March 30, 2018
On March 8, President Donald Trump announced his intention to impose tariffs of 25 percent and 10 percent on foreign imports of steel and aluminum, respectively. This isn't the first time tariffs have been imposed but some people believe it could cause a trade war.
President Trump's tariffs are ostensibly targeted at a real problem—an international oversupply of steel, driving down market prices and making it harder for American steel producers to make profits. The impact of the oversupply of steel is undeniably a problem. State-run companies, like those in China, can essentially operate at a loss. They produce steel cheaply and if they fail to cover their costs, the businesses are bolstered by government funding. With cheap, available steel on the market, steel consumers have been turning away from American steel producers.
The Trump administration has promoted the tariffs in order to combat cheap metals flooding into the United States, particularly from China. Tariffs are a reasonable and recognized method for targeting the sale of goods sold at below market value. But do the latest tariffs really target China’s steel? Are they even intended to do so?
China is not one of the top 10 steel importers into the U.S. In fact, less than 2 percent of all U.S. steel imports come directly from China.1 The Trump administration has levied the tariffs under a provision of U.S. trade law that applies to national security.2 The argument goes that the U.S. needs to sustain a healthy steel industry to avoid reliance on foreign countries should additional steel be needed in case of war. Steel tariffs are functionally designed to increase the price of steel, thus making it possible for domestic steel producers to be more profitable.
The term “import penetration” is used to describe the percentage of U.S. steel consumption that is produced internationally. The higher the import penetration percentage, the more reliant the country is on foreign steel. The current U.S. import penetration for steel is 33 percent, meaning one-third of all steel consumed in the U.S. is purchased from foreign steel producers.3 If you exclude Canada and Mexico, the remaining trade penetration is only 24.75 percent, indicating that the U.S. is not overly reliant on foreign-sourced steel for their national security.4
The best argument for the new tariffs is that they will almost certainly boost the U.S. steel industry by increasing the market price of steel. However, the gains to the steel industry from high market prices will negatively impact U.S. steel consumers. There are about 140,000 steelworkers in the U.S., according to the American Iron & Steel Institute, and about 6.5 million workers in steel-consuming manufacturers, according to Moody’s analysts.5 Does the benefit to the steelworkers outweigh the cost to the steel-consuming manufacturers and the potentially higher costs of goods passed along to the consumer?
There are additional ripples created by the trade tariffs that may have negative impacts for U.S. foreign policies in two distinct ways. The first is through retaliatory actions taken by our current trading allies, including the European Union. Within days of President Trump announcing his intentions to levy tariffs, the EU responded with possible tariffs of their own on blue jeans, bourbon and Harley Davidson motorcycles.
The second impact is to the World Trade Organization (WTO). The WTO is organized through consensus of its 164 members under the notion that countries reliant upon each other for trade are less likely to engage in armed conflict. The WTO is likely to be deemed the arbiter of whether President Trump’s tariffs are “legal” under their definition of allowable impositions on trade. Members of the EU have already announced plans to bring claims in front of the WTO to challenge the legality of the tariffs. The WTO is facing a conundrum on how to rule. Part of the organization’s formation doctrine allows for great deference to be made to national sovereignty. A ruling allowing the tariffs under such a tenuous national security argument could damage the perceived authority of the WTO as a governing body. It’s possible that if the WTO rules against the tariffs, President Trump could potentially ignore the order or pull out of the WTO altogether, leaving member nations in uncharted territory.6
The benefits of the trade tariffs remains unclear, but so do the potential costs. The same argument that says tariffs won’t have a significant benefit because of the limited need for foreign steel would also indicate that the market price of steel may not increase significantly as a result. This is furthered by the reminder that relatively little of the steel consumed in the U.S. and internationally will ever be subject to these tariffs. Perhaps the steel industry’s support will not come at significant cost to steel consumers.
The markets initially responded negatively to the news, but quickly rebounded, indicating a lack of consensus around how much the tariffs will impact the market and in which direction. Despite a softening of the tariff’s impact by specifically exempting Canada and Mexico and a very measured retaliatory response from China, the market has still been turbulent in the few days since the tariffs have taken effect.
How do the new trade tariffs or other current events affect your portfolio? Your Eide Bailly advisor and our Financial Services team can get you the answers you need.
Financial Advisor offers Investment Advisory Services through Eide Bailly Advisors LLC, a Registered Investment Advisor. Securities offered through United Planners Financial Services, Member of FINRA and SIPC. Eide Bailly Financial Services, LLC is the holding company for Eide Bailly Advisors, LLC. Eide Bailly Financial Services and its subsidiaries are not affiliated with United Planners.
 Steel Imports Report: United States, December 2017, Global Steel Trade Monitor, International Trade Administration, www.trade.gov/steel/countries/pdfs/inports-us.pdf
 Section 232 of the Trade Expansion Act of 1962
 Id. Current tariff proposals specifically excluded Canada and Mexico. Canada and Mexico combine for twenty five percent of current U.S. Imports according the Steel Imports Report.
 Trump Tariffs will hurt the 6.5 Million U.S. Workers At Steel Consuming Manufacturers, Dow Jones Newswires, March 5, 2018.
 See Trump’s trade approach announced Mar 1, 2017, stating that the Trump administration vowed to ignore certain rulings by the W.T.O. if those decisions infringe on U.S. sovereignty.