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Aon Hewitt Retirement and Investment Blog

Tariffs on steel and aluminum… and why they matter


  • A 'no exceptions' 25% tariff on imports of steel and a 10% tariff on aluminum imports have been announced by the US to start soon.
  • The intention is to support domestic production of steel and aluminum, an attempt to reverse their shrinkage over the past decade or more. The moves are clearly protectionist in nature.
  • These tariffs are, however, blunt instruments, and the objectives difficult to realize. Some of the potential gains in output and employment in these two industries will be lost in higher profit margins. The bigger issue is that steel consumers (of 'cars and cans' and more) commanding a far bigger share of US employment and output, stand to lose.
  • There is also a possibility that these measures prompt retaliation abroad, which will further dilute the effectiveness of such a policy. The EU commission is reportedly reviewing the possibility of a retaliatory tariff on US goods.
  • Market moves since the announcement suggests that there is fear of more such announcements to come. The concern is the possibility of a chain reaction that threatens open trade and interrupts global production chains in many areas of industry.
  • Even if there is a rethink and abandonment of the planned tariffs, some damage to market sentiment has been done. Trade policy uncertainty is a volatility-inducing factor.

Tariffs on steel and aluminum

A 'no exceptions' 25% tariff on imports of steel and a 10% tariff on aluminum imports have been announced by the US President under the Section 232 provisions on trade and national security. They were set to commence this week. Though the moves have been attributed to President Trump in their entirety by the media, it is clear that Wilbur Ross at the US Department of Commerce had been closely involved in the decision to go ahead with these controversial measures, following a departmental review of both industries.

The intention is to support and encourage the production of steel and aluminum in the US. Both industries have shrunk sizably over several decades, faced with rising international competition and global overcapacity. As the US Department of Commerce points out, even compared with five years ago, employment in steel and aluminum production has shrunk by 35% and 58%, respectively. The logic behind the moves is that these tariffs will encourage US companies to source their steel and aluminum domestically to avoid higher import prices, supporting these industries and encourage some job growth.

Other motivations have also been cited. The moves are seen as a kick-back against unfair production practices elsewhere which have produced a substantial global glut. There are a great number of anti-dumping investigations in both steel and aluminum globally at present, a substantial number of which are against China, whose production and trade practices are seen as a key cause of global excess capacity. It should be noted, however, that these measures are not directed against China as such, which, in fact, is a relatively small exporter of steel and aluminum into the US market.  

Will they achieve their objectives?

This is far from the first such example of such tariffs being levied. The historical track record of these policies is not good. However, the intentions behind tariff imposition have not always been the same. After the famous Smoot Hawley tariffs in 1930, which were integral to the global protectionist wave that ushered in the Depression, this is the only other occurrence of tariffs being imposed for clearly protectionist purposes and openly stated as being so.

The problem is the bluntness of the policy and its likely side effects. If the target is China's perceived dumping of excess domestic capacity abroad, this tariff will not hit its target since imports of Chinese steel are a very small share of US steel and aluminum imports. If the target is job growth in steel and aluminum, it will achieve some positive impact, but at the potentially larger cost to consumers of steel who lose from higher costs.

Even the potentially positive impact on employment in production of the two commodities may be overstated. Take steel. What will happen is that the price of domestically produced steel will tend to rise towards the higher import price of steel. Steel and aluminum producers will enjoy a hefty rise in profit margins as they will be able to raise prices towards the higher import price. They will probably boost employment and production to a degree but not necessarily as much as might initially appear.

The bigger problem is the rise in costs for steel consumers. Though the Commerce Secretary has been under great pains to point out that raw material costs are a relatively small proportion of the price that consumers pay on the likes of cars or cans, the tariffs will still be felt in higher costs, with at least some pass-through to consumers. Since steel producers employ only about 1.5% of the numbers employed by steel consumers, the wider employment impact, small or large, will dwarf the jobs boost in the production of steel and aluminum. As we know, product chain linkages run deep among users of both commodities, based on a price structure that now threatens to rise substantially. The only outright winners here are steel and aluminum producers in the US who have the windfall of higher profit margins. 

None of this is to argue that there is no problem in the way steel or aluminum is produced and traded globally. There clearly is. Excess capacity is rife in both commodities – with close to a third of global steel capacity regarded as being in excess of likely consumption.  However, tariffs are unlikely to help matters. Even on its own terms, they could hurt the US economy rather than help it given the product chain linkages that run deep among users of both.

If these tariffs precipitate retaliation from Europe or China, it will hurt the US even more, though the ill effects will by this time be felt more globally. With global trade and open borders already challenged in recent years, it is easy to argue that this move on trade from the US could take the global economy a little further down the slippery slope of more protectionism. This is why the announcement from the US administration was greeted with such alarm last week.

Why tariffs matter to markets

At the time of writing, markets appear to have calmed down after a strong initial reaction which had seen stocks down substantially on the day of the initial announcement. The issue troubling the market was much less the announcement itself, and far more the possibility that this could be the beginning of a series of similar announcements on the 'America First' platform. As we pointed out at the start of the year, the lack of any definitive action on this front in the first year of an administration that had come to office explicitly promising trade restrictions could not be taken to mean that there would be none on an ongoing basis. 

It should be apparent that these policies do have the power to move markets on an ongoing basis. Moves in stock prices globally since the tariff announcement make it clear that concerns over trade restrictions that pressure exporters to the US are widespread. Stock price moves ranging from Asian steel exporters to Japanese and German automakers and differential stock price moves between US winners and losers make this clear.

There is a distinct possibility that other announcements on trade of a similar nature will follow, which invites retaliation or other responses from Europe and China. The EU is already reportedly considering action at this time. All of this goes to show that we might be in the early stages of potentially a difficult skirmish that could ultimately challenge the free trade status quo that the World Trade Organization and multilateral consensus on open trade borders have built and defended successfully until now. There is more to come on this front for sure.

It is very likely that US trade policy will be one of several factors that will usher in more market volatility as we look ahead. Even if opposition within the Republican Party and beyond prompts a rethink or abandonment of these tariffs very soon, markets will continue to fear that more such announcements are to come.  

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