America’s Steel Tariff: A Not-So-Impenetrable Defense Against China

Making America Great Again – At China’s Expense?

On March 8, 2018, President Donald Trump exercised his authority under Section 232 of the Trade Expansion Act of 1962 to impose a 25% tariff on steel and a 10% tariff on aluminum imports from foreign producers, with the exception of those from Canada and Mexico. In sticking with his “America First” campaign promise to “re-promote” the United States’ best interests, Mr. Trump officially kicked off a tit-for-tat trade war with looming economic power China in a move that will have implications across the globe. Long threatened by the manipulative and unfair practices of Chinese economic policy – including creating and manufacturing an overproduction of raw steel over the last 15 years with which domestic manufacturers struggle to compete – the Trump administration took the first step to curb China’s economic footprint by imposing the tariffs. The question remains though: will they succeed?

In theory, the tariffs can be effective. As the president attempts to assuage voters in swing states such as Pennsylvania where steel is produced, the tariff offers the glimmer that industrial jobs will return to America’s heartland. As foreign competition in the steel arena has grown larger, so too have the number of imports, causing a loss of American manufacturing jobs. Steel mills represent a nostalgic reminder of America’s industrial strength and unity; recreating these jobs and industries could boost American morale as well as profitability.

In practice, however, tariffs have not proven to be effective historically. President George Bush implemented a tariff in the early 2000’s, only to see more lost manufacturing jobs at home (200,000) than the number of total jobs in steel mills altogether (150,000). Is there any reason to think this one will be any different, particularly with respect to China?

A View From the Front Lines

I spoke with Robert G. Evans III, Executive Vice President of Con-Tech International headquartered in New Orleans, LA to understand his perspective from the steel industry. Con-Tech specializes in distributing for the steel industrial packing industry, in particular cold roll coil steel which is used to make steel drums for industrial consumers. Like most US manufacturers, Mr. Evans is not pleased with President Trump’s purported effort to put “America First”.

“The only beneficiaries of this move are the domestic steel mills themselves,” Mr. Evans told me over a cup of coffee in his office. “Domestic steel prices have gone up 40% since the start of the year. Domestic manufacturers know what’s going on, and they boost their prices right up there with the new imported price that’s 25% higher. These American steel mills are a majority publicly traded, and they’re looking to boost their profitability, as well as their dividend.”

As a result, manufacturers of finished goods such as lawnmowers, cars, and steel drums are forced to make-up the 25% increase regardless of whether they buy foreign or domestic steel. The steel mills’ gain comes at the expense of every other US manufacturer that requires steel – and there are many more manufacturing jobs than those in steel mills. However, there is still the option of importing from Canada or Mexico.

But according to Mr. Evans, “It’s only a temporary ban (on those two countries). We’ve been given a mandate that if Mexico becomes subject to Section 232, then we’d have to pay the 25% increase. The price of Mexican steel is only slightly lower than the domestic price, but with the added risk that the ban be lifted, you’re better off going with the domestic. It’s not only created an increase in prices, but confusion as to where you can get your steel and if we’re going to run into trouble with credit lines – both our own and our customers’.”

The Impact on China

I then prodded about China. Are they a problem for you in the global market? And do you feel like the tariff is having the desired effect to curtail their steel dominance and bring them to the negotiating table?

“China makes more steel than the rest of the world combined, and their overproduction is a big problem not just to the United States, but to the global steel market,” cautioned Mr. Evans. “Having that much overcapacity in a state-owned industry is a big issue, and it needs to be addressed – just not through a tariff”

Mr. Evans hastened me to think about the problem in a way I had not previously. There are ways that Chinese steel is being imported into the US – just not as raw steel from its steel mills – and therefore are not subject to the tariff. He explained, “I can not bring in cold roil (steel) coils from China because of foreign duties that have been in place since 2016 that increase the price more than 2.5 times. But I can bring in steel circles from China for the ends of my drums because these are under a different code. So if I bring in a steel manufactured product, I don’t have to pay the tariff; I save costs and don’t have to produce this item at home – and this results in people getting laid off.”

What Now?

Perhaps the tariff will be one of many straws that help break the camel’s back in a trade war. On April 10th of this year, President Xi of China claimed that the two countries needed to work together and with a “cooperative tone”, signaling that he may be more open to negotiation than we believed. A week later, on April 17th, China eased rules on foreign automakers, no longer mandating them to work with Chinese joint ventures in order to produce cars locally. There are glimmers of hope for the United States in this trade war, yet it is anyone’s guess as to how it will end.

The tariff in and of itself, however, is fundamentally flawed. The last quote from Mr. Evans underscores the two biggest problems with the tariff. On the one hand, it doesn’t provide a net positive impact on jobs in the United States, as more domestic manufacturing jobs will be lost than those gained in steel mills. And on the other, China has ways around the tariff. Chinese steel parts, such as the shell of a lawnmower, used in the assembly of an American product are not levied a duty in the same way as raw steel. Furthermore, only 2% of American steel is imported from Beijing and its subsidiaries.

In instituting this tariff, we are not only harming productivity at home, but we’re barking up the wrong tree to boot.

 

CJ El-Dahr

MBA Class of 2018