Pursuant to Section 232 of the Trade Expansion Act of 1962, the US imposed import tariffs on steel (25 percent) and aluminum (10 percent) in 2018. The tariffs included products such as plated steel, slabs, coil, rolls of aluminum and tubes, which are used intensively across US manufacturing and construction sectors. The US administration said these imports threatened the US domestic industries and national security.
In response, a group of countries, including China, the EU, Russia, India, Japan and Turkey, announced the imposition of retaliatory tariffs on certain imports from the US. The EU issued a list of 10 American products to be subjected to tariffs, including liquor and motorcycles.
In 2020, the US President Donald Trump expanded the 2018 tariffs. He signed an executive order imposing import tariffs of 25 percent on derivative articles of steel and 10 percent on derivative articles of aluminum globally, with the exception of Argentina, Australia, Brazil, Canada, Mexico and South Korea. So, what are the implications of this decision and how does it affect the future of international trade in steel and aluminum manufacturing sectors. Also, what it means for the US relation with its trade partners?
First: Reasons behind the US decision
Tariffs are used as a tool to achieve a number of goals including protection of national industries from foreign producers, especially infant industries that cannot compete with imported products in domestic market, as well as protection of local consumers or even national security. The reasons behind the US decision can be summarized as follows:
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Protection of national industry: This seems to be one of the main reasons behind the US decision, particularly given the growing intensity of competition in steel and aluminum industries in the US domestic market and the inability of the US industries to compete against foreign imports. Based on statements coming from the United States, the imposition of these tariffs was intended to encourage local industry, increase local production, protect against competition from countries such as China. US manufacturers welcomed the decision and some of them announced plans to ramp up their production.[1]
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Job creation and employment: Protection of national steel and aluminum industries would ensure increase in production and create more job opportunities, and reduce unemployment which might rise if these factories shut down due to fierce international competition. This also serves electoral goals for President Trump who is preparing for a second term presidential election by the end of this year. As these industries are concentrated in states with heavy electoral weight, this may explain why the US administration is not concerned with the impact of this step on US allies but are prioritizing domestic affairs and interests.
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Trade wars: in light of the recent trade war between the US and China, this decision can be viewed as a step by the American administration to deliver on its promises to voters to reduce the US trade deficit with other global powers, particularly China, by redrafting foreign trade agreements or by imposing tariffs.
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National security: Imported aluminum and steel products are intermediate goods that are used in strategic industries in the US, such as automobiles, aircraft, machinery and equipment, construction, oil, public utilities, pipelines and wires, in addition to defense and security industries. There are fears that heavy dependence on imports of these products may create national security risks as 60 percent of the total supply of aluminum in the US market comes from abroad, making them significantly impactful on defense and security industries that rely on aluminum and steel. Two reports issued by the US Department of Commerce in 2018 asserted that imports of steel and aluminum have become a national security risk for the US, an assertion President Trump used to justify the imposition of tariffs as a measure that serves the US economy and safeguards its national security.
Second: Winners and losers
According to foreign trade statistics, Canada, China and the UAE, respectively, rank top in the list of countries from which the US imports aluminum. The US import of aluminum amounted to nearly US $12.8 billion in 2018, i.e. 53.1 percent of the total US imports of aluminum that year, as shown in the following graph:
US Imports of Aluminum in 2018
Source: http://www.worldstopexports.com/us-aluminum-imports-by-supplying-country/
According to the International Aluminium Institute statistics, China and the GCC countries are the world’s top exporters of aluminum. The statistics also indicated that while the value of the Canadian and Chinese aluminum exports to the US plummeted by 3 percent and 14.5 percent respectively in 2017-2018, the UAE exports of aluminum to the US grew by 4 percent in the same period. Bahrain ranked 7th in the list of countries exporting aluminum to the United States. In 2017-2018, the US aluminum imports from Bahrain amounted to US$687.4 billion, with an increase of 10.8 percent.[2]
Based on the above, it becomes clear that the countries most affected by the American decision are the top aluminum exporters to the US, which are Canada, China, the UAE and Mexico, but Canada and Mexico were excluded from tariffs. However, not only these exporting countries are affected so are the American people because tariffs on aluminum imports will benefit the American producers and hurt the consumers who will suffer from the high prices of aluminum and steel manufactured goods. Also, these tariffs may adversely affect the quality of products available to the American consumers.
Third: Effects of the American decision
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Macroeconomic effects: Although tariffs help in adjusting and directing local economies and fixing some trade imbalances, they also have some adverse effects. According to the IMF data, tariffs lead to the deflection of trade and economic activities to inefficient producers, and smuggling to evade tariffs. Such distortions reduce public welfare. In addition, tariffs create a ”deadweight loss”, which is the cost to society created by market inefficiency. Consumers lose more from tariffs than producers gain and the resulting redistribution of income creates vested interests. Broad-based protectionist policies may also trigger retaliatory action from the affected countries, which add further costs and losses in other markets.
