Understanding the tariff dispute

Trump eyes tariff on imported metals, citing U.S. security concerns.

President Donald Trump has said his administration would impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, on the grounds that other countries’ trade practices involving the metals endanger U.S. national security by undermining domestic production. Here’s what you need to know.

What is a tariff ?

It is simply a tax placed on some particular class of imported goods. If the Trump administration follows through on the president’s comments last week, a company bringing $100,000 of steel made in Canada into the United States would have to pay $25,000 to the government, effectively increasing its price. Tariffs are typically a tool governments use to protect domestic industries and raise revenue.

What is the rationale?

U.S. steel and aluminum companies have long complained of unfair practices by overseas competitors, especially Chinese state subsidies that encourage production. This can flood the global marketplace with metals, depress prices and make U.S. production less economical than it otherwise would be.

This is a long-standing complaint that U.S. trade officials have sought to redress in various ways, including a decision by the George W. Bush administration in 2002 to impose steel tariffs of up to 30 percent. But that was a more narrowly targeted law aimed at safeguarding domestic industries harmed by imports (the Trump administration used that provision to impose tariffs on imported solar panels and washing machines).

The Trump administration is on more uncharted ground by basing the tariffs on national security concerns — Section 232 of a law enacted in the Cold War. The argument is that by undermining domestic metals production, the United States is left vulnerable in the event of conflict that disrupts trade flows.

Who wins and who loses?

The big winners are the U.S. steel and aluminum industries. For years, those industries have lobbied for more aggressive government action against what they view as unfair practices by global competitors, and they’re now getting their way.

The most immediate losers are the industries that rely on steel and aluminum and will face higher prices. That includes some of the nation’s biggest industries: the automobile sector, aerospace, heavy equipment and construction. In short, the chassis of a Ford, the body of a Caterpillar bulldozer, the wings of a Boeing aircraft, and the steel girders inside a New York skyscraper are all about to get more expensive.

The industries that use steel and aluminum are considerably larger as a share of the U.S. economy than are steel and aluminum producers. By one estimate, from Lydia Cox of Harvard and Kadee Russ of the University of California-Davis, steel-using industries employ 80 times as many people as steel-producing industries.

But what does this mean for consumers?

The simple answer is that goods containing metals will become more expensive. But there’s not much reason to expect enormous price increases for most goods.

First, the United States imports only about one-third of its steel, and the tariff would not apply to domestic production (aluminum is more heavily dependent on imports, with only 10 percent made domestically).

So prices will go up by only a fraction of the tariff amount. But consumers don’t generally buy raw steel and aluminum. People buy consumer goods in which those raw materials are but one input.

For any given product, it is hard to predict whether producers will eat the cost of more expensive metals, pass the cost on in the form of higher prices, or both. Put differently: If your favorite beer producers are looking at paying an extra fraction of a cent for each aluminum can, they might just eat the cost, they might raise prices, or they might split the difference. It is hard to know in advance how much of each will take place.

So does this matter for the economy?

The American economy is relatively strong at the moment, and has been historically resilient to most disruptions. And companies are good at restructuring their supply chains to minimize disruption because of tariffs like these. In most retrospective analyses, the 2002 Bush administration steel tariffs have been judged to be costly relative to the jobs that were saved.

The action may create some jobs in metals-producing industries, cost some jobs in fields where steel and aluminum are inputs, and push consumer prices a bit higher. The large U.S. economy can handle it.

The risk comes from the potential ripple effects.

Affected countries may well retaliate by ordering tariffs on American goods, and they could carefully target goods to cause economic or political pain.