Steel Tariffs

By Mike Koetting May 9, 2021

Okay. This doesn’t sound like the usual stuff I write about. But it got my attention because it Is such a technicolor illustration of how much more difficult real policy is than policy theatre, in large part because things in the real world turn out to be very interconnected. The topic also begins to raise some necessary questions about what kind of global institutions we might need for the future of the species.

Background

At the end of World War II, the U.S. was the only reliable source of steel in the world. Even while serving as the world’s steel mill, this was never as large an element of the actual work force as it was the American labor psyche. Steel’s direct share of the labor force topped out in the 1950’s at just over 1% of the civilian workforce. American steel continued to dominate in the world market in the following decades, but as technology changed, employment started to slip—both because new approaches required fewer workers and other countries were getting into steel production, thereby lowering demand. (Ironically, other countries found it easier to adopt new technologies because they were essentially starting over from scratch. Japan became a larger source of steel used in America than domestic production.) A CNN/Money report notes the decline in the importance of steel as an American product corresponded with other changes in the economy.

…U.S. Steel was dropped from the Dow Jones industrial index in 1991 after 90 years. Disney joined the index at the time, as did JPMorgan, which is ironically a Wall Street firm named for the founder of U.S. Steel. Bethlehem Steel was the last steel company to fall out of the Dow in 1997, when Walmart, Hewlett-Packard and Travelers insurance were added in.

At the beginning of this century, China began a build up in steel production that has dwarfed American steel. This build up, achieved with material state subsidies, enabled China to flood the market with less expensive steel, further stressing American steel production.

Source: World Steel Association

In 2018, then President Trump invoked the “national security” clause of the 55 year old Trade Expansion act to levy a 25% tariff on steel and a 10% tariff on aluminum. His basic argument was that this would strengthen the American steel industry and thus grow American employment while reducing reliance on foreign steel, particularly from China.

While the assessment of these tariffs is complicated by the disruption of the pandemic, there is general agreement that, despite some small successes around the edges, the tariffs have not substantially achieved these objectives.

• Investment in American steel has not increased in any material way and American steel plants are still running below full capacity—let alone adding new capacity. While there have been substantial increases in the profitability of the remaining American steel companies recently, it has been as a result of consolidating around fewer big players and increasing prices.
• At best, pre-covid employment increased by two or three thousand (out of workforce of 160M). These are certainly better paying jobs than many others, but that is less because they are in steel and more because the steelworkers have a strong union.
• Given the above, the extent to which the tariffs have improved American’s security situation with regard to steel seems minimal.

Conversely, there is general agreement that the tariffs have contributed to snarls in American supply chains and have increased costs throughout the economy. They have also adversely impacted employment in sectors that rely on steel products—by making American products that use steel more expensive. One paper from the Federal Reserve Board  estimates 75,000 fewer jobs in related manufacturing than would have been the case without the tariffs. There is particular concern that if the Biden infrastructure plan is adopted, difficulties obtaining steel could lead to major delays.

The above notwithstanding, early signs are that the Biden administration is in no hurry to end the tariffs.

How should we process this?

Reasons

While I am not privy to the inner workings of the Biden administration, I believe the primary reason for continuing the tariff is broadly political. A Republican caricature of Democratic politics is that they are all about the cosmopolitan elite and minorities but willing to abandon American workers to global markets. The steel tariff is a bit of an antidote. There is also the realpolitik that while it may be only 140,000 steel workers, it becomes a big deal when you count families, friends and communities concentrated in a few states where 25,000 votes can mean 20 electoral votes.

This tariff needs also be considered in a broader global context.

One obvious set of concerns are the implications for national security. At some level of abstraction, it would seem problematic to be dependent on foreign suppliers for a resource as vital as steel, particularly if one of those suppliers is a potential adversary. I suspect, however, this abstract concern is rendered incomprehensible by the actual details. Steel is not simply steel. There are now an infinity of blends, alloys and techniques producing specialized products that are necessary for many applications. I doubt simply producing the same tonnage of steel as aggregate national demand—which we more or less do—meets our security needs. One would have to know much more about the details of steel production to know how much and what kind of steel we would have to produce to actually meet these needs. But I suspect to do so would require a much greater investment in steel than is likely given the rest of the world is willing to offer a wide variety of steel at lower prices.

The specific behavior of China raises a second set of concerns, questions that go to the core of how to organize world trade. The World Trade Organization is an attempt to order world trade markets on a loosely free market basis. China, although a member, doesn’t play by the WTO rules, and nowhere more egregiously than in steel. When Trump imposed the tariffs, he had particularly targeted them at China. The Biden administration has lower ambitions, but appears to see the tariffs as something that might get China to be more cooperative in trade talks on steel that have been going on for 5 years without much progress,

A third area of concern, although touching on an entirely different dynamic, is the role of these, and potentially future, tariffs as part of an environmental tool kit. At least one Congressman has proposed that rather than end these tariffs, we should reconfigure them to discourage imports with a high carbon footprint. Whether this is a real option or not, there is an obvious appeal to trying to create incentives to lessen the carbon impact while not overtly discouraging global trade.

Where Does This Leave Us?

Pretty much nowhere. There is virtually no one who thinks the actual results of these tariffs is a good deal for Americans generally. But neither is there much enthusiasm, outside of some free trade zealots, for ending them. No one wants to be accused of letting American jobs go overseas, of endangering America’s security, or of caving to the Chinese.

One can imagine a more helpful set of policies—careful support for aspects of steel actually critical for national defense, tariffs based on carbon-footprints and a real program of support for workers to reduce the sting of jobs leaving for elsewhere. But I suspect it will be much easier to simply leave the tariffs in place.

In the meantime, I wonder what happens to the broader questions of how to create a better world. For openers, it seems axiomatic that we need global solutions to solve the problems of the environment. But there is no way of decoupling environmental issues from economic issues. If we want to save the planet, we need instruments of global economic cooperation. It is not likely the old imperatives of the WTO are that helpful since they are designed as ground rules for competition not cooperation and so heavily favor corporate influences.

 Of course, the more fundamental problem is that there isn’t much political infrastructure that would allow countries to think about how to best rationalize the manufacture and distribution of products in global terms rather than in national terms. Or in sustainable terms rather than maximizing terms. Moreover, since some countries already have so much higher standards of living, they fear “cooperation” will end up threating their way of life, a concern that Trump played in the U.S. like a virtuoso.

I think we need to be putting more thought into developing radically different models of economic cooperation than tinkering with tariffs that, in today’s world—global whether we like it or not—are as likely to do harm as good.