President Donald Trump’s recent announcement and official order to implement tariffs on steel and aluminum imports has worried American manufacturers and ignited a chorus of warnings from lawmakers, companies, and industry leaders.
Secretary of Commerce Wilbur Ross and Director of the National Trade Council Peter Navarro have touted the new tariffs’ potential to make US steel manufacturers more competitive and bring jobs back to American workers.
Billed as the fulfillment of the Trump administration’s America First agenda, the United States placed a 25-percent tariff on steel imports and a 10-percent tariff on aluminum imports beginning on March 23. All countries except Canada and Mexico are subject to the tariff, but the European Union, South Korea, Argentina, Australia, and Brazil have been granted temporary exemptions.
While the stated objective of this trade policy is to “level the playing field” for American manufacturers—and many trade experts believe cheap imports have hurt the domestic steel industry—tariffs may do more harm than good over the long run. Many US manufacturers rely on affordable foreign steel and aluminum to make their products. Moreover, these tariffs may result in retaliatory measures from other nations, fueling a global trade war. Consequently, American manufacturers, lawmakers, and industry leaders worry about the far-reaching and unintended consequences of the tariffs.
Effects on Domestic Sectors
American manufacturers across multiple sectors use a combination of foreign and domestic steel and aluminum in their production processes. In 2017, imports made up 60 percent of aluminum and about one third of the 100 million tons of steel used by American businesses.
US automakers tend to buy much of their raw steel and aluminum domestically, but they import certain components from other countries. Another major domestic source of jobs, beer manufacturers, rely on imported thin aluminum to make cans for their products. Tariffs would make much-needed foreign materials more expensive, which may force manufacturers to lay off workers or move their facilities to Canada or Mexico.
The tariffs may also affect industries, like construction, that buy products directly from manufacturers. Price uncertainties about building materials made of steel and aluminum have already disrupted deal negotiations and planning processes for real estate projects. Any price increases probably won’t be catastrophic for the sector, but contractors and real estate investors may choose to pass the costs along to future tenants. This would give neighboring property owners of existing buildings a chance to raise their rents as well.
While US steel and aluminum makers may see a short-term boon in production, there are structural limits to the increase. Steel mills may not be able to easily or cheaply convert their facilities to produce different kinds of components previously made abroad. They may also not be able to meet the demand for products formerly imported from other countries.
Pipeline, oil, and gas companies have lobbied against the tariffs because there just isn’t enough domestic steel available to make pipeline materials. U.S pipelines are currently made with only about 30 percent domestic steel components, according to data by IHS Global Insight and the International Trade Association. Requiring pipelines to be made entirely of US steel would make their production prohibitively expensive to American companies and hamstring efforts to support the energy industry.
Potential for Trade Wars
In response to the tariffs, foreign countries have threatened to implement reciprocal tariffs on US exports. Initially, the EU floated a list of potential target goods, which includes Harley-Davidson motorcycles, bourbon, sweet corn, and blue jeans. These tariffs would decrease American products’ competitiveness abroad and hurt American manufacturers.
China is the first country to take retaliatory action, announcing up to $3 billion in tariffs against 128 US products, including: wine, fruit, pork, and recycled aluminum and steel pipes, among others. A frequent target of Trump’s criticism on trade, China is well-positioned to hurt American businesses in sectors from aerospace to agriculture.
Boeing exports 80 percent of its planes and its largest market is China. As retaliation for the tariffs on its exports, China may decide to cancel its orders with Boeing and instead buy from a foreign competitor. Boeing employs 137,000 people in the United States, and American workers would directly feel a reduction in business.
China is also the United States’ most valuable customer for soybeans, importing more than one third of all domestically produced soybeans. Chinese officials have explicitly indicated that US produced soybeans are prime targets for tariff retaliation, which could be devastating to American farmers.
China did not include Boeing or soybeans in the initial retaliatory tariffs, but left room for escalation depending on next moves from the US
The Trump administration does seem willing to negotiate with trading partners and make deals to avoid trade wars. At the last minute, Trump temporarily excluded key US trading partners from the tariffs, giving them time to negotiate deals in exchange for permanent exemptions. Treasury Secretary Steven Mnuchin is also reportedly in talks with Chinese officials to prevent the situation from escalating.
Despite these negotiations, the Trump administration is expected to levy an additional $50-$60 billion in tariffs on advanced technology imports from the “Made in China 2025” industrial development program, following an investigation into intellectual property theft from US companies. If these new tariffs take effect, they could derail US-China trade talks and motivate further retaliation from China.
Canada and Mexico’s exemption from the tariffs is contingent on the results of NAFTA renegotiation. While NAFTA needs be modernized to address the changes brought about by the digital economy, the threat of tariffs and any resulting reciprocal tariffs might derail otherwise productive talks.
The US Chamber of Commerce estimates that trade with Canada and Mexico supports nearly 14 million US jobs, and trade wars would put millions of livelihoods at risk.
Canadian Prime Minister Justin Trudeau has already threatened to impose tariffs on imports of foreign steel into Canada. Trudeau stated that he does not want cheap, foreign steel to undercut Canada’s robust steel making sector. Depending on the results of NAFTA renegotiation, Canadian and Mexican political leaders may threaten counter tariffs on US manufactured goods.
There doesn’t appear to be a clear end in sight for NAFTA talks and the Trump Administration has not set a deadline for when negotiations must conclude. Barring any unexpected breakthrough, the future of the United States’ trade relationship with Mexico and Canada will likely remain in a state of uncertainty indefinitely.
The forthcoming tariffs may disrupt American manufacturing across multiple sectors and offset any realized gains from the recent tax bill. Manufacturers that normally rely on foreign steel and aluminum may see their production costs increase, while manufacturers targeted by retaliatory tariffs may see their products become less competitive abroad. Even manufacturers who only buy domestic steel or aluminum are worried about the tariffs potential to disrupt complex, global supply chains.
Rising production costs and decreased competitiveness may lead to worker layoffs and facility transfers to countries with access to cheaper production materials. The Trump Administration has made clear its desire to pursue policies that will benefit American manufacturers and their workers, but perhaps more nuanced actions than tariffs are warranted.
It’s safe to say that, outside US steelmakers, the American manufacturing industry is strongly opposed to any changes to trade policy that may ultimately limit market access overseas. The reduction of the corporate tax rate was a significant step in the right direction and will increase domestic industries’ competitiveness worldwide. But while the industry applauds the Trump administration’s efforts to rebalance unfair, global trade relationships—and certainly the World Trade Organization’s anti-dumping measures have been largely ineffective to date—protectionist policies like tariffs will disrupt the complex, global supply chains on which manufacturers rely and stoke the flames of a tit-for-tat trade war. Unhindered global trade ultimately benefits manufacturers, who have long supported policy agendas that break down trade barriers rather than build them.
Rick Schreiber is the National Leader of the Manufacturing & Distribution Practice at BDO, one of the nation’s leading accounting and advisory firms. He is also the National co-Leader of BDO’s Industry 4.0 initiative. Contact him at email@example.com.