To the dismay of many pro-free trade Republicans, President Donald Trump announced last week that he intends to impose across the board a 25% tariff on imported steel and a 10% tariff on imported aluminum. The move is an effort to keep his campaign promise to working class voters and protect American jobs by fighting back against foreign producers who have been dumping their steel and aluminum on the U.S. market at below cost prices, decimating those key sectors of American industry.
The tariffs are intended to level the economic playing field. They were an integral part of Trump’s campaign pledge to “Make America Great Again” by revitalizing and rebuilding America’s industrial base. That promise earned Trump the support of many displaced workers in the steel and coal-producing areas of the Rust Belt, including Pennsylvania, Ohio and Indiana. By winning those states, along with Michigan and Wisconsin, Trump was able to put together a majority in the Electoral College and take the presidency despite losing the national popular vote to Hillary Clinton in the 2016 election.
Trump’s populist, protectionist promise to impose tariffs to end unfair competition from foreign producers separated him from the rest of the 2016 GOP presidential candidates. It was as important to his supporters in industrial states, and as controversial, as his promise to build a wall along the border with Mexico to halt illegal immigration.
After announcing the tariffs, Trump vigorously defended them in a series of tweets. He argued that U.S. industry has been on the “losing side of almost all trade deals” for far too long. “Our friends and enemies have taken advantage of the U.S. for many years. Our Steel and Aluminum industries are dead. Sorry, it’s time for a change! MAKE AMERICA GREAT AGAIN!”
Initially, Trump and administration officials initially said that there would be no exceptions made in applying the sanctions to all foreign steel and aluminum suppliers. But in his later remarks, Trump made it clear he would be willing to forgo the tariffs on countries willing to make other concessions that the U.S. wants in their trade policies.
TARGETING CANADA AND MEXICO
Trump increased the pressure on Mexico and Canada, which are the top two countries exporting steel to the U.S., warning that they would not be exempted from the new tariffs unless they agree to other changes to the 1994 NAFTA free trade agreement, which Trump had criticized long before he started running for president. The have been ongoing talks for the past year between the U.S. and its North American trading partners about the revisions Trump wants in NAFTA.
Trump is demanding that Canada “must treat our [U.S.] farmers much better,” calling Canada’s policies toward American agricultural products “highly restrictive.”
Canadian Prime Minister Justin Trudeau told reporters that Trump’s proposed tariffs were “absolutely unacceptable” and “will hurt them (the U.S.) every bit as much as they would hurt us.”
Mexico’s chief NAFTA negotiator, Kenneth Smith-Ramos, demanded that his country’s steel exports to the U.S. be exempted from the tariffs. A Mexican steel industry trade group argued that the tariff would be unfair because Mexico had a $3.6 billion deficit in its steel trade with the U.S. over the past two years.
MAINSTREAM REPUBLICAN OPPOSITION TO TARIFFS
Since the end of World War II, most Republicans have been supportive of free trade policies. Many of today’s mainstream congressional Republican leaders oppose Trump’s tariff proposal and have expressed their hope that he will change his mind.
Gary Cohn, Trump’s chief economic advisor quit on Tuesday after failing to convince the president to back down. The former Goldman Sachs president was a Trump booster and played a very important role in the administration.
House Speaker Paul Ryan spoke for many of his Republican colleagues by issuing a statement saying, “We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan. The new tax reform law has boosted the economy and we certainly don’t want to jeopardize those gains.”
The next day, Ryan backed away from his criticism of Trump’s proposal. He acknowledged the need to fight unfair trade practices but recommended that Trump’s tariffs be more narrowly targeted at the countries that are most guilty.
“There is clearly abuse occurring,” Ryan told reporters. “Clearly, there is overcapacity dumping in trans-shipping of steel and aluminum by some countries, particularly China, but I think the smarter way to go is to make it more surgical or more targeted.”
Republican South Dakota Senator John Thune warned that the reaction to the tariff could hurt other sectors of the American economy. “There is always retaliation, and typically a lot of these countries single out agriculture when they do that. So, we’re very concerned,” he said.
Wisconsin’s Republican Governor, Scott Walker, asked Trump to reconsider his tariff proposal, because, by raising the cost of their raw materials, it encourages U.S. manufacturers to move their operations abroad.
South Carolina Senator Lindsay Graham said that across the board tariffs would hurt U.S. allies the most, while letting China, the true culprit, “off the hook.”
“China wins when we fight with Europe,” Graham said.” ‘’China wins when the American consumer has higher prices because of tariffs that don’t affect Chinese behavior.”
