Steel Squeeze: A Look at How the Trump Tariffs Could Impact Manufacturing in North America
Lane Long posted on June 11, 2018 |
Coil like this is about to get a lot more expensive for U.S. manufacturers. (Image courtesy of BBC.)
Coil like this is about to get a lot more expensive for U.S. manufacturers. (Image courtesy of BBC.)

Back in March, the Trump administration announced that it would begin applying steep tariffs to U.S. imports of steel and aluminum from most trading partners worldwide. Certain allies, including Canada, Mexico and the European Union were granted indefinite exemptions to these penalties as trade officials sought satisfactory alternatives. There was hope on both sides that an arrangement could be reached that might make such restrictive trade policies unnecessary.

Last Thursday, however, the Trump administration broke the news that those talks had fizzled. The three previously named U.S. allies are now subject to the same 25 percent tariff on steel imports and 10 percent tariff on aluminum faced by the rest of the world. In economic terms, this is a much bigger deal than imposing penalties on Chinese or Russian steel. Geopolitical ramifications aside, the move brings with it major implications for the U.S. manufacturers that rely on imported raw material.

These Tariffs Make Higher Prices Inescapable

The impact that Trump’s March round of tariffs will have on the actual prices manufacturers pay for steel and aluminum might have been negligible had the impact stopped there. The likes of China, Japan and Russia ship millions of tons of steel to the U.S. annually, but these imports are dwarfed by the contributions of the partners now being targeted.

Canada and Mexico are two of the three largest exporters of steel to the U.S. The nations comprising the European Union collectively account for another hefty chunk of that total. At a conservative estimate, the three partners account for 30-35 percent of the steel the U.S. imports annually.

The United States imports more steel from its North American neighbors than anywhere else. (Image courtesy of Wood Mackenzie.)
The United States imports more steel from its North American neighbors than anywhere else. (Image courtesy of Wood Mackenzie.)

Slapping a 25 percent tariff on some of the largest suppliers of the steel used by U.S. businesses is not a baby step. This decision will be felt in waves, and many of the ripples emanating from that wave will be hard to quantify until years from now. Basic economics, however, can take the guesswork out of predicting one change: Price. Raw steel and aluminum will become more expensive for U.S. companies to purchase, effective immediately. This price increase won’t affect all industries equally, however. Some of the largest vertical markets in American manufacturing will be disproportionately impacted. The automotive, aerospace and consumer goods industries are the three places this change will likely be felt the most keenly. Here’s why.

Automotive

No matter where a car is ultimately assembled, automotive production is an international affair. U.S. carmakers are not exempt from this trend. Imported metals and/or metal parts are an integral piece of the puzzle for U.S.-based manufacturers. The global supply chain of car parts is so tightly interwoven, in fact, that some auto executives have gone so far as to say that no vehicle is made in America without the use of foreign metals. Rising input costs associated with the massive, tariff-induced spike in steel and aluminum prices are inevitable. The total production costs of U.S. vehicles will rise with them.

The new tariffs could hardly come at a worse time for the U.S. auto sector. By January, well before the tariffs were even announced, Ford Motor Company CEO Jim Hackett had already written off 2018 as “a bad year.” The reason? Skyrocketing metal prices. In 2017, the price of the hot-rolled steel coil defined by Ford as its primary input cost rose by over 17 percent. Aluminum, its second largest material cost by volume, soared by nearly 35 percent. Ford isn’t alone in its assessment of the challenges ahead, as GM has also identified rising material costs as a significant obstacle for its business in the coming years. The Trump tariffs promise to compound what was already a major headwind for these companies.

The auto industry already had a metal price problem well before the tariffs against Mexico and Canada were announced. (Image courtesy of Bloomberg.)
The auto industry already had a metal price problem well before the tariffs against Mexico and Canada were announced. (Image courtesy of Bloomberg.)

These companies have suggested that a coming drop in their earnings should be expected as a direct result of material price increases. It’s not hard to forecast what will happen next. Belt-tightening measures are likely to include job cuts and a decline in R&D investment as a first resort. As manufacturers are forced to pass along their costs to consumers, auto industry trade groups have predicted a dip in vehicle sales. This might pump the metaphorical brakes on innovation in areas like fuel economy and safety. The details will play out over time, but automotive officials agree that the latest tariffs will be a barrier to their global competitiveness going forward.

Aerospace

The aerospace sector could be set to feel the effects of the steel squeeze even more sharply than automakers. Accounting for nearly $85 billion of positive trade balance in 2017, this industry is one in which U.S. manufacturers have retained the mantle of international leadership. Aerospace manufacturing, which supports 2.5 million jobs domestically, relies on a higher proportion of foreign metals than do U.S. car manufacturers.

