Dan Shugar

Shug Speaks

Steel Tariff Implications: Reduction in Manufacturing in US

November 26, 2018

How are the broad U.S. steel tariffs working out? They are exactly the wrong medicine to improve U.S. competitiveness. Tariffs are bad economic policy but have even worse economic implications when applied to raw materials. We’ve analyzed historical information in dollars/ton on steel prior to tariffs and compared it to the post-tariff period. Not surprisingly, domestic producers cranked up prices, which are now averaging at $883 (from $618 pre-tariff) for hot rolled coil, a basic material.

U.S. Midwest Domestic Hot-Rolled Coil Steel Futures Historical Data. Photo and Data Courtesy of Investing.com.

This policy may provide a windfall profit to steel producers, but hugely increases cost to value-added manufacturers, from nuts and bolts to Harley-Davidsons. US manufacturers now cannot export at a profit – and are forced to relocate production overseas so they can procure reasonably priced raw material for their products for international markets.

The reduction in manufacturing activity in U.S. is largely a result of steel tariffs, as seen with General Motors who reported the tariffs on steel and aluminum would cost the company $1 billion this year and recently announced a restructuring that shuttered three North American factories and reduced its salaried workforce by 15%.

International trade negotiations move slowly, but business moves at light speed, and many U.S. manufacturers are losing customers – some permanently. To improve the competitiveness of U.S. steel, the key is to incentivize those manufacturers to match that speed, which for example can be achieved through low cost financing for new, highly efficient mills. Then, American steel companies, and the much larger segment of the manufacturing economy that uses raw material, will be competitive. Perversely, tariffs disincentivize investment in new, efficient steel production capacity. Producers just fire up old inefficient mills to take advantage in a short-term opportunity while tariffs last. Costs will be passed on to US customers, which is fueling inflation, depressing earnings, and hurting the market.

Read my posts on steel tariffs here and here on LinkedIn.

Shug