If tariffs are imposed on imported inputs, as in this case, these losses will be exacerbated because these tariffs add to production costs. Steel and aluminum are important inputs used in many industries and since the new import tariffs imposed by Washington will increase production costs in the steel and aluminum sector, the price rise will be transmitted to retailers who will eventually increase consumer prices. This may push the Federal Reserve to accelerate interest rate hikes.
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Impact on manufacturing sector and steel and aluminum markets: Theoretically, producers in the importing country benefit from import tariffs considering increase in the price of their products. Also, price rise encourages existing companies to raise their productivity and attract new companies to the sector, leading to an increase in employment, profits, and/or revenues. This is what happened following the announcement of the new tariffs. The price of steel in the US rocketed to levels much higher than in most countries, exceeding European prices by 50 percent and Chinese prices by 80 percent. This will have a positive impact on workers in this sector, as more than 80,000 Americans work in steel industry and about 60,000 work in aluminum industry. However, the downside is that there will be a negative impact on workers in the downstream industries that consume steel and aluminum, such as manufactured steel articles, transport machinery and equipment, where production costs will rise. There are over 3.4 million persons working in these industries.
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Impact on the US steel and aluminum markets: When the first round of tariffs was announced, economic observers forecast that 2018 would be a strong year for iron and steel industry in the United States. They expected this industry to grow by 14.8 percent compared to 2017 as the domestic price of steel was forecast to increase to a five-year high. Although demand for steel from downstream market that depend on it (including construction, automotive and infrastructure industries) was a key driver of industry performance, the upward movement in selling price was expected to contribute significantly to the strong performance of the US local steel industry.
Besides, steel exports were expected to rise at a faster rate than that of imports for the first time in the five-year period due to a growing demand for US-made steel from foreign companies and reduced demand for foreign steel by US companies. So far, the tariffs implemented at the beginning of 2018 have served the US steel industry but their impact on other sectors remains debatable.
Similarly, the aluminum manufacturing industry in the US was expected to see a strong growth in 2018. After experiencing revenue declines for three consecutive years from 2014 to 2016, it erased all losses after the imposition of tariffs. The industry is forecast to grow further with the expected decline in demand for foreign-made aluminum due to higher import prices after the implementation of tariffs.
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Impact on global steel and aluminum markets: Global steel markets suffer from ”industrial overcapacity” caused by the expansion of production in many countries to levels more than customer demand, especially Chinese production which floods global markets with quantities exceeding the needs of customers. This is why China has been accused of unfair trade practices and circumventing the rules of transparent international competition.
Also, steel and aluminum factories and workers in the countries that have been targeted by the tariffs, such as China, Canada and others, will be negatively affected due to the higher prices of their products compared to local US products, which may make these countries lose part of such a large market like the United States’.
These tariffs will also break many cross-border supply chains for steel and aluminum companies in the targeted countries which will have to restructure their production and rebuild their own supply chains, making them globally less competitive.
The impact of these tariffs on the targeted countries is serious, given the importance of steel and aluminum industry to their national economies:
- In Canada, the steel industry employs more than 23,000 people and contributes $4.2 billion to the country’s GDP, while the Canadian aluminum industry employs 10,000 workers and contributes $4.7 billion to the GDP.
- China is the largest crude steel producer in the world, accounting for 50 percent of global production in 2018. It has six of the 10 largest steel companies in the world. These giant state-owned companies have controlled the Chinese steel industry. For example, China Baowu Steel Group alone produced 67.43 million metric tons of crude steel in 2018.
- Russia is the second largest aluminum producer in the world, after China. It produced 3.7 metric tons of aluminum in 2018 compared to 3.58 metric tons in 2017. However, its aluminum industry has been affected by the American sanctions. In early April 2019, the US Treasury Department imposed sanctions on the Russian aluminum giant company Rusal, which contributes more than 6 percent of world’s aluminum supply, because the company was owned and controlled by the Russian oligarch Oleg Deripaska who was close to the Russian government. Later on, the US Treasury Department lifted the sanctions and announced that companies could resume imports of aluminum from Russia at the same levels prior to the sanctions. However, Washington has soon imposed tariffs on its aluminum imports from some countries.
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Impact on companies and institutions: American companies working in steel and aluminum industries, including United States Steel, Century Aluminum and Whirlpool, asked the US administration to impose import tariffs on these products to protect the country’s domestic industry. These companies have been complaining about unfair foreign competition for a long time.[3]
Major Aluminum Producers in the U.S. According to Sales Volume
Steel producers in the US have definitely benefited from the tariffs. In 2018, Reliance Steel & Aluminum Co. and Nucor Corporation made record sales when the first round of tariffs was imposed. Conversely, the American steel-consuming companies, such as Harley Davidson, General Motors and General Electric, were forced to adjust their supply chains in the face of declining profit margins. Among the most affected sectors are building and construction industry which accounts for 40 percent of the demand for steel in the US, and American automotive industry which accounted for 26 percent of demand for steel in 2017.
