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Steel Tariff Proposition: Will It Work?

Posted by Tal Porat | August 17, 2017

After unsuccessful dialogue with China in April, the U.S. government began working on a proposition in June to impose tariffs and fines on foreign-sourced steel, suggesting that all pipelines operating on American soil use only American-sourced steel.

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Ideally, implementing the tariff would result in the accomplishment of three main objectives: bolstering the economy via an influx of funding into local production, lowering the price of steel by avoiding fines imposed by foreign manufacturers, and moving jobs “back” to the U.S. by creating on-shore job openings.

While U.S. lawmakers decided in July to shelve the proposition for further discernment, it’s enough to have steel industry trade partners wary. The big question on everyone’s minds being: will a system that disincentivizes the most economically sound way of acquiring steel work?

 

Section 232 & The Trade Expansion Act 

The proposed tariff policy hinges primarily on two things. First is Section 232 of the Trade Expansion Act of 1962 which authorizes the President to impose import restrictions to protect U.S. national security. Under Section 232, the Commerce Department initially conducts an investigation to determine the effects of imports on U.S. 'national security.'

The second cornerstone has to do with the aforementioned “threat” to national security, namely: job security in the U.S., or lack thereof. The U.S. basically views cheap steel exports as being the cause of a deficit of available jobs. The proposed policy uses Section 232 as a means to justify this view, however, there have been questions raised as to whether the current unemployment rate of 4.3% in the U.S. (which is at an all-time low) as of July 2017 actually merits a “national security” issue.

 

Trade War Possibilities

Furthermore, analysts have pondered that instead of creating more jobs, a tariff could backfire because it would raise the prices of essential production materials and invite not just a slowing of trade but retaliation from competitors and would-be-former suppliers. Implementing strict trade restrictions could also violate International Trade Agreements which are currently in place.

This viewpoint is based on choices made by previous administrations: in 2002, for example, former U.S. President Bush imposed tariffs of up to 30% on steel imported from Japan and the European Union (EU) which cost 200,000 jobs in steel-involved industries, with the unemployment rate being at 6% by the end of 2002

It’s also interesting to note that the U.S. actually imports the smallest amount of its cheap steel from China: in 2016, the U.S. only imported 4% from the Republic, and imported mostly from the European Union (23.3%) and Canada (18.2%)

The U.S. has much more at stake than China does when it comes to steel. China’s main issue is overproduction which it takes care of by supplying a wide variety of markets, creating a boom of income for both themselves and the companies and industries they supply--losing the U.S. as a client would effectively deal them negligible damage.

However, it could hurt the U.S. because they would be alienating possible allies (e.g. the EU, Canada) or taxing China for no good reason whilst pouring loads of resources into making their own steel or both. Canada, Australia, and the European Union raised warnings against the administration’s implementations of the tariffs following the talks back in April.

The U.S. Chamber of Commerce also released a statement in which it said that employing protectionist measures would jeopardize not just jobs or U.S. production but the ability of  U.S. exports to do well. They emphasized the fact that American-made or American-owned goods and services cater to an audience that is primarily outside the U.S., or 95% of their consumer market.

 

Supply Chain Implications

One of the biggest arguments against the steel tariff have come from steelmakers themselves, expressing concern over the impact that tariffs may have on their supply chains.

The Truck and Engine Manufacturers Associations wrote to the Department of Commerce, expressing worry over the tariffs sending steel prices through the roof which may cause their clients to seek supply elsewhere. Steelmakers such as ArcelorMittal, Tenaris, Evraz, Steelscape, and Harris Steel are all subsidiaries which operate in America but have foreign parent companies-- concern has been expressed over how their situation would be handled, what with their pipeline operations consisting mostly of foreign-sourced steel, oil, and labor.

The tariff could also very heavily impact U.S. ports, port workers, and the already-embattled shipping industry: in 2016, 960,000 metric tons of steel were moved via the Lower Columbia River route alone. At the Ports of Kalama and Vancouver, more than 850 jobs have to do with steel shipping. If the steel prices in the U.S. rise, this could potentially lead to industry leaders looking for different sources of steel, subsequently resulting in production cuts and layoffs at U.S. ports.

 

The Future & Possible Alternatives

Given the high-risk implications of implementing a tariff on foreign-sourced steel, the proposition as it is doesn’t seem likely to be effective. Some steelmakers who operate between borders such as TransCanada which moves oil and steel between the U.S. and Canada, have suggested that the U.S. may do better to incentivize supporting local steel rather than requiring its use or penalizing foreign trade.