PRESIDENT TRUMP READY FOR A TRADE WAR
President Trump insisted during a brief White House appearance with Israeli Prime Minister Binyomin Netanyahu that he is “not backing down” from imposing tariffs despite the objections by Ryan and other Republicans, as well as foreign leaders.
He warned that if the EU did go through with its threats to retaliate with tariffs on American exports, he would slap a stiff import tax on European-made cars and SUVs. That prompted German Chancellor Angela Merkel to issue a statement declaring that, “such punitive tariffs and additional protectionist measures are an aberration and to the contrary, a joint elimination of trade barriers would be the right approach.”
British Prime Minister Theresa May called President Trump to express her “deep concern” about his tariff proposal. She added that multilateral action was the only way to solve the underlying problem of “global overcapacity.”
When Trump announced his tariff proposal last week, he said that “trade wars are good” and “easy to win,” because of the power of the U.S. economy, but his more recent statements indicate he believes that he can achieve his goals without starting a trade war.
White House officials defended the tariff by citing the importance to national security of maintaining a sufficient domestic steel and aluminum production capacity to meet defense and other critical needs.
COSTS TO THE ECONOMY AND CONSUMERS WOULD BE “INSIGNIFICANT”
Administration trade officials, including Commerce Secretary Wilbur Ross and Trump’s National Trade Council Director Peter Navarro, said the higher costs to American industry and consumers due to the tariffs would be “insignificant” in the current business climate, which is marked by rapid economic expansion, sharply lower taxes and a reduced regulatory burden.
Ross suggested that the new tariffs would add no more than a fraction of a penny to the cost of a can of soda. Others estimated that they would add about $45 to the cost of a new car, and $25,000 to the cost of a Boeing 777 jumbo jet.
Ross said that the total cost of the tariffs, about $9 billion a year, would be too small to “destroy a lot of jobs, raise prices, [and] disrupt things” in the American economy. He also dismissed as “trivial” threats by European Union trade officials to retaliate by imposing tariffs on popular U.S. exports such as Harley Davidson motorcycles, Kentucky bourbon and Levi’s blue jeans, which represent about $3 billion worth of goods.
U.S. INDUSTRIES IN SHARP DECLINE
Ross released a new Commerce Department report which showed that the U.S. steel industry has closed 10 major steelmaking plants since 2000, and employment in that industry has declined by 35% since 1998, and by more than 70% since 1974.
In 1945, the U.S. produced 72% of the world’s steel, but then gave up its leadership to China and other developing countries. China quadrupled its steelmaking capacity between 2000 and 2007 and doubled it again by 2017. It currently produces 830 million tons a year, or about 50% of world steelmaking capacity. Today, the U.S. has fallen to fourth place behind China, Japan and India. The U.S. currently makes only 82 million tons of steel a year, less than 6% of world capacity, and about 25% less than it made in 1967.
The U.S. currently imports 29% of its steel needs, and domestic production is still falling. Most of the giant American integrated steel mills of post-World War II era have been closed. The open hearth steel-making process they used has been replace by the newer technologies of the basic oxygen process and the electric arc furnace. Today most American steel is produced in much smaller mini-mills making specialty grades of steel which command a higher price in the domestic and international market. However, for certain types of more basic steel which are important to the U.S. economy, such as the variety used to make electrical transformers, the U.S. has only one domestic supplier still in operation.
The situation in the aluminum industry is even worse due to the dumping of below-cost foreign aluminum on the American market. Aluminum imports have risen to 90% of domestic consumption, up from 66% in 2012. Between 2013 and 2016, employment in the U.S. aluminum industry fell by 58%. During that period, 6 of the 11 aluminum smelters in the country were shut down, and only two are currently operating at full capacity despite an increase in domestic demand.
A NATIONAL SECURITY CONCERN
The U.S. has only one remaining domestic producer of the high-quality aluminum needed by the U.S. military and aerospace industries to produce its airplanes and missiles.
This is why the Department of Commerce report found that the current level of steel and aluminum imports at below-cost prices “threatens to impair the national security.” Heavy U.S. dependence on foreign suppliers for strategic materials is particularly dangerous in light of the possibility that the U.S. might soon find itself at war with the world’s leading steel producer, China.
A separate report by the Defense Department agreed with the conclusions of the Department of Commerce. It also declared that “the systematic use of unfair trade practices to intentionally erode our innovation and manufacturing industrial base poses a risk to our national security.”
Steelmaking capacity has always been viewed as a key indicator of the health and independence of a nation’s economy. Like oil, steel is considered to be a vital strategic material. Steel is too important for any country to allow its supply to become totally reliant on foreign sources.
