The economics behind the 25% tariff on Steel imports and 10% tariff on Aluminium imports to the US

Unsurprisingly, following the Department of Commerce recommendations [1], US President Donald Trump announced tariffs on Steel and Aluminium imports.

Here are a few excerpts from the Department of Commerce Reports [1][2][3] and Department of Trade Report [4],

“Key Findings of the Steel Report:

• The United States is the world’s largest importer of steel. Our imports are nearly four times our exports.
• Six basic oxygen furnaces and four electric furnaces have closed since 2000 and employment has dropped by 35% since 1998.
• World steelmaking capacity is 2.4 billion metric tons, up 127% from 2000, while steel demand grew at a slower rate.
• The recent global excess capacity is 700 million tons, almost 7 times the annual total of U.S. steel consumption. China is by far the largest producer and exporter of steel, and the largest source of excess steel capacity. Their excess capacity alone exceeds the total U.S. steel-making capacity.
• On an average month, China produces nearly as much steel as the U.S. does in a year. For certain types of steel, such as for electrical transformers, only one U.S. producer remains.
• As of February 15, 2018, the U.S. had 169 antidumping and countervailing duty orders in place on steel, of which 29 are against China, and there are 25 ongoing investigations.

Recommendations of the Steel Report:

Secretary Ross has recommended to the President that he consider the following alternative remedies to address the problem of steel imports:

1. A global tariff of at least 24% on all steel imports from all countries, or
2. A tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States, or
3. A quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States.

Each of these remedies is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry. Each remedy applies measures to all countries and all steel products to prevent circumvention.”

“Key Findings of the Aluminum Report:

• Aluminum imports have risen to 90% of total demand for primary aluminum, up from 66% in 2012.
• From 2013 to 2016 aluminum industry employment fell by 58%, 6 smelters shut down, and only two of the remaining 5 smelters are operating at capacity, even though demand has grown considerably.
• At today’s reduced military spending, military consumption of aluminum is a small percentage of total consumption and therefore is insufficient by itself to preserve the viability of the smelters. For example, there is only one remaining U.S. producer of the high-quality aluminum alloy needed for military aerospace. Infrastructure, which is necessary for our economic security, is a major use of aluminum.
• The Commerce Department has recently brought trade cases to try to address the dumping of aluminum. As of February 15, 2018, the U.S. had two antidumping and countervailing duty orders in place on aluminum, both against China, and there are four ongoing investigations against China.

Recommendations of the Aluminum Report:

Secretary Ross has recommended to President Trump three alternative remedies for dealing with the excessive imports of aluminum. These would cover both aluminum ingots and a wide variety of aluminum products.
1. A tariff of at least 7.7% on all aluminum exports from all countries, or
2. A tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela and Vietnam. All the other countries would be subject to quotas equal to 100% of their 2017 exports to the United States, or
3. A quota on all imports from all countries equal to a maximum of 86.7% of their 2017 exports to the United States.

Each of the three proposals is intended to raise production of aluminum from the present 48% average capacity to 80%, a level that would provide the industry with long-term viability. Each remedy applies measures to all countries and all steel products to prevent circumvention.”

“Imports by Top Source

The top 10 source countries for U.S. steel imports represented 78 percent of the total steel import volume in YTD 2017 at 21 million metrics tons (mmt). Canada accounted for the largest share of U.S. imports by source country at 16 percent (4.3 mmt), followed by Brazil at 13 percent (3.6 mmt), South Korea at 10 percent (2.7 mmt), Mexico at 9 percent (2.4 mmt), and Russia at 9 percent (2.4 mmt). While the rankings of the top 10 source countries for U.S. imports has fluctuated over time, Canada has retained the top spot.

Trends in Imports from Top Sources

Between YTD 2016 and YTD 2017, imports increased from eight of the United States’ top 10 import source countries. Imports from India showed the largest volume increase in YTD 2017, up 209 percent, followed by Russia (up 64%), Taiwan (up 36%), and Mexico (up 23%). The two countries which the United States had decreases in imports from are Japan (down 9%) and South Korea (down 2%). Outside the top 10 sources, other notable volume changes included U.S. imports from 11th-ranked China (down 5%), 15th-ranked Thailand (up 274%), 18th-ranked South Africa (up 68%), and 20thranked United Arab Emirates (up 98%). The overall value of U.S. imports increased from all of the top 10 sources. Imports from India, Russia, and Taiwan showed the largest increases in value in YTD 2017, up 144 percent, 128 percent, and 55 percent, respectively.”

Here are our thoughts:

1. The steel tariff is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, which isn’t much. But with a weakening dollar, higher inflation, higher input costs and higher bond yields this isn’t necessarily good for the dollar or for factory price inflation.
2. The aluminium tariff is intended to raise production of from the present 48% average capacity to 80% which could turn out to be quite good for the US.
3. China is the 11th largest Steel importer to the US for Steel. The steel tariff would likely hurt Canada and Brazil the most.
4. The US dollar has lost significantly against a basket of currencies in both 2017 and 2018 (so far), details here. In fact, the US dollar has lost over 10% against 29 currencies (for 56 countries) over the past year, details here. The US recorded a $53.1 billion trade deficit in December 2017, the highest trade deficit since October 2008. A weaker currency for a nation that imports more than it exports means higher inflation which in turn (normally) means higher bond yields. These tariffs won’t help the dollar at all.

[1] https://www.commerce.gov/news/press-releases/2018/02/secretary-ross-releases-steel-and-aluminum-232-reports-coordination

[2] https://www.commerce.gov/sites/commerce.gov/files/the_effect_of_imports_of_steel_on_the_national_security_-_with_redactions_-_20180111.pdf

[3] https://www.commerce.gov/sites/commerce.gov/files/the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117.pdf

[4] https://www.trade.gov/steel/countries/pdfs/imports-us.pdf

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