Tariffs on Steel and Aluminum are big in the news these past few weeks with President Trump looking to impose tariffs on these materials later this month, 25% and 10% respectively. This has sparked a lot of debate around the country, including within Trump's own administration and potentially being the final straw causing Gary Cohn to resign as Chief Economic Advisor to the President.
During the Presidential campaign, Trump set a goal of achieving at least 3% GDP growth on a sustained basis. In his administration’s view, the tax reform package was a significant step toward helping to achieve that goal. The administration looked around the world at tax rates and observed that our higher tax rates made our companies less competitive on the global scene. Trump felt that was not fair to U.S. companies and his administration moved to narrow the gap. Now he has turned his focus to another campaign promise, that of free and fair trade. The trade deficit has been in existence largely in the past 20 years or so. On the link just provided, click on MAX to see the history. One factor contributing to this deficit are the tariffs other nations impose on our goods coming into their country. China, for example, imposes a 25% tariff on U.S. car companies on vehicles sold into China. In January 2018, the trading partner with the largest deficit was China at $36 billion dollars, an increase of almost 17% from the prior month. The cause for the sharp increase was primarily due to much lower exports to China, dropping by 28%, while imports rose 3%. It seems that China is a primary focus on this issue, not so much other trading partners such as Mexico and Canada. Exports to Mexico rose almost 11% in January 2018 while exports to Canada dropped by almost 3%. Imports from both of these countries increased by about 3% from each. The overall trade deficit in January 2018 was just under $57 billion (again, China is well more than half of this amount at $36B), the largest trade gap since the Fall of 2008. Although month over month fluctuations could contain one time transactions and other isolated events, it is an interesting indication nonetheless.
Imposing tariffs on certain trade partners is Trump attempting to continue his mission of leveling the playing field for U.S. businesses, in this case steel and aluminum companies. Part of the challenge here is that as these companies stand to benefit, others in our economy will incur higher costs for those materials inputs. The price of goods containing those inputs will increase, some more than others depending on how much of those particular inputs they consume. As of last year, there are approximately 150,000 workers in the U.S. in the Steel and Aluminum industries (Bureau of Labor Statistics). The number of U.S. workers who are employed at companies using steel and aluminum as inputs in their manufacturing processes is over 6 million. The concern some have over these tariffs is that you will probably benefit those 150,000 workers (less foreign competition, more jobs/higher wages), but at the possible expense of the over 6 million using those materials as inputs. When businesses face higher costs, they make decisions to offset those costs which sometimes comes at the expense of the labor force (e.g. job and wage cuts). Additionally, consumers stand to get hurt to some extent as the rising costs of goods coming into the U.S. as a result of tariffs will end up being reflected in the price consumers pay for those goods, essentially a trade tax.
As of now Mexico and Canada were exempted from the tariffs, pending continued negotiations on the NAFTA deal, other trade partners may be exempted in the next few weeks per Treasury Secretary Mnuchin. This should serve to mitigate the increases in the cost of steel and aluminum as we import just a bit over 25% of our steel from those two nations. China accounts for approximately 3% of our steel imports when looking at direct imports. The problem with the numbers I just cited is that there is a practice known as “trans-shipping” whereby a country like China sells through to another country, and that country in turn sells it to the U.S. The import statistics don’t account for this trans-shipping practice so it makes it more difficult to know how much steel and aluminum are actually coming from China and what the tariffs will mean to the cost of goods here. Trump’s administration has said they will not allow trans-shipping from Mexico and Canada since they will be exempt from the tariffs. If you hear that tariffs on these materials won’t have much of an impact because we don’t get much of it from China, that may not be entirely true. Some predict the cost of commercial and industrial construction projects, particularly those that are steel intensive, could rise as much as 4% give or take.
There are concerns that imposing these tariffs could spark a trade war. Trump himself has come out and expressed little concern over this possibility, also stating it would be “easy” to win a trade war. It's often said no party really wins in a trade war, all parties would be hurt at least to some extent. Even if there is retaliation in the form of new tariffs on U.S. exports, you would think it wouldn't last long-term. Generally speaking these leaders aren’t stupid, and resolving any issues regarding trade is in everyone’s best interest. Treasury Secretary Mnuchin stated last week that President Xi of China understands that it is their best interest to reduce the trade imbalance with the U.S. President Xi knows it exists, the numbers back it up and he obviously knows it’s a serious issue with the U.S. administration presently.
Higher costs related to steel and aluminum are already showing up in the market, and determinations need to be made as to who will bear that cost. If you are a producer of steel, you will get higher prices and fare well under this policy. If you are a consumer of steel, you will be paying the producers more. Work that is in process as these price increases are currently flowing though will be borne by the party consistent with the contract terms in place. If you already have market volatility terms in your contracts, that’s great! If you don’t, wording such as this might make sense... “Escalation costs may be added via equitable adjustment due to current market volatility”. As always, consult with your legal counsel to ensure the objectives you are trying to reach are being well served by any terms and wording you include in your contracts.