This is also a lesson from history. President Franklin D. Roosevelt’s decision in 1940 to embargo the export of U.S. iron and scrap steel to the Japanese Empire, which did not have a steel-producing capacity of its own, had serious consequences. It was a factor, in addition to a later oil embargo, in Japan’s decision to launch a surprise attack on the U.S. fleet anchored in Pearl Harbor, Hawaii on December 7, 1941, which brought the U.S. into World War II.
Conservative Republican economic experts have criticized Trump’s proposal, citing previous tariffs which had a net negative effect on the U.S. economy. They argue that while tariff increases would save the remaining American jobs in the steel and aluminum industries, they would hurt workers for other American companies that would be forced to pay more for the steel and aluminum they use to make their products, ranging from automobiles to appliances to soda cans.
Former Reagan economic advisor Larry Kudlow pointed out that to protect the jobs of 140,000 Americans employed making steel today, Trump would raise costs for industries which currently employ 5,000,000 American workers.
REOPENING A CLOSED FACTORY
Those whose livelihood depends on the survival of the American steel and aluminum industries have been cheering Trump’s proposal. Michael Bless, the president of Century Aluminum, said, “enthusiastic and gratified are probably understatements” of his reaction to Trump’s 10% tariff announcement on imported aluminum. “Finally, we have got an administration who is willing to say, ‘It might make a lot of people around the world mad, but if we don’t do it now, then when?’” Bless said he now plans to re-open a plant in Hawesville, Kentucky that produces high-purity aluminum for military use, that he closed three years ago. He also intends to invest $100 million in the smelting operation and hire 300 more workers.
Trump’s supporters claim warnings that Trump’s tariffs would launch an international trade war that would “destabilize the global economy” and “bring global trade growth to a halt” are exaggerated and misleading.
In fact, other countries already have tariffs in place to protect themselves against the dumping of Chinese-made steel. There has not been free trade in the international steel market for many years.
China has continued to expand its steel production despite 50% of excess capacity above current world demand. In response, U.S. allies such as Canada and the European Union have had broad tariffs in place on Chinese steel while providing subsidies to their own domestic steel industries in order to enable them to survive. In that respect, Trump’s tariff announcement can be viewed as a long overdue adjustment to the realities of the international steel marketplace.
TOO MUCH PRODUCTION
Because the world produces much more steel and aluminum than it needs, the oversupply forces prices down. Because every country wants its own producers to survive, many have been forced to abandon free market policies and provide the subsidies and tariffs needed. The global competition then becomes a contest of national economic tolerance for the losses incurred by keeping those factories in operation.
Supporters of Trump’s tariff liken it to President Barack Obama’s auto industry bailout in 2009. Some still argue that Obama should have allowed General Motors and Chrysler to go into bankruptcy, and that the cost to U.S. taxpayers to save them was too high. But because of that action, both companies are still in business and profitable once again, employing American workers to build cars in the U.S.
Trump’s public threat to impose tariff barriers to the U.S. market could be sufficient by itself to convince foreign producers to price their steel and aluminum more fairly, thereby eliminating the need for the tariffs.
THE 2002 TARIFF
The last time a U.S. president put tariffs on imported steel was in March 2002. George W. Bush slapped a 30% tariff on imported steel which was supposed to continue through 2005, but they were canceled ahead of schedule, in late 2003, after U.S. steel makers had become profitable again, and before America’s trading partners imposed retaliatory tariffs on U.S.-made export goods.
While they were in effect, the 2002 tariffs achieved their goal by reducing imports from the foreign steel suppliers who were targeted by 30%, worth $700 million.
The net effect on the economy was slight. More American jobs were lost than saved due to the higher cost of steel to U.S. industries. But the strategically vital domestic U.S. steel industry, which was nearing the point of collapse, survived. That is a crucial point that many critics of Trump’s proposed tariffs miss when they complain about the net cost to the economy.
The relief for the U.S. steel industry was temporary because Bush’s tariff did not address the driving force behind the problem. China continued to build steelmaking capacity and sell its steel to the rest of the world at a loss, for its own internal reasons.
President Trump believes it is in this nation’s interest to retain a domestic production capacity for steel and aluminum despite the cost, as President Obama did when he bailed out U.S. auto makers. Trump had the choice of propping up U.S. steel and aluminum producers with federal subsidies or protecting their domestic markets from the below-cost dumping of foreign steel and aluminum by imposing tariffs. Trump has chosen the latter approach.
The U.S. government has long maintained price supports and other incentives to protect selected industries, such as the required addition of corn-based ethanol to gasoline, providing an additional domestic market for corn.
