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Backfire economics: Trump tariffs are killing American steel

AEIdeas

1. From the Council on Foreign Relations blog post “Trumps Tariffs Are Killing American Steel“:

“Our Steel Industry is the talk of the World,” President Trump tweeted in September. “It has been given new life, and is thriving.” Yet nearly a year after Trump slapped tariffs on imported steel, the U.S. steel industry is not thriving. It is reeling. Steel prices have fallen back to pre-tariff levels. Employment is stagnant. The clearest sign that tariffs are not working, however, is the stock market.

If the president’s policies were working as planned, the steel industry should outperform other sectors. Yet as the graphic above shows, since Trump announced steel tariffs on March 1, 2018, steel-producer stock prices (blue line) have plummeted 22 percent—while the S&P 500 index (brown line) has fallen only three percent.

So why has the market soured on American steel? One reason is that Trump’s tariffs, overall, hurt the industry far more than they help. Here is how we know. For the first half of 2018, steel-producer stocks followed broad market performance, even after steel tariffs took effect. Then, while the S&P index kept rising, steel stocks took two dives—in mid-June and early August, as the graphic highlights—before re-tracking the market.

What happened in June and August? Just before each drop, Trump released lists of imports covered by tranches of his first $50 billion in China tariffs. Since 95 percent of these imports were intermediate goods, purchased by American firms, markets anticipated that the tariffs would push up their prices, reduce their output, and hurt their sales. Tariffs would, in turn, drive down their purchases of domestic inputs, like steel. That tariffs are hurting American steel, the very industry they were imposed to help, shows just how misguided they are.

2. From the New York Times article “U.S. Steel Companies Face Downturn Despite Trump Claims of Revival” (bold added):

In the 10 months since the Trump administration imposed 25 percent tariffs on steel imports, prices in the United States have now fallen back to levels last seen before the tariffs were announced on March 1. Hiring in the steel sector remains stagnant, in part because new mills have become more reliant on automation. Even with the opening and restarting of several mills last year, direct steel industry employment was 146,300 as of November — 4 percent lower than it was four years ago, according to the American Iron and Steel Institute.

Investors are increasingly wary about the industry’s long-term strength, and American steel makers are feeling the pressure. Stock prices for some of the nation’s biggest steel manufacturers dropped by as much as 47 percent in 2018 amid fears of slowing global economic growth and the potential for Mr. Trump to reach trade deals that remove the tariffs. Despite strong earnings in 2018, the stock prices of steel companies have been in a deep slump as investors fret that they are being propped up by government support that will be temporary. In the last year, shares of AK Steel are down 56 percent, US Steel is down 46 percent, Steel Dynamics is down 29 percent and Nucor’s stock is down 18 percent.

The Trump administration imposed sweeping steel and aluminum tariffs on trading partners like Europe, Canada, Japan and Mexico, saying it was trying to protect American security by preventing a flood of cheap metals into the United States. The tariffs, which went fully into effect in June, initially goosed steel prices in the United States, which jumped more than 50 percent after it became clear that the tariffs would really be put in place.

Mr. Trump has routinely pointed to the rising prices as a boon to American steel companies. But the price spike ultimately hurt demand as industries that rely on the metal, like automakers and homebuilders, struggled to absorb the rising costs or passed them on to customers. Caterpillar, the farm equipment manufacturer, said last year that it would face $200 million in additional costs because of the steel tariffs. General Motors slashed its profits forecast for 2018 because of higher steel costs. Many businesses chose alternative materials or delayed investments, putting pressure on steel prices, which have since fallen.

MP: If only there were an academic discipline that has studied and researched international trade, protectionism, and trade wars for hundreds of years and amassed mountains of evidence on the significant costs and economic damage that inevitably results from protectionist trade policies that could have helped us predict the economic fallout, collateral damage and fatal friendly fire of Trump’s trade war.

Discussion (27 comments)

  1. Jon Murphy says:

    This is a pretty classic example of cutting one’s nose off to spite thy face. First off, basic econ tells us that one of the worst things one can do is put a tax on an intermediate good.

    But there is another issue here: if, indeed, the role of the tariff is to reduce the trade deficit, it wouldn’t work. According to the USTR, of US exports, approximately 40% are steel-intensive products (machinery, autos, etc). By increasing the cost of steel, it would naturally increase the relative price of US exports, which will naturally reduce US exports, all else held equal. Coupled with the fact that reducing imports naturally reduces exports, this indicates that tariffs would naturally reduce economic growth and could increase the trade deficit.

    1. Warren Platts says:

      Taxing intermediate goods is no different than taxing finished goods. 90% of the world uses VAT taxes, apparently because they like the way they work, which is to tax every step of the manufacturing process. In reality, I don’t see how it matters if you have a sales tax on the finished product of 20%, or a 20% VAT. The amount collected is the same.

