President Trump recently announced he would impose a new across-the-board tariff on all steel and aluminum imports into the United States. That was the harshest of three tariff options outlined by the Department of Commerce in a trade investigation report presented to the president.
That investigation, initiated in April 2017, was conducted under Section 232 of the Trade Expansion Act of 1962, a provision which authorizes such inquiries into the impact of certain imports on U.S. national security. According to the Commerce study, steel imports do indeed “threaten to impair the national security.”
However, the report—and Trump’s across-the-board tariff plan—makes no distinction from where the imports originate. Among the top suppliers of steel to the United States is NATO partner Germany. Also among that group are key strategic allies, especially with regard to containing the nuclear threat from North Korea: Japan and South Korea. The biggest supplier of steel to the United States is another NATO country, Canada. As Canadian Foreign Minister Chrystia Freeland opined, “It is entirely inappropriate to view any trade with Canada as a national security threat to the United States.”
Indeed, peeking behind this aegis of security concerns reveals that the real motive for the Commerce investigation was the so-called Trump Trade Doctrine, developed by then-campaign advisors Wilbur Ross, who was in charge of the investigation and is now Commerce secretary, and Peter Navarro, who turned his campaign stint into directing the very Trumpian-named White House Office of Trade and Manufacturing Policy.
The Trump doctrine has a three-part objective: increase the GDP growth rate, decrease the trade deficit, and strengthen the U.S. manufacturing base. While imposing additional tariffs on imported steel and aluminum may help the manufacturing base of those domestic industries, it is unclear how more expensive steel and aluminum will help other manufacturers, from autos to airplanes, who would pay more for steel and aluminum.
Moreover, new tariffs on steel probably would increase the cost of Trump’s signature $200-billion infrastructure spending plan. And that cost will only multiply across the country as the Trump blueprint relies on state and local governments to come up with matching funds of at least four times the federal spending amount. Local bridge repairs will be more expensive.
The question remains, however, will the new tariffs help decrease the trade deficit? Probably not. So-called trade remedies, like tariffs and duties, seemingly haven’t slowed down imports of steel. Consider, the Commerce report notes that as of February 15, the United States already had 169 antidumping and countervailing duty orders in place on steel, with 25 ongoing investigations.
The proposed Trump tariffs would be applied to all, on top of what is already in place, which from a national security point of view—i.e., the reason for these new tariffs—paints a confusing picture. For example, Russia has an antidumping and a countervailing duty imposed on its exports. That’s a total of two trade sanctions, which compares with 18 for South Korea and 12 for Taiwan and Japan. Appropriately, however, China is facing 29 sanctions, the most of any exporter.
The investigation report itself provides a telling historical timeline on the lack of efficacy to date of protecting the steel industry:
Prior to those actions, President Lyndon Johnson, in 1968, negotiated voluntary restraints on European and Japanese steel imports in lieu of the existing antidumping and countervailing duties the United States was to impose. In other words, it would appear that imports have had the U.S. steel industry in a state of crisis literally for decades.
It is not clear that the newly proposed trade remedy will change much. According to the Commerce Department’s analysis, the tariffs would increase U.S. steel production from its current rate of operating at 73 percent of production capacity to 80 percent of capacity. That increase would imply 9.7 million metric tons in marginal steel production, added to the current 81.9 million metric tons.
In theory, that marginal production increase will meet the standard relied upon in the Commerce report that was set by the Foreign Investment and National Security Act of 2007, which states in part:
It’s not clear that the forecast outcome of less than 10 million more metric tons of U.S. steel, in fact, would make the U.S. steel industry able “to produce internationally competitive products.” The Commerce Department estimated the excess steel production capacity globally to be 700 million metric tons.
Predictably, the steel exporting countries targeted by these tariffs are sure to retaliate if the new measures are enacted. Given the roster of countries and the nature of our two-way trade with each, it is certain agricultural exports will be high on their lists. The top 11 countries supplying steel to the United States account for 80 percent of all U.S. steel imports; those imports were worth about $17.52 billion last year. Comparatively, those same countries account for 62 percent of total U.S. agricultural exports, valued at $86.6 billion—nearly a 5-to-1 ratio.
Agriculture, the backbone of the economy in most deep red states that supported Trump in 2016, is the top trade surplus industry in the United States. Agriculture’s positive net balance was valued at $21.3 billion last year. That balance is virtually identical to the gross amount of steel imports into the United States for the same year, valued at $21.9 billion.
The tariffs are more likely to reduce ag exports than steel imports. Even if any retaliation is limited in scope, much of the U.S. agricultural exports that countries buy are purchased with earnings made from shipping industrial and manufactured goods, such as steel and aluminum, to the United States. That calls into question the logic of the president’s twitter boast: “trade wars are good and easy to win.”
Dave Juday is a commodity market analyst and the principal of The Juday Group.
