Why did Trump double his steel tariffs? Because he could

The Age

2 days ago

Apart from trying to show that he still has some, albeit more limited, authority to act on tariffs, Trump's announcement, to a rally of US steelworks, had a secondary purpose.
Loading
During last year's election campaign, Trump was vehemently opposed to a proposed $US15 billion ($23.3 billion) acquisition of US Steel by Japan's Nippon Steel - as was Joe Biden, who blocked the deal only days before he left office.
Both were chasing the votes of steelworkers and their powerful union in the critical swing state of Pennsylvania, where US Steel is headquartered and has its major plants.
Having won the election, however, Trump has had a change of mind.
While the US will impose some significant conditions on the deal -- including, perhaps, a 'golden share' that would give the government a veto over major decisions along with a commitment from Nippon Steel to appoint a US chief executive and a majority of Americans to the board – it now appears that he will approve the deal, even though he says he hasn't seen its final details.
Nippon Steel, one of the world's most sophisticated steel producers, has promised to invest about $US14 billion in US Steel's operations, which have been struggling, shrinking and suffering from under-investment for decades.
Trump's doubling of the tariff rate for steel and aluminium is a way of justifying the decision to approve the deal, as well as enhancing the economics of US Steel and other US steelmakers and helping to underwrite Nippon Steel's massive investments, most of which will occur over the next four years.
Trump's original tariffs on steel and aluminium infuriated America's trade partners, including Australia, even though Australia's exports of those metals to the US are quite modest. Canada, whose steel exports represent about a quarter of US steel imports and half its aluminium imports, has far more at stake.
Mexico, Brazil, South Korea, Vietnam, Japan and European nations will also be impacted, with Canada and the European Union already threatening retaliation, as they did in response to Trump's initial 25 per cent tariffs. Australia is still, probably fruitlessly, seeking an exemption.
Loading
The decision to allow the Nippon Streel deal to proceed, if that is the final outcome, is good policy. The US steel industry is small – about half the size it was half a century ago -- and has been shrinking. It has poor profitability and ageing technology. Nippon Steel's investment and its technologies can arrest that decline.
The decision to double the tariffs on steel – indeed the original decision to impose the 25 per cent tariff – is, however, poor policy.
It will increase investment in the sector, and will probably improve its profitability, plant utilisation rates and employment numbers. But that will come at a significant cost.
In 2018, when Trump first imposed tariffs on imported steel, steel prices rose almost 10 per cent, the sector's profits rose by about $US2.5 billion, capacity utilisation jumped from 74 per cent to about 80 per cent and nearly 10,000 jobs were added within the sector. The impact was quite short-lived, with those numbers subsequently reversing as the industry resumed its long-term decline.
The initial impact was predictable. Tariffs are protectionist. They protect domestic industries and companies from more efficient producers elsewhere by boosting their sales, margins and profits. That's what happened after the 2018 tariffs.
Loading
They come, however, at a cost to the customers of the protected industries, which is also what happened after Trump's 2018 tariffs were imposed.
A Peterson Institute for International Economics study concluded that the 2018 tariffs cost US downstream steel-using industries about $US5.6 billion, or about $US650,000 for each new job they added in the steel sector. The US Federal Reserve Board concluded that they cost about 75,000 jobs in those downstream industries, or more than eight times the number of jobs added by the steelmakers.
Steel is a key input to the manufacturing industries, whose protection Trump has trumpeted as the rationale for his trade wars. It's also extensively used in the construction sector.
With the 25 per cent version of the tariffs on steel and aluminium not only set at twice the 2018 rate, but also applying more broadly – they now also extend to downstream products containing the metals – their impact on steel and aluminium users and US companies and consumers will be far more significant and damaging.
Trump might regain a little of the authority and ego he lost when the court knocked out, perhaps temporarily, his broader weaponisation of tariffs against the rest of the world. He might also have ingratiated himself with the steelworkers whose jobs he will protect, but the economic benefits of his metals tariffs will be far outweighed by their costs to the rest of the US economy.
The probable impact on the steel and aluminium industries and their customers provide, in fact, a glimpse of the broader damage that Trump's trade wars on everyone – if the courts allow him to continue them, or he can find other means to implement them – will inflict on the world's largest economy.