The recent decision to impose steel and aluminum tariffs might appear to favor American manufacturing. But the unintended consequence will be to eliminate on net American manufacturing jobs, raise the prices of many goods in the U.S., and reduce the ability of American firms to compete world-wide. Its effect in Michigan will be amplified as it is the fourth largest steel and aluminum importer in the United States.
The administration may levy the tariff under Section 232 of the Trade Adjustment Act, which allows the president to impose tariffs for national security reasons. For a number of reasons, it is difficult to believe that our national security is threatened due to our reliance on steel supplied by countries that might pose a threat.
First, Defense Secretary Mattis acknowledged that the requirements for steel by the Defense Department represent only about 3 percent of U.S. steel production. Second, U.S. steelmakers currently supply about 70 percent of all steel-mill products in the U.S. The percentage of steel imported into the U.S. has been about the same as it was prior to the 2008 recession and do not show a long term trend of increasing. Third, the largest importers by far of steel into the U.S. are Canada, Brazil, South Korea and Mexico. Together they account for about half of steel imports.
Imposing the tariff on foreign steel will increase the demand for American steel products, thus raising the price of steel manufactured by American firms. That will be good for American steel manufacturers. But it will also increase the cost of production for all American firms that use steel.
The tariffs will mean lower production of U.S. manufacturing and thus less employment in U.S. manufacturing. While the American steel industry directly employs about 147,000 workers, and about 28,000 are employed in the aluminum industry, about 6.3 million workers are directly employed by steel-using industry. Thus far more workers will be affected negatively than positively by the tariff.
Unforeseen consequences from these tariffs will abound. Car prices will increase with the increase in cost of steel and aluminum, making the Big Three auto companies less able to compete with German manufacturers. Goldman Sachs has estimated that the tariffs would cost both GM and Ford $1 billion.
Steel is used in natural gas pipelines, railroads, and bridges. Thus it will be more costly to expand, maintain, and replace the nation’s infrastructure.
An Illinois plant that rolls slabs of steel into sheets for customers such as Caterpillar and Harley-Davidson may be forced to eventually lay off its 1,200 steel workers since the company relies on a type of Russian steel that is not available from U.S. steel manufacturers.
In 2002 the Bush administration imposed a tariff on foreign steel in order to benefit the domestic steel industry. Unfortunately, the administration failed to see consequences on other domestic industries, such as our domestic auto parts manufacturers who would not be able to compete with Chinese auto parts manufacturers that used cheaper Chinese steel. The tariff was lifted a little more than a year and a half after it was imposed.
Finally, the tariffs risk retaliation by other members of the World Trade Organization. This will result in a general economic decline worldwide. It is useful to recall that the Smoot-Hawley Tariff Act of 1930 led to an international trade war that was a factor in the length and depth of the Great Depression. While the current steel and aluminum tariffs are not nearly as broad as Smoot-Hawley, nonetheless they are likely to lead to a response internationally that will reduce the economic growth both here and abroad.
Gary Wolfram is the William Simon Professor of Economics at Hillsdale College.
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