The effects on international steel companies will surely be negative because their access to the huge US market, and their competitiveness in it, will decline significantly, given the competitive advantage enjoyed by the American local companies.
For example, Chinese companies have built up massive steel production capacity in China, making the country the largest steel producer. China produced 928 million tons of steel in 2018, a 6.6 percent jump from 2017 total production[4], which led to rapid growth in its steel exports, and as a result it was accused of dumping cheap steel on to global markets.
These import tariffs affect Chinese steel exports to the US but their overall impact on China’s economy will not be significant, given the limited amount of Chinese exports of steel to the US market. However, the most serious impact may occur from the slowdown in Chinese domestic demand or if other countries follow the lead of the US and impose import tariffs.
Canadian companies were expected to be the most affected as the US market accounted for 82 percent of total Canada’s exports of steel in 2018. However, Canada was exempted from these tariffs. The exemption made its companies benefit from the US import tariffs because its competitiveness would be higher against imports coming to the U.S. from countries that are subject to the tariffs.
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Impacts on Investments, Trade and International Financial Sector: There was a sense of fear that the US decision would invoke retaliatory responses from the US trade partners, which would in turn force the US to react and cause a spiral of negative impact on the American and global economies. In terms of impacts on trade structure, the US import tariffs will affect the imports of primary metal products to the US, which will shrink due to this protectionist measure.
In regard to investment, the tariffs would create a state of uncertainty which would negatively affect foreign direct investment (FDI) in the US but companies from the countries on which import tariffs are imposed may move to the US to avoid the levies. This in turn may increase the FDI in the country.
During the trade war between China and the US, FDI fell by 90 percent in the first half of 2017 to $1.8 billion. Chinese investors sold about $9.6 billion in US assets, leading to a decline in FDI into the US from China.[5] With respect to the financial sector, the tariffs may cause more turbulence in stock markets,[6] and more uncertainty that will leave less policy room for the US Federal Reserve to maneuver.[7]
As for the European economy, the tariffs may reduce the EU exports of metal products to the US to some extent but the overall impacts on total EU exports will be much smaller due to the ‘relative’ importance of metals sector in the structure of the EU exports. With respect to Japan, the impact on exports and production sector is expected to be small because the US is not a major export market for Japan in these products. The same applies to India. However, the biggest impact will be on Russia as the US is the main export market for it, and the US is unlikely to lift the tariffs on it.
Regarding the impact on global investment, a report by the World Economic Forum indicated that based on the Ebeke and Siminitz measure of trade uncertainty aggregated over the EU, US, China and the UK, a one-standard deviation increase in the level of trade uncertainty reduces the investment-to-GDP ratio in the euro zone by 0.75 percent in the following five quarters. The report also indicated that researchers at the US Federal Reserve develop different measures of trade policy uncertainty – one at a firm level and two aggregate indicators based on using newspaper coverage and data volatility on import tariffs – and estimate that the rise in trade policy uncertainty in 2017 and 2018 predicts a decline in aggregate investment of 1-2 percent.[8]
Trade policy-related decisions, such as the imposition of tariffs, will increase the uncertainty and hence decrease the investment-to-GDP ratio. Therefore, the recent imposition of import tariffs will increase the level of uncertainty and reduce the investment-to-GDP ratio.
Conclusion
It is clear that the US decision to impose import tariffs was meant to protect its national industries against foreign competition and protect its national security. Nonetheless, the impact of this step has extended far beyond the US borders, given the size of the US economy and its global reach, especially with exporters of steel and aluminum products, such as China, Canada, and the United Arab Emirates.
However, the impact of the US decision on the global economy varied depending on the volume of each country’s exports of these products to the US market and the extent of its economy’s dependence on these products in its trade with the world. Despite initial fear of the tariffs’ impacts on the global economy if the affected countries retaliate with similar measures, market indicators and trends have shown that the world is adapting to the new reality.
[1] مجدي صبحي، ” حماية الأمن القومي الأمريكي أم حماية الصناعة؟!”، بوابة العين الإخبارية، 31 يناير 2020.
[2] http://www.worldstopexports.com/us-aluminum-imports-by-supplying-country.
[3] https://www.thomasnet.com/articles/top-suppliers/aluminum-manufacturers-suppliers/
[4] S&P Global https://www.spglobal.com/en/research-insights/articles/chinese-steel-output-reaches-new-heights
[5] CNBC https://www.cnbc.com/2018/07/05/ripple-effect-from-pending-us-china-trade-war-drop-in-fdi-worldwide.html
[6] https://www.putnam.com/institutional/content/marketOutlooks/772-trump-tariffs-and-trade-the-impact-on-stocks
[7] World economic Forum https://www.weforum.org/agenda/2019/01/how-trade-war-would-impact-global-growth-tariff/
[8] World Economic Forum https://www.weforum.org/agenda/2019/10/tariffs-and-monetary-policy-us-china-tariff-war/
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