As a sector, aerospace is uniquely susceptible to these tariffs because of the industry’s interconnectedness. The complexity of aerospace production processes, in which dozens or hundreds of manufacturers may be involved in a final-use good, has an amplifying effect on material price increases. Imported steel and aluminum are used by virtually every link in the industry’s value chain. From landing gear to fuel tanks, aerospace components depend on access to global supply chains to stay price competitive. Industry leaders regard the result of limiting that access as easy to forecast: higher costs, lower supply, and compromised quality.

American-made planes like these will feel the sting of hefty tariffs on imported metals through nearly every inch of their design. (Image courtesy of Industry Week.)
American-made planes like these will feel the sting of hefty tariffs on imported metals through nearly every inch of their design. (Image courtesy of Industry Week.)

The fact that the U.S. aerospace industry exports so heavily leaves it especially vulnerable in ways that go beyond input costs, however. The threat of international retaliation looms over the $150 billion in aerospace products that U.S. companies expect to sell abroad this year. Given the new tariffs on North American trading partners, the Aerospace Industries Association sees this as something to worry about. The trade group’s CEO penned an open letter to Trump when the first round of tariffs was announced, outlining their possible damage to U.S. aerospace manufacturers. Chief among his concerns was the likelihood of retaliatory action from the nations that buy U.S.-produced aircraft and defense systems.

“If these proposed policies are implemented,” he wrote, “there is a risk of trade retaliation on aerospace and defense products, which are the consistent source of America’s largest manufacturing trade surplus. If these exports become too expensive to compete for market share, we lose benefits from initial sale and ongoing sales of parts, and components critical for maintenance, repair, and overhaul.” The U.S. might be playing a dangerous game with its most important class of exports. Tit-for-tat trade measures from the EU, Mexico and Canada could erode the worldwide strength of U.S. aerospace products by making them too expensive for these countries to buy.

Consumer Goods

For aerospace manufacturers, the threat of retaliation remains just that: a threat. For makers of consumer goods in other classes, however, it has already become a reality. The Trump tariffs have sparked a wave of reactionary penalties against U.S. exports in countries around the globe. American-made goods from motorcycles to bourbon have already been named as targets. Mexico will impose 20 percent tariffs on U.S. motorboats and an equal 25 percent penalty on American steel. Canada will hit imports of beer kegs and household appliances. And the EU plans to slap tariffs on a wide range of American-made apparel, footwear and agricultural products. These measures will make it difficult for U.S. manufacturers to sell products in international marketplaces, where they’ve traditionally excelled by forcing foreign consumers to substitute cheaper products sourced elsewhere.

A Black & Decker production facility in Charlotte, N.C. The toolmaker has said it’s being forced to consider outsourcing many of its components in light of rising material costs at home. Driven by the latest round of tariffs targeting Canada, Mexico and the EU, steel and aluminum prices are surging. (Image courtesy of Bloomberg.)
A Black & Decker production facility in Charlotte, N.C. The toolmaker has said it’s being forced to consider outsourcing many of its components in light of rising material costs at home. Driven by the latest round of tariffs targeting Canada, Mexico and the EU, steel and aluminum prices are surging. (Image courtesy of Bloomberg.)

Rising trade barriers aren’t the only dangerous condition these tariffs will create for consumer goods makers. Many companies have already encountered higher materials prices that are forcing them to charge more for their wares. Their customers, in some cases, are responding by buying from foreign suppliers, which were able to make the same goods using tariff-free steel and aluminum. To prevent this loss of business, some organizations are outsourcing their supply chains. By importing manufactured components instead of the raw materials required to make them, U.S. businesses can circumvent the tariffs and get goods to market for a reasonable price. Executives from companies that have taken this action, however, emphasize that each step in the value chain that they’re forced to surrender means jobs (and profits) lost to international competitors.

Net result: TBD

Removing the exception to steel and aluminum tariffs for America’s closest trading partners isn’t a universally destructive business decision. Certain parties stand to benefit enormously from this decision. Such high fees on international steel and aluminum are a clear boon to the domestic steelmakers Trump intended to protect in the first place. A 25 percent cost advantage is nothing to sneeze at, and as these tariffs continue to squeeze supply, market prices for the raw materials these companies offer will rise. The market recognizes these advantages, as shares of companies like Nucor and U.S. Steel rose sharply the moment the new policy was announced.

In the long run, it’s entirely possible that these entities will take advantage of Trump’s protectionism. The insulated market might deliver them windfall profits not seen in decades. These profits might enable them to invest more aggressively in innovating and improving their production processes. These improvements might eventually bring lower prices and higher qualities to the downstream American industries that rely on their materials. But that’s a lot of “mights.”

Leaders from nearly every sector of manufacturing have come forward to condemn the tariffs as a severe threat to their industries. Those in the aerospace, automotive and consumer goods spaces look poised to be the biggest losers, but they aren’t alone. The simple fact is that the downstream businesses that rely on affordable access to metal dwarf the American metal producers that will benefit from the tariffs by every metric. Time will tell, but the odds aren’t good that this move will wind up as a net positive for U.S. (and more broadly, North American) manufacturing.


Recommended For You