      As for the steel tariffs not affecting the trade deficit, you are mostly right, but for the wrong reasons. The root cause of the trade deficit is not that American companies are not “competitive” on the world market. Rather, it is because surplus countries artificially force up savings, and because we do not control our capital markets, the excess savings flows into the country.

      Since S – I = NX, the excess foreign investment makes the left side negative, and so the right side is also negative as a matter of mathematical implication.

      Until we decide to stop letting surplus countries use our country as dumping ground for their excess savings, we will ALWAYS run a trade deficit. Well, until that is, the resultant debt exceeds our ability to service that debt, and the entire economy crashes into a shambles. Then the foreign investment parasites will seek better, more reliable hosts, and the trade deficit will end naturally with the death of the American economy.

      In the meantime, we might as well extract as much term of trade gains as we can through tariffs.

      1. XY says:

        It is the old argument that it is OK to have big decide because the money flows back into our economy (As China buys our companies and dismantles them IBM computers and Motorola phones come to mind)

        I have a similar situation in my household. It is almost impossible to buy more goods and services than money flows into the household. If I spend more than we earn it flows in from credit cards and banks. But I wouldnt recommend going 100k into credit card debt just because the inflows and outflows all match. And of course the “foreign entity” bank will eventually own everything I have.

        1. Jon Murphy says:

          For the umpteenth time, a trade deficit does not imply debt. You know your analogy is incorrect. Please do not repeat it

          1. Warren Platts says:

            For 21st-century United States, there is no shortage of needed investment for desired capital improvements. It is the opposite of 19th-century United States.

            Therefore, the trade deficit does indeed increase debt at a rate faster than we can service that debt.

  2. I believe Trump is conducting a trade War. It is a war of attrition. In Warfare over history, the general with the most troops wins. We have the most troops. Dollars. I believe Trump is inflicting tariffs in the short-term so he can get rid of them in the long term. There will be casualties in some of the battles, but, in the long-term, we will win the war.

    1. Jon Murphy says:

      I believe Trump is inflicting tariffs in the short-term so he can get rid of them in the long term.

      Despite his explicit statements otherwise? That’s a rather major leap of faith, no?

      1. Jon Murphy says:

        I mean, Trump already tore up one trade agreement where tariffs were virtually zero (and reciprocal) in NAFTA, walked away from another agreement (TPP), and rejected the EU’s proposal to eliminate their tariffs on US goods.

    2. Dan Phillips says:

      Let’s suppose you are correct in your assessment, that the tariffs will eventually lead to the US winning the trade war. What exactly would that victory look like? What is the happy outcome you expect? How much attrition on the US’ part is acceptable before victory is achieved? What is the plan to repair the attrition caused by the war? I ask again: what will the victory look like? How will we know when the US has won the war?0

    3. Dan Phillips says:

      I hate to beat a dead horse, but I was really hoping you would answer my question. In your opinion what will the world look like, what will America look like, after it wins the trade war? How will things be improved? How much economic destruction will take place in the form of attrition before the victory? Who will be the political/economic victims that will pay the ultimate price? You say there will be casualties, who will they be, and why must they be the casualties, not someone else? What will be the casualties’ recompense once the war is won and the world order has been restored to the victor’s betterment? I have so many questions! But for some reason I am never provided any answers. Will you be the first?

      1. Warren Platts says:

        The victory will be when the working class in this country gets its first real raise in over 40 years. Their lives will drastically improve.

        The losers will be the elite class who will see their share of GDP decline relative to the working class. They will mope and whine very loudly, but of course those will be crocodile tears. In reality, they will do just fine.

        Indeed, in the long run the elite class will be better off with a larger share of GDP going to the working class: aggregate demand will be up big time, and there will be less pressure to tax the rich in order to support the poor.

        1. Dan Phillips says:

          I appreciate that you replied, but to be honest that is about the most tepid generalized non-answer possible. A lot of words that signify nothing. It makes me wonder if you know what you are talking about or if you have devised a fanciful world in your head that has no reality included.

          So you expect the tariffs to create a situation in which the “workers” will gain in their percentage of the economy, and that’s how we’ll know the UD has won the trade war. Have I got that right? So if the tariffs result in a stagnant or reduced economy it will still be considered a win by you as long as the workers’ percentage gains on the elites. It’s merely an unfortunate casualty of the tariffs contribute to crashing the economy. What’s important is that workers close the gap with the elite. Please tell me I am misunderstanding you.

          1. Warren Platts says:

            Yes of course you are misunderstanding me. Tariffs for 21st-century American will not result in a stagnant or reduced economy. Look at the results so far: the ROW is slipping into recession. Meanwhile USA is doing pretty good, the stock market–which is 35% foreign owned–notwithstanding.

