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The Impact of Steel Tariffs on U.S. Jobs and the Squeeze on the Pockets of Consumers

07/02/2018 By

Spend Matters welcomes this guest contribution from Prince Fiifi Yawson, analyst at Mintec.

In June 2015, President Donald Trump announced in his candidacy for president, “We need a leader that can bring back our jobs, can bring back our manufacturing.”

Fast-forward to June 2018 and the U.S. economic growth rate has risen, bringing the unemployment rate down to 3.8%, its lowest level in 18 years. It goes without saying that Trump has brought back some jobs, but is this a continuing trend?

The U.S. is the world’s largest steel importer, importing 34.6 million tons in 2017, mostly from Brazil, Canada, China and its southern neighbor, Mexico. Over the past few months, the U.S., and to an extent the global, steel sector has been rattled by Trump’s imposition of tariffs on steel imports.

On March 8, the U.S. administration announced a 25% surtax on steel imports, led by the conviction that it would stimulate the domestic steel sector and create new jobs. While this is not novel, the industry awaits to see if it is going to work or will distort the global trade, just like the protectionist policies introduced by Ronald Reagan in 1987.

Although domestic steel production has been sluggish in recent years, it looks to be improving in recent months.  Year-to date production through June 9 was estimated at 40.3 million tonnes, an increase of 2% from the same period last year. Prices of steel hot-rolled coil, used in numerous applications from making steel bowls to building bridges, have trended upwards since January. Prices in mid-June were up 41% y-o-y and 6% from the previous month.

As a response to import taxes imposed by the U.S., China, Canada, Mexico and the E.U. have fought back with retaliatory tariffs. What does this mean for the U.S. steel sector and the purse of the school teacher in Virginia or the sales person in Ohio? Let’s not forget the economic principle that in a trade war, there are winners and losers, yet there’s a gap where losses surpass the wins.

Already we are seeing U.S. firms that utilize steel paying higher prices, thereby squeezing out their profits. Although the tariffs are supposed to deter U.S. imports of cheaper steel from China and other countries, steel from regions not targeted by the U.S. import sanctions can still find its way into the U.S. market and compete with locally sourced steel. In the end, prices of U.S. steel will continue to rise with manufacturers looking for ways to cut down on costs, which might impact employment.

The spilling effect of the sanctions into other sectors cannot be overemphasized either. For example, Mexico has retaliated by introducing tariffs on cheese imports from the U.S., which will come into force in July 2018. Americans will then either have to munch more cheese or find alternative markets, which would be Herculean to accomplish. This will ultimately hurt the export-reliant U.S. dairy sector, consequently putting pressure on jobs.

Overall, we are going to see prices rising for imported goods, with importers and producers most likely passing these higher costs on to consumers, thereby squeezing their pockets. As production costs increase, manufacturers will have to make savings, consequently leading to a loss in jobs.

A trade war isn’t something anyone should wish for. For “In the long run,” borrowing the words of John Maynard Keynes, “we are all dead.”