TRUMP’S STEEL RESOLVE
Analysts explain why the U.S. president will be loath to drop tariffs — NAFTA deal or not
TORONTO If landing a new North American Free Trade Agreement has been a tough haul for Canada, securing a permanent exemption from U.S. President Donald Trump’s steel tariffs may prove even harder.
Doubts about how the newly booming American steel industry will fare without tariffs, combined with Trump’s penchant for wielding them as leverage in trade talks, suggest the U.S. will be reluctant to simply drop them without insisting on quotas, analysts say.
“It will be very difficult to get rid of those tariffs now, especially with a president like Trump who really believes in them,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, D.C.
“That means even if he agrees to remove them he’ll just change them into quotas. Canada won’t like it, but it’s better than a kick in the pants.”
A decision on whether to lift tariffs on Canadian and Mexican steel and aluminum would be made “when we get NAFTA done,” U.S. Trade Representative Robert Lighthizer said Tuesday.
Trump has put blue-collar industries like steel at the heart of his “America First” economic agenda aimed at reducing trade deficits and returning the U.S. to its days of rapid industrial expansion. So far, tariffs have been the key policy tool for advancing those goals.
In a March report recommending the steel tariffs on “national security ” grounds, Commerce Secretary Wilbur Ross said they were intended to increase steel production from 73 per cent of domestic capacity to approximately 80 per cent, “the minimum rate needed for the long-term viability of the industry.”
Since the tariffs were announced in March, capacity utilization in U.S. steel mills has increased, hitting 77.4 per cent in the year ending September 2018, according to data compiled by the American Iron and Steel Institute.
With foreign supply weighed down by the levies, demand for locally produced steel is up and a number of restarts and new projects have been announced, many of them touted by Trump as evidence a revitalization is underway.
And data from the U.S. Bureau of Labor Statistics suggests about 1,000 jobs have been added in primary metals manufacturing since the tariffs went into effect, though crediting those jobs to the levies is difficult given the current strength of the U.S. economy, “which is lifting all boats,” Hufbauer said.
But the biggest impact of the tariffs has been on pricing, with the benchmark price for hot rolled steel rising to US$911 per tonne in July, a 50-per-cent increase from the previous November. The price has since moderated, settling at US$850 per tonne, compared to US$650 a tonne in Canada and US$600 in Europe.
So what happens if the U.S. takes the tariffs away?
“You can’t, that’s the problem,” said Ryan Connelly, global economist with Washington D.C.-based Frontier Strategy Group.
While a number of new steel projects have been announced in the U.S., none of them add up to the kind of massive greenfield investment necessary to help U.S. mills better compete in world markets or for the 20 per cent of the U.S. market usually fed by imports, Connelly said.
Indeed, many of the investments announced seem to be incremental, he said, aimed at making up for upkeep that was postponed during previous market downturns.
“If you examine production from before the tariffs came in March 2018 and after, you don’t really see a structural shift that can’t be explained by regular seasonal variation in the data,” Connelly said.
Part of the challenge, he added, is that firms are unlikely to invest heavily in new operations if they think the tariffs are temporary.
“If we think the U.S. really wants to add more long-term sustainable jobs to the industry, then what they really need to do is substantially reduce imports. That suggests the tariffs have to be permanent for long term business planning.”
Though the U.S. initially exempted Canada and Mexico from blanket tariffs of 25 per cent on steel imports and 10 per cent on aluminum, Trump allowed those reprieves to expire on June 1 pending the outcome of the NAFTA talks. That prompted Canada to immediately hit back with retaliatory tariffs on $16.6 billion worth of American steel, aluminum and a range of other goods.
Since then, the flow of steel over the border has stalled. Canada is the largest foreign supplier of the alloy to the U.S., accounting for 16.1 per cent of the country’s imports. In addition, half of all hot rolled steel imports — a key material in auto and other manufacturing — are from NAFTA countries, said Phil Gibbs, director, senior metals equity analyst at Ohio-based Keybanc Capital Markets.
Remove the tariffs from these key trading partners and “there’s no reason to think steel prices won’t moderate,” he said.
That would take the heat out of steelmakers’ profits, though by the same token, Canada is an important market for U.S. steelmakers, accounting for 90 per cent of exports.
Given the importance of this trading relationship, Gibbs believes the tariffs against Canada won’t last. “What is it accomplishing at the end of the day other than making steel prices high for consumers?” he said. “I think the logic will prevail that this is stupid. We’re just trading money.”
But that doesn’t mean the free flow of steel across the border will just snap back to the way it was. Argentina, Brazil and South Korea have all accepted volume limits on exports in exchange for tariff exemptions. And crucially, Mexico failed to win an exemption from Trump’s steel tariffs as part of its recently announced bilateral “agreement in principal” with the U.S.
“That makes things considerably harder for Canada,” said Hufbauer of the Peterson Institute. “Historically, Canada has been omitted from American tariffs but that hasn’t been the case under Trump and it won’t be this time.”
Not that maintaining trade protections for steelmakers will ultimately be in the best interests of the U.S. economy as a whole, he said.
Former president George W. Bush’s attempt to revitalize the steel industry through tariffs in 2002 ended up costing the broader economy US$800,000 per job saved, according to an analysis by Hufbauer.
The Bush tariffs — which Canada was exempted from — were ultimately lifted less than two years later when the economy had recovered, Europe had threatened retaliation and the World Trade Organization ruled them illegal.
Given the current strength of the U.S. economy, the same should be happening now, “but that’s not Trump,” Hufbauer said. “I don’t see the tariff approach being dismantled while he is in office, though you might get a few shifts here and there due to outside pressures.”
One outside pressure might emerge from the steel industry itself. Nearly 15,000 workers are negotiating new labour deals at steelmakers ArcelorMittal and U.S. Steel — which together account for a quarter of all U.S. steel production. They voted last week to give their union, the United Steelworkers of America, the right to call a strike with two days notice. As steel prices soar under the tariffs, union leaders say workers deserve a bigger share of the profits.
“The steel companies are not promising as much as the union wants because they’re afraid the tariffs are temporary,” said John Tumazos, a New Jersey-based steel industry analyst. “The labour bargaining is complex, the union wants its share of the pie now and the companies are afraid the economics of their profits are going to fall apart. So it’s possible they don’t agree. There are lots of ways these tariffs might have to change.”
If we think the U.S. really wants to add more long-term sustainable jobs to the industry, then what they really need to do is substantially reduce imports. That suggests the tariffs have to be permanent for long-term business planning.