            Again: the stock market is not the real economy.

    4. Mark Perry says:

      Depends a lot on how you define “winning.”

  3. jorod says:

    GM? Government Motors… Unions are killing them and steel. You can put on tariffs but you can’t stop labor cartels.. er… unions.

  4. Warren Platts says:

    American steel production measured in tonnes of steel is up 10% year over year. Too bad the rest of the economy has not grown by 10%!

    Since the price has declined back to the pre-tariff price, then consumers haven’t been hurt one iota.

    As for employment, the primary metals sector is only up 1.7% yoy. However, in contrast to the hundreds of dire predictions that downstream employment would go down, in fact the opposite has happened. E.g., fabricated metals: up 3.2%; Heavy and civil engineering construction: up 11.8%; machinery: up 3.8%; transportation equipment: up 3.2%.

    As for the stock market, if “investors” in the casino get their information mainly from sites such as this, then naturally, they will attempt to sell short tariff announcements. Not to mention there are probably foreign sovereign wealth funds whose masters are mad at Trump because of the tariffs. We will see how well that trade continues to perform. In any case, the stock market is not the real economy. There is literally nothing to see in that chart.

    1. Mark Perry says:

      Here are one-year returns for the largest US steel companies vs. the -5.73% return for the S&P500:

      US Steel: -45.3%
      Nucor: -15%
      AK Steel: -56.3%
      CMC: -32.0%
      Steel Dynamics: -26.3%

      From the Bloomberg article “Trump’s Tariffs Are Killing American Steel With Kindness” https://finance.yahoo.com/news/trump-tariffs-killing-american-steel-000020413.html

      “Ultimately, the shares of U.S. metal manufacturers are weak not because their earnings are poor, but because their valuations have fallen to their lowest levels since the 2008 financial crisis. Investors simply don’t believe that the current good times will last. They’re right to be skeptical. The problem for U.S. steel was never so much about a glut of Chinese metal as the never-dealt-with overcapacity in America’s own domestic industry.

      The smart way to deal with that is either to cut capacity, or invest in better technology — or better still, do both. The path of least resistance, though, is to work the levers of power in Washington to prop up your business at the expense of your consumers by raising barriers to cheaper foreign competitors. That’s essentially what U.S. policy is now doing.

      1. XY says:

        I am not sure that stock market valuation influenced by economist scaring the public on behalf of the industrialistz the economists are beholden to is really a great measure.

        Stock value isnt just the mathematical formula about “all future returns npv” that we learned in business school. Turns out there is a lot of emotion involved. Tesla and Apple would have near the market value if it wasn’t for the feelz. Tesla is technically bankrupt.

        1. Jon Murphy says:

          Emotional investors do not last long in the market; they tend to get eaten pretty quickly. And any emotion-driven market movement tends to last a few hours, or maybe a day. This has been an 8+month trend. If all you have is “well, the feelz” then you don’t really have much of anything.

          1. XY says:

            Bubbles can go on for decades.

            Drops tend to be over less time, but can go on for many years – while you and your friends talk down the market. It helps that the same morons who are telling us this stuff, taught all the business folks on wall street the same mis-truths – so they all tend to walk in lockstep.

            We need your middle initial so we can have both AOC and J?M to ponder about.

          2. Jon Murphy says:

            A bubble is different from emotion.

            Plus, if you’re going to call the decoupling of steel stock pricing a bubble, then that is making the case that the tariffs are indeed failing.

          3. Jon Murphy says:

            XY-

            How many shares of steel companies have you bought over the last 8 months? I mean, if you’re so utterly convinced that these prices are too low, you should be buying up steel stocks left and right. You’d stand to make a ton of money if you’re right.

          4. Warren Platts says:

            Here is a bit of stock trading advice: Do the opposite of what so-called economists predict. You will be right more than half the time.

      2. Warren Platts says:

        “Operationally, the tariffs seem to be doing the job. The June and September quarters of 2018 saw our group of companies post their largest aggregate profits since 2008. Steel Dynamics reported record earnings in the third quarter.”

        1. Mark Perry says:

          Stock prices reflect current AND all future earnings and would be the best long-term measure of the negative effects of steel tariffs on US steel companies. Tariffs can artificially “juice” earnings in the short-run, but it’s like an artificial “sugar high” that won’t last. Investors correctly see the long-term negative effects on US steel firms and have correctly sold off those companies’ shares, reflected in falling share prices.

  5. I think some steel mills are making money more than before now! They are investing in steel mill equipment and services. Here is more about steel mill equipment: https://gmbindustries.com/products/
    These tariffs just made it more difficult for other countries to close trade deals with the US so we will also have to pay more for the materials and final products.

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