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How Trump’s Steel and Aluminum Tariffs will Impact Economic Growth

August 20, 2018
Stock markets were rattled by President Donald Trump’s March announcement of the implementation of tariffs on the importation of steel and aluminum, even including our closest allies of the European Union, Canada, and Mexico. In the week leading up to the news, Canada and the United States were approaching a trade deal before Vice President Mike Pence called Canadian Prime Minister Justin Trudeau and demanded a sunset clause on the agreement.[1] While these types of deals are meant to create certainty for businesses and economies, the expiration dates imposed by a sunset clause would significantly undercut this stability, and Prime Minister Trudeau refused to sign onto the agreement with VP Pence’s demands. Similarly, the European Union had sought a limited trade deal, but President Trump’s investigation into automobile imports worried negotiators, especially Germany for whom cars are a major export.

The U.S. administration has justified these tariffs via a legal statute related to national security concerns. This logic specifically cites how the status quo has weakened the manufacturing sector and, thus, our ability to produce military weapons and vehicles. However, Canada and the European Union reject this claim and point to their alliances and agreements with the United States to prove that they pose no threat to American security.

Trump’s tariffs went into effect June 1st, and Canada’s retaliatory tariffs began July 1st covering American steel and aluminum exports, as well as toffee, strawberry jam, and other basic consumer products. Canada’s tariffs were specifically designed to cover the same amount of American goods as the value of their steel and aluminum exports to the U.S. last year, $12.5 billion. As PM Trudeau declared “[as] Canadians, we’re polite, we’re reasonable but we also will not be pushed around”.[2] The previous week, the EU imposed its own new tariffs of 25% on US products such as motorcycles, targeting Harley-Davidson production in Speaker Paul Ryan’s Wisconsin, and bourbon in Majority Leader Mitch McConnell’s Kentucky.[3] Mexico took a similar approach by focusing on products made in states that are traditionally Republican and zeroed in on Wisconsin dairy and Indiana steel for the Vice President.[4][5] The implementation of tariffs has also largely suspended NAFTA talks, despite emphasis from the Mexican Economy Minister Ildefonso Guajardo and the Canadian Foreign Minister Chrystia Freeland that they are separate. The former Mexican Commerce Secretary Carlos Gutierrez has deemed the tariffs as a “gun-to-the-head negotiating style” which would only make coming to an agreement more difficult.[6]

For industries such as automobile or beer manufacturing, the increased cost of both international and domestic steel and aluminum has led to higher costs that will almost certainly be passed on to consumers. Harley-Davidson, for example, calculated that it would cost an additional $2000 per motorcycle with an added net cost of $90-100 million annually. As a result, they have announced plans to move some production for international markets out of the United States to avoid both increased costs of steel and aluminum and new EU tariffs on motorcycles.[7] This is unlikely to be the only company to move a significant portion of their manufacturing abroad in order to keep costs low. The Beer Institute, a trade group for beer manufacturers, has said that the tariff on aluminum will lead to an additional $347.7 million in costs across the industry and will put more than 20,000 jobs at risk.[8] This is not just due to the increased cost of international aluminum, but also the rising prices from domestic manufacturers. Domestic prices are no longer driven down by foreign competitors and this is part of the reason manufacturing jobs are expected to be lost in industries affected by the tariff.

Image: US steel imports by country Source: BBC, originally from US Department of CommerceImage: US steel imports by country Source: BBC, originally from US Department of Commerce

The combination of international retaliation and domestic downstream price increases is estimated to lead to a .2% short-term annual decline in GDP and job-loss mainly in low-skill areas.[9] The increased unemployment and higher product costs is also projected to lead to a decrease in consumption, estimated to harm approximately 400,000 service-industry jobs.[10] While there will be employment gains for the steel and aluminum industry, there will likely be around eighteen jobs lost for every single steel or aluminum job created.[11]

Image: Job loss in steel industry during 2002 Bush tariffs Source: Bloomberg, original from U.S. Bureau of Labor StatisticsImage: Job loss in steel industry during 2002 Bush tariffs Source: Bloomberg, original from U.S. Bureau of Labor Statistics

After the Bush administration placed 15-30% tariffs on steel in 2002, an estimated 200,000 jobs were lost and only minimal gains were made in the steel industry—ultimately leading to a rollback a year later after the WTO declared they did not meet global trade rules.[12] Senator Lamar Alexander (R-TN) tried to use it as a cautionary tale when discussions first began February, but Trump was unmoved by the stories of auto-parts producers leaving the U.S.[13] Overall, the unpredictability of the Trump administration’s trade policy may be the greater threat to the national economy, as companies are unable to plan long-term with the current uncertainty of trade regulations. Other nations have inefficient policies, like the previous 50% tax Japan had on imported American beef, but it was stable, and the businesses could factor it into their price calculations.[14] Without stability, the economic forecast is unclear, and industry will have difficulty planning for the future. Business spending will likely wane, and companies will be less likely to take risks with the uncertainty. This may even lead to relocation out of the United States as a precaution against further domestic policy changes.[15]

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References:

  [1] https://www.nytimes.com/2018/05/31/us/politics/trump-aluminum-steel-tariffs.html
  [2] https://money.cnn.com/2018/07/01/news/canada-us-tariffs-steel-aluminum/index.html
  [3] https://www.theatlantic.com/international/archive/2018/07/us-china-tariffs/564440/
  [4] Ibid. 
  [5] https://www.politico.com/story/2018/07/05/mexico-imposes-retaliatory-tariffs-670424
  [6] Ibid. 
  [7] https://www.heritage.org/trade/commentary/trumps-tariffs-are-pushing-american-companies-leave
  [8] http://www.hollandsentinel.com/news/20180610/impacts-of-steel-and-aluminum-tariffs-already-felt-in-west-michigan
  [9] http://tradepartnership.com/wp-content/uploads/2018/06/232RetaliationPolicyBriefJune5.pdf
  [10] Ibid. 
  [11] Ibid. 
  [12] http://www.atlanticcouncil.org/blogs/econographics/steel-tariff
  [13] https://www.politico.com/story/2018/03/07/steel-tariffs-trump-bush-391426
  [14] https://www.nytimes.com/2018/05/31/upshot/-us-tariffs-real-economic-risk-is-unpredictability.html
  [15] https://www.inc.com/this-way-up/4-ways-uncertainty-will-impact-business-in-catalonia.html

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