SOME TARIFFS WORKED BETTER THAN OTHERS
Some tariffs have been more successful than others. The Smoot-Hawley tariff was signed into law in 1929 by Herbert Hoover at the worst possible time, at the start of the Great Depression, and added to its severity.
Protectionist measures against cheap imported color television sets backfired. They destroyed all domestic TV production by the early 1990s. Zenith, the last surviving American TV manufacturer, went bankrupt and was forced to sell itself to South Korea’s LG Electronics.
But as the 2009 U.S. auto industry bailout demonstrates, bail outs and other protectionist measures can save endangered domestic industries if they encourage the companies to reorganize and operate more efficiently.
CHINA IS THE MAIN CULPRIT
Trump’s tariffs will fall most heavily on Canada, Mexico and the European Union, which account for more U.S. steel imports than China, as well as South Korea. But their below-cost prices have been dictated by China because of its huge excess production capacity.
China’s trading violations have long been recognized by the U.S. government. Currently, the U.S. has 29 antidumping and countervailing duty orders on various types of steel imported from China, and 25 more cases are under investigation. In addition, there are two countervailing duties orders on imported Chinese aluminum and four more cases under investigation.
Some have suggested that the new steel and aluminum tariffs be limited to countries like China which are driving the oversupply problem, rather than U.S. allies which are acting to protect themselves. However, selective imposition of tariffs would be more difficult to enforce because the ultimate source of imported steel and aluminum can be easily hidden.
Trump initially said that the tariffs will be applied across the board on all imported steel and aluminum, but subsequent comments by White House Press Secretary Sarah Sanders and Commerce Secretary Ross indicated that the situation was fluid and that details of how the tariffs will be applied could change before the tariff regulations are published. Ross also suggested that Trump could still “change his mind” about the tariff entirely.
Trump appears to saber rattling with his threat to impose tariffs in an effort to persuade China and other trading partners, such as Mexico and Canada, that he feels have taken unfair advantage of the U.S. in trade deals, to take his demands for changes in those deals more seriously.
Trump’s tariff proposal provides him with political benefits by showing that he is determined to fulfill his campaign promises.
Carmen Dorobat, an international trade expert at Leeds Trinity University, notes that there is a long tradition of American presidents interceding on the affairs of the U.S. steel industry.
Other presidents who have taken action to defend U.S. steel companies include Ronald Reagan, George H.W. Bush, Jimmy Carter, Richard Nixon and Lyndon B. Johnson. This prompts Dorobat to conclude that “Trump isn’t doing anything radical. He’s just doing it in his own way, which makes it look like it’s really, really radical.”
The timing of Trump’s tariff announcement has been politically fortuitous. It comes when the U.S. economy is showing signs of sufficient strength to overcome any drag from higher prices due to the tariffs, thanks to Trump’s tax cuts and anti-regulatory policies.
It is also having a disruptive effect on Trump’s political opponents. Before Trump’s tariff announcement, Democrats had high hopes of winning a formerly Republican-held House seat in southwestern Pennsylvania in a March 13 special election.
That area near Pittsburgh had once been the steelmaking capital of the world. Its economy is still heavily dependent on the steel and aluminum industries.
The GOP candidate for that seat, Rick Saccone, issued a carefully worded statement which tried to meld traditional Republican support for free trade with an endorsement of Trump’s call for tariffs. “Rick supports free trade as long as it’s fair. If other countries aren’t playing by the rules and tariffs are needed to protect steel and aluminum jobs in southwestern Pennsylvania, Rick would support those measures,” a statement by his campaign said.
PUTTING DEMOCRATS ON THE DEFENSIVE
Saccone’s liberal Democrat opponent, Conor Lamb, initially declined a reporter’s request for comment on Trump’s call for tariffs. However, Lamb could not avoid the issue in a televised debate with Saccone.
“For too long, China has been making cheap steel and they’ve been flooding the market with it. It’s not fair and it’s not right. So, I actually think this is long overdue,” Lamb conceded.
His Republican opponent responded with a more vigorous defense of the tariff and by giving credit to Trump for the making the controversial proposal. “Unfortunately, many of our competitors around the world have slanted the playing field, and their thumb has been on the scale, and I think President Trump is trying to even that scale back out,” Saccone said.
Other Democrats have also been reluctant to attack Trump’s call for a tariff. His insistence on renegotiating trade agreements such as NAFTA tracks closely with the protectionist positions taken by Senator Bernie Sanders during the 2016 Democrat primaries. Hillary Clinton’s outspoken support for the Trans Pacific Partnership and other free trade agreements hurt her support among progressive Democrats.
