March 22, 2018

How Bad Would Steel and Aluminum Tariffs Be, Really?

President Trump has proposed slapping a 10- and 25-percent tariff on aluminum and steel imports, respectively.  The cry from the free trade quarter and the mainstream media is loud, often bordering on hysterical.  They claim that these tariffs will raise consumer prices, hurt the U.S. economy, invite retaliation from other countries, and maybe lead to a trade war reminiscent of the 1930s.

Where to start?  The best place is with the term “free trade” itself.  In reality, these is no “free trade.”  Mouthing the words “free trade” sounds good, so it must be good, right?  Wrong.  What has been passing for free trade is the condition whereby the U.S. markets are kept relatively open while other countries are allowed to put up barriers to our exports and maintain predatory trade practices.  It is this “free trade” that has been grinding American manufacturing down for years and erasing middle-class jobs in the process.

Let’s look at some of the specifics of the steel and aluminum tariffs.  To begin with, there is a global overcapacity in the manufacture of both steel and aluminum.  This has come about because many countries heavily subsidize their industries.  The production goals in said countries are based not on market conditions, but on government policies that typically focus on jobs at home.  This results in too much production.  The excess is then exported abroad, often into the open American market, at artificially low prices – that is, at prices below the cost of manufacture.  In economic circles, this is called dumping, and it has historically been viewed as an unfair trade and predatory trade practice.

The top exporter of aluminum and steel into the U.S. is Canada, a country Trump is hinting at exempting from the tariffs.  This is not just because Canada is our largest overall trading partner, but because the attractive prices of Canada’s steel and aluminum are due to production efficiency – namely, Canadian mills have access to relatively inexpensive hydroelectric electricity.  That’s not the case for the other producers, who should be hit with tariffs.

You may wonder, why have predatory trade practices against the U.S. been allowed to fester for so long?  That’s a question you have to ask the free traders.  Good luck getting an answer.

Fortunately, Trump is starting to act.  And the recent departure from the administration of economic adviser Gary Cohn – a Democrat, a free trader, and a Wall Street fat cat – is a welcome sign.

Wilber Ross, secretary of commerce, is solid.  He has said the U.S. will no longer be a “patsy” for other countries on trade.  At Davos, he also commented that “[t]here have always been trade wars.  The difference now is U.S. troops are now coming to the ramparts.”  This is exactly what many of our trading partners find highly objectionable: America defending itself.  It’s as if they’ve grown accustomed to going out for dinner and drinks each night and having America always picking up the tab.  It’s a shock for them to hear that the arrangement is coming to an end.

Now let’s look at the effect of the aluminum and steel tariffs on U.S. prices.  Take aluminum.  A 10-percent tariff will raise the cost of the imported metal by at most 10 percent.  And since aluminum has extensive use, the argument goes that this tariff will ripple through the economy and hurt the consumer.  Will it?

Say a product costs $10 and has $1’s worth of raw aluminum in it.  With the tariff, the cost of the metal rises to $1.10 and the product to $10.10.  How significant is that?

Some concrete examples.  Take airline manufacturing, which is a big aluminum-user, as the planes have aluminum shells.  So what do you suppose is the percentage cost of the raw aluminum in the overall cost of producing a Boeing 777 or any other plane in the Boeing fleet?  It’s minuscule.  It is nearly the same for the car you drive.  Moving down the product sophistication ladder, what is the percent cost of the aluminum in a can of Coors Lite?  It shouldn’t be all that much.

Example after example can be given, and the results will be the same.  In all but a few exceptional cases, like aluminum foil for the kitchen, the cost of the aluminum in the product will be small, in some cases so small that the effect of the tariff might not even be noticeable.  The steel tariff will have more bite, but the argument is the same.  For a building, what percentage of its cost is due to the raw steel in its structure?

This percentage cost of steel and aluminum in products is relatively low because both are commodities – or, if you will, low value-added products (unless they are specialized).  Admittedly, the cost effect of tariffs would be magnified when applied to finished products like cars, TV, iPhones, and high-end sub-assemblies like automotive engines and transmissions.  That’s a story for another time.

There’s another factor on steel and aluminum which the free traders neglect to address.  As previously stated, for both, there is a global overcapacity.  Under that condition, if these tariffs were imposed, might not the producers eat the tariffs to maintain market share?  To the extent that that happens, the cost of the tariff is transferred from the American consumer to the foreign producer.

Given all this, it is hard to see that President Trump’s proposed tariffs on steel and aluminum will affect prices all that much.  What probably has the free traders hyperventilating is the thought that these tariffs – like the previous ones on washing machines and solar panels – might lead for a more serious effort by the administration to address a trade arrangement that is skewed against America.  The free traders know they are backing a system that is difficult to defend on its merits and fear that any breach in their position might cascade.  As for the globalists in the free trade camp, they love the status quo because it has the U.S. subsidizing the economies of other countries.  To them, that’s America’s role in life.

Source: American Thinker