The Hindu Business Line

Steel tariffs’ blow will hurt America most

While helping US metal makers, the move will hit the car and machinery industries

- DAVID FICKLING GETTY IMAGES/ISTOCKPHOT­O BLOOMBERG

To a hammer, every problem looks like a nail. To US Commerce Secretary Wilbur Ross — who owes much of his personal wealth to buying US steel mills and selling them on — there’s no manufactur­ing problem that can’t be solved with metal tariffs.

President Donald Trump is considerin­g actions to limit imports of steel and aluminium “in a very thoughtful and systematic way,” Ross told CNBC on Thursday. Decisions on the curbs, which could include charges as high as 53 per cent on steel imports, are due in April.

To see why proposed tariffs on US steel imports would be such bad news for the country’s manufactur­ing sector, consider how production has evolved in recent years. After collapsing during the 2008 financial crisis, output from America’s mills never fully recovered — in line with developmen­ts in Europe and Japan.

The natural response to reduced demand is to cut capacity. But almost uniquely among major steel producers, the US never did that.

Annual output capacity of 113.3 million tonnes (mt) in 2016 was a scant 100,000 tonnes less than it had been in 2007. The European Union trimmed about 14.1 million tonnes over the same period. As a result, while Europe’s steel capacity utilisatio­n has edged up in recent years, America’s has languished at the sub-80 per cent levels where making a profit becomes a struggle.

Look at the consumers

Ross has tended to put the blame for this on the global steel trade, in particular China, but as Gadfly (Bloomberg’s fast commentary section) has argued previously, the US isn’t a big user of steel from Asia’s biggest economy, which barely makes it into the list of top 10 import sources. So why is America’s heartland suffering? The answer comes from looking not at steel’s producers, but its consumers. Analysts typically initially examine the trade in crude steel to work out which countries are importers and which are exporters — but that’s a skewed way to look at the situation. After all, if Subaru Corp buys a tonne of steel from JFE Holdings Inc for its Japanese factories and turns it into cars for sale in the US, the steel production and consumptio­n is happening in Japan but the metal is ultimately being used on the far side of the Pacific.

Compare the World Steel Associatio­n’s figures for crude steel production to its estimates of true steel demand, and a striking picture emerges:

Almost every major steelmakin­g country produces more steel than it uses domestical­ly because they’re manufactur­ing and exporting steel-intensive products in greater quantities than they’re importing them.

The US is unique in showing the opposite pattern: Its trade deficit isn’t in coils and bars, but in the vehicles, machinery and constructi­on products that are made out of such crude materials. That helps explain why shares in Ford Motor Co, General Motors Co and Caterpilla­r Inc dipped last Friday after Ross outlined his tariff options, while those of Nucor Corp and US Steel Corp soared. In trying to help America’s metal manufactur­ers, Ross risks dealing a blow to the far bigger car and machinery industries that depend on their raw materials. If Trump is going to address this issue in a thoughtful and systematic way, he’d do well to reflect on that fact.

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