With Donald Trump returning to the White House, domestic steel producers are asking for additional protection from foreign-sourced metals. Scott Buehrer, B. Walter & Co., suggests there is a way to do just that without resorting to tariffs. alexey_ds/E+
Steel, like other commodities, is prone to price cycles. In times of low steel prices, domestic steel producers historically have sought government intervention, particularly in the form of import tariffs, to reduce foreign competition and increase steel pricing. With prices back near 2017 levels, domestic steel producers once again are seeking government assistance. Based on how the Trump administration’s 25% tariff on imported steel played out, is this the best way for the U.S. to help its steel producers?
Tariff Repercussions
Initially, the 2018 Section 232 tariff on all steel being imported to the U.S. was highly effective in reducing import levels. However, the tariff ignited a global trade war that sent U.S. manufacturing in 2019 to a 10-year low as measured by the Purchasing Managers’ Index of U.S. Manufacturing Activity. Domestic steel mills soon announced permanent closures and production cutbacks due to reduced demand for steel caused by a trade war started by steel tariffs. How ironic!
When COVID arrived in early 2020, the U.S. government responded with $5.3 trillion in stimulus money to support the economy. Since much of the service sector was shut down until a vaccine began arriving in 2021, a good portion of this money was spent on manufactured goods and home improvement projects, both of which require large amounts of raw materials like steel. However, because of the cutbacks in domestic steel production and the level of steel imports, availability was insufficient to meet the increased demand, causing steel prices to reach all-time highs in 2021. We experienced this at our factory, where we were hit with 21 consecutive steel price increases in a one-year period, more than tripling its cost. The domestic steel shortage also caused the premium for purchasing steel in the U.S. to increase to a record level (see Figure 1).
The price of steel should be viewed in two ways:
- How does steel’s current price compare to its historical price range? If it is significantly above this range, manufacturers might start substituting other materials, reducing the demand for steel.
- How does the price of steel compare to its price outside the U.S.? If the gap gets too large for too long, some domestic steel users may no longer be able to compete against their foreign counterparts, forcing them to move manufacturing operations outside the U.S. An example is Tenneco Automotive’s announcement in 2021 to shut down its shock absorber factory near Dayton, Ohio, and move 650 manufacturing jobs to Mexico, where the cost of steel was much lower.
What finally caused the price of steel to stop climbing during this period was President Biden’s announcement in fall 2021 that he was willing to negotiate tariff rate quota agreements with countries exporting steel to the U.S. that still were subject to the Section 232 steel tariff. This would allow more tariff-free steel into the U.S.
Even so, the extreme prices in 2021 of raw materials subject to import tariffs, including both steel and aluminum, contributed to inflationary pressures that led the Federal Reserve to begin raising interest rates in 2022 at the fastest pace in 30 years. These higher interest rates have been a key cause of weakness in the manufacturing sector for most of the last two years, which has in turn sent steel prices back down to near-2017 levels.
Effects on Producers and Manufacturers
Another facet of the steel price spike story of 2021 and 2022 was its impact on steel producer profits—and how these profits were used. The combined average annual profits of three of the largest steel producers (Nucor, Steel Dynamics, and U. S. Steel) during this period was 5.6 times higher than it was in 2017, the year before the Trump administration’s steel tariff.
Although some of this money was used to fund expansion projects and build new mills, these steel producers also used their profits to fund new stock buyback programs that collectively reached several billion dollars, benefiting their shareholders.
And now, just a few years later, domestic steel production is not any higher than it was before the Section 232 steel tariff was implemented (see Figure 2). Factors at play include ongoing weakness in the domestic manufacturing sector, the level of steel imports, and some amount of permanent demand destruction for steel because of its extremely high price over a prolonged period.
For domestic manufacturers using steel, the Section 232 steel tariff had many shortcomings. It started a trade war that launched a manufacturing recession in 2019; led to a few years of extremely high steel prices (magnified by COVID stimulus spending) that damaged manufacturer profitability and global competitiveness; and contributed to inflationary pressures that drove up interest rates, sending domestic manufacturing into a period of weakness these last two years.
FIGURE 1. In 2021, the domestic steel shortage caused the premium for purchasing steel in the U.S. to increase to a record level. Source: http://steelbenchmarker.com/history.pdf
Domestic manufacturers would agree that we need a vibrant, competitive domestic steel producing industry. But there must be a better way to address steel producers’ need for sustainable pricing without relying on import tariffs that create a host of problems for steel users and U.S. consumers. Fortunately, we can find an example in farming.
An Alternative to Steel Tariffs
A better idea would be for the federal government to use price supports for steel, like it does for farmers. When the price of steel falls below a certain level, the price support would kick in, and above that level it would drop off.
There are several advantages to this approach:
- By removing tariffs, steel producers, like steel users, would better feel the global pressures on their industry and so be incentivized to strive for efficiency.
- The U.S. would be less likely to experience another period of extremely high steel prices. This will help steel users with their financial survival, as they often cannot fully recover price increases from their customers.
- Most important, this will help increase domestic steel demand. The labor cost differential between the U.S. and other countries is not the only cost that manufacturers consider when deciding if they need to move manufacturing operations outside the U.S. Raw material price differentials are important too.
The use of price supports instead of import tariffs would reduce the premium for acquiring steel in the U.S., thus encouraging more industrial steel users to keep their manufacturing in the U.S.—and for those that left to return. The U.S. trade deficit in manufactured goods is more than $1 trillion annually. A number of these goods are made using steel. Improving U.S. manufacturing cost competitiveness will help to shrink the trade deficit and lead to increased domestic demand for steel.
For those who say the U.S. government cannot afford to provide price supports to steel producers, think again. As a point of comparison, the recent trade war resulted in more than $10 billion annually in additional payments to farmers to offset their loss in income from lower agriculture prices and reduced export trade. For domestic steel producers, a typical year results in roughly 84 million tons of steel being produced. It is unlikely that a price support of more than $150 per ton would ever be needed, which equates to $12.6 billion in price supports.
FIGURE 2. Domestic steel production is not any higher today than it was before the Section 232 steel tariff was implemented. Source: https://tradingeconomics.com/united-states/steel-production
