariffs make it cost prohibitive to import steel and, as a result, there is an associated cost burden for US industrial sectors that are dependent on steel as a raw material, weakening the competitiveness of American manufacturers and potentially leading to job losses. Besides causing direct damages to import sectors, tariffs on steel and aluminum would also lead to inflationary pressures for the US economy. The increase in production costs will ultimately be reflected in consumer prices. Retailers (such as Best Buy and JC Penney) and manufacturers (such as solar panel companies) will need to increase prices. This may prompt the Federal Reserve to accelerate the pace of its rate hikes to contain inflation and avoid risking an economic slowdown.

The last time that the US government imposed tariffs on steel imports was in 2002, when the Bush administration imposed temporary tariffs of 8-30%. Imports from Canada and Mexico were exempted at that time, as per NAFTA terms. The tariffs were lifted twenty months later. During this 20-month period, around 200,000 American jobs were lost in manufacturing sectors that depended on steel imports. The magnitude of this year’s tariffs is far more significant than those imposed in 2002, in part due to the lack of exemptions to our trading partners. For example, Canada and Mexico, who together contribute over 20% of US steel imports, are not exempt from the tariffs this time around. 

The possible breaking apart of supply chains is another risk that would directly affect US companies. Since the signing of NAFTA, various cross-border supply chains have been created by US and international companies to maximize production efficiency. These supply chains are already under the threat of the ongoing renegotiation of NAFTA terms. The imposition of tariffs on Mexican and Canadian imports would further complicate the renegotiation process and increase the risk of a total NAFTA disintegration. That would mean a severe shock on the performance of companies in industries, such as the automobile and textile and apparel industries, which are highly dependent on cross-border supply chains. Companies in those sectors will need to redraw their production structures and reconstruct their supply chains. Not only would this be a costly exercise for companies, it will make them less competitive globally.  

This article is for general informational purposes only and is not legal advice and should not be construed as legal advice.  Actual coverage is subject to the language of the policies as issued.