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Steel Tariffs and the Law of Unintended Consequences

02/06/2019

The February 4th editorial in The Wall Street Journal on the consequences of steel tariffs succinctly identified the beneficiaries and losers of a precipitous action that in retrospect, was a misplaced bargaining strategy. Any egg producer intending to erect new housing will appreciate the escalation of the cost of steel as a result of tariffs imposed on imports. The intent of the tariffs was to "bring back the U.S. steel industry and create jobs for workers in the rust belt."

It is obvious to any person having passed an elementary course in economics that if imported steel increases in price due to an artificial tariff, domestic producers will take advantage of the price differential, certainly until production rises to meet demand. The Wall Street Journal reported that Caterpillar spent an additional $100 million in 2018 for steel, Whirlpool, $300 million and Ford, $750 million. These substantial figures belie the farcical assertion by Secretary of Commerce Wilbur Ross that the tariffs on foreign steel and aluminum would be a "rounding error". This is a simplistic and erroneous White House characterization of the inflationary effect of tariffs.

Returning to the original intent of the tariffs, there has been no increase in the number of workers employed in the steel industry. As of November 2018 the Department of Labor documented 83,400 employed in domestic steel mills, a few hundred less than in February 2018 at the time tariffs were imposed.

In rebuttal John Ferriola Chairman of Nucor Corporation writing in the February 7th edition of the WSJ points to an increase in U.S. steel mill utilization to 78.3 percent. This is attributed to Section 232 tariffs imposed by the Administration. He notes six new projects initiated by his Company scheduled to commence operation in 2019. Collectively these represent a capital investment of $1.2 billion that will eventually create 800 new direct jobs.

The increase in the price of steel has resulted in escalation throughout the chain of production and consumption of consumer durables and has indirectly increased prices to all consumers. Tariffs may have generated political capital but at a high cost to the U.S. economy and consumers without any tangible benefit to workers and shareholders of companies using steel and aluminum. Tariffs concentrate gains in a narrow sector and generate widespread negative effects in the economy. There is clearly a negative reaction by an aggrieved trading partner by imposing countervailing tariffs as a punitive measure as exemplified by the tit-for-tat trade war with China.

It is hoped that with eventual ratification of the USMCA and possible bilateral trade agreements with Japan, Korea and even the EU, tariffs will be rescinded to the benefit of our Nation.