Democrat Senators Sherrod Brown and Senator Bob Casey have been outspoken Trump opponents, but because they represent the steelmaking states of Ohio and Pennsylvania, they have thrown their support behind his call for tariffs to protect the jobs of workers in their states. “I urge the administration to follow through and to take aggressive measures to ensure our workers can compete on a level playing field,” Casey tweeted.
APPEALING TO ORGANIZED LABOR
Trump’s call for tariffs is also very popular with Leo Gerard, the president of the United Steelworkers union, which also represents includes aluminum workers. He says his union members are tired of being laid off their jobs due to “cheaters” in China selling their steel and aluminum to the U.S. below cost.
Gerard scoffed at critics of Trump’s call for tariffs, labeling them as, “idiots that say we are going to start a trade war, well, we are in a trade war now, and we are just sitting back.” However, Gerard would like the exceptions to be made for steel imported from Canada, where his union has more than 200,000 workers, and other countries which he claims “don’t cheat” in pricing their steel and aluminum.
If Trump’s tariff proposal succeeds in providing help for the U.S. steel and aluminum industry, it could help Republican candidates win the votes of more typically pro-Democrat union members in November’s midterm elections.
WHEN JFK CONFRONTED THE CEO OF U.S. STEEL
The most dramatic example of presidential involvement with the U.S. steel industry was in 1962, when President John F. Kennedy interceded in contract talks between the nation’s 10 largest steelmakers and the United Steelworkers union. Kennedy hoped to avoid a repeat of the disruptive 4-month steel strike in 1959, during President Dwight D. Eisenhower’s second term.
The new contract, brokered by Kennedy’s Labor Secretary, Arthur Goldberg, was announced on March 31. It limited union members to a 10 cent-an-hour increase in fringe benefits in order to keep inflation under control.
Kennedy called the new contract “obviously non-inflationary” and publicly praised union leaders and the steel companies for showing “industrial statesmanship of the highest order.”
Just ten days later, Kennedy was infuriated when Roger Blough, the CEO of U.S. Steel, informed him that his firm and six smaller steel companies were immediately raising their prices by 3.5%, or $6 a ton.
On April 11, at a White House press conference, Kennedy condemned the price hike as “a wholly unjustifiable and irresponsible defiance of the public interest [by] a tiny handful of steel executives whose pursuit of power and profit exceeds their sense of public responsibility.”
Publicly, Kennedy accused the steel company executives of holding the U.S. in “utter contempt.” In private, according to his biographer, Arthur Schlesinger, and AFL-CIO labor chief George Meany, Kennedy was even harsher in his condemnation of their character.
Like Trump, Kennedy did not stop at harsh rhetoric to pressure the steel executives to reverse their announced price hikes. He issued orders to Secretary of Defense Robert McNamara to cancel the contracts for the steel needed to build new Navy submarines with all seven companies that had raised their prices and buy it instead from steel producers that did not. By April 13, U.S. Steel and the other six steel firms rescinded their announced price increases.
Kennedy’s ability to face down steel industry executives sent a political and economic message to those who still considered him to be a weak president. Similarly, Trump’s decision to defy the accepted wisdom and reject the advice of his own top economic advisor, Gary Cohn, by announcing the tariffs was intended to send a message to working class voters across the country.
Trump views imposing tariffs on imported steel and aluminum as another promise kept, reminding his supporters that, unlike other political candidates once they are in office, he has not reneged his campaign trail pledges to them.
Trump won the 2016 election because he won the trust of working people that he would keep his word, especially in states which lost millions of jobs to unfair foreign competition. Even before he announced the new tariffs, the conservative Heritage Foundation calculated that the Trump had already fulfilled more than 60% of his campaign agenda.
MANY STEEL JOBS ARE NOT COMING BACK
Even if Trump’s tariff proposal succeeds in saving U.S. steel and aluminum producers, that will not necessarily mean a major increase in the number of workers employed in those industries. Steel industry employment around the world has been reduced by 1.5 million workers over the past 25 years, and that reduction is expected to continue due to productivity improvements from new technology.
Today 140,000 U.S. workers produce 82 million tons of steel. But the world’s most modern steel plants in South Korea are far more efficient. They need only 30,000 workers to produce 28 million tons.
Many American steel and aluminum jobs will be inevitably eliminated in the years ahead, regardless of whether Trump imposes tariffs. The more important question is whether the U.S. steel and aluminum industries will survive to play their critical role in fulfilling Trump’s promise to restore America’s industrial infrastructure and “Make America Great Again.”