Announced tariffs on steel and aluminum are pending, as is renegotiation of NAFTA. President Donald Trump threatens tariffs on other Chinese goods in retaliation for alleged theft of intellectual property. Thus, many email queries from readers about last week’s column on trade and tariffs remain relevant. Let’s look at some.
Will U.S. steel and aluminum prices go up? By how much? Will the increases apply to U.S. production also or only to imports?
Prices will go up for domestic and imported metals alike. That is the whole point of the tariffs, to raise U.S. prices. Within specified grades, metals are pretty much a “homogeneous commodity.” It is not like comparing a DeWalt or Milwaukee power saw to a cheaper no-name imported one. But if rebar meets the specs for Grade 60, it does not matter if it came from a mill in Lithuania, Brazil, Canada, China or Indiana. Ditto for A36 or A529 structural steel or the aluminum for die cast components or for extruded shapes in windows and doors.
Edward Lotterman (Pioneer Press: Scott Takushi)Edward Lotterman
Markets determine prices for all of these things. If a tariff raises the relative cost of imports, the domestic market price for both domestic and imported will rise. Since we still produce about 80 percent of the steel we use, the impact of tariffs on price will be much smaller than the 25 percent level proposed for the tariff. The exact increases will vary with grade and end use.
Who will actually “pay” these tariffs?
Trump, and other tariff advocates through history, implicitly assume foreign producers will bear all the burden of a tariff. At the other end, many agree with columnist George Will’s sweeping assertion that the tariffs are “paid by American consumers.” Neither extreme is correct. At root, a tariff is an excise tax. As introductory econ students learn, the burden of an excise tax depends on “elasticities” — or the degrees to which consumers’ willingness to buy varies with price and on the willingness of producers, either foreign or domestic, to sell different quantities at a range of different prices.
If prices of a product or commodity rise, how much do users reduce the quantities they purchase? If foreign producers get less per ton because of the tariff, just how much will they reduce amounts they offer for sale? At a higher price, how much will U.S. producers ramp up output and over what length of time? All these factors will play into what new price levels will be and who bears the burden.
Consumers will indeed pay more, but not bear all the cost. All foreign producers will see the world price fall, whether or not they export to our country. So they will bear some. U.S. steel-using businesses will see somewhat lower profits and offer fewer jobs. And if other countries retaliate by imposing tariffs on U.S.-made products, then farmers, lumber companies, med-tech firms and firms selling locomotives, airplanes, dozers and the like will sell less, earn less and hire fewer people.
What role do exchange rates play in all this?
This is the question no one seems to note. A “stronger” dollar, i.e. one that costs more in terms of foreign currencies, makes imports, including steel and aluminum, cheaper and U.S. exports more expensive to foreign buyers. A “weak” dollar, one that can be purchased with fewer units of a foreign currency, makes imports more expensive to U.S. consumers and our exports cheaper.
The U.S. dollar was very “weak” at the end of the George W. Bush administration, reaching a point where it took U.S. $1.58 to buy a euro in April, 2008. From there it grew “stronger” until reaching $1.04 per euro in late December, 2017. That meant that a ton of steel from a European mill priced at 800 euros cost U.S. $1,264 in 2008 and only $832 eight years later. That 34 percent drop in the U.S. cost of European steel is a major factor in U.S. imports from there.
Since that point, shortly before Trump’s inauguration, the number of dollars needed to buy a euro has increased by about 20 percent, narrowing the cost advantage of imports from across the Atlantic. This “weakening” of the dollar is precisely what is needed to close the trade deficit our president sees as such a threat. But Larry Kudlow, his new economic adviser, called for a “strong dollar” on his first day. This is incoherent, to put it kindly.
Canada is a large source of our steel imports and its currency followed a similar pattern. In mid-2011, it took U.S. $1.06 to buy a Canadian dollar, the high point in its value in some time. Ironically, it hit a low the week Donald Trump was inaugurated, when it cost only 69 U.S. cents to buy a loonie. That meant a ton of Canadian steel or aluminum dropped in price by a third to U.S. buyers, even though the price to a Canadian producer stayed the same. This is like holding an enormous clearance sale. Again, over the next year, the U.S. dollar rose 16 percent in value against the Canadian, but in the last two months is again weakening, restoring some of Canadian metals price advantage.
The same is true with Brazil, though that nation’s chronically higher inflation rate makes unadjusted comparisons of exchange rates misleading.
The situation with China is complicated by that nation’s varying manipulation of exchange values. While it long tried to keep Chinese exports cheap, two years ago the Bank of China dumped a trillion U.S. dollars from its foreign exchange holdings to raise the value of the yuan and make its exports more expensive.
If we raise our domestic steel prices by taxing imports, but don’t change tariffs on imports of cars and appliances, doesn’t that put U.S. manufacturers of these goods at a disadvantage?
Bingo! Yes, and this should be obvious to anyone. Raise the production cost of a U.S. made Ford and you automatically make it more expensive relative to an imported Toyota or Volkswagen. Of course, most foreign automakers have U.S. assembly plants, so this is on a model-by-model basis. But the cars from these foreign owned plants, largely in the U.S. South, also are now at a cost disadvantage relative to other models of the same make produced in their home countries. Ditto for washers, dryers and other appliances.
If tariffs are a taxn and the Constitution says Congress has the power to set taxes and that all tax bills must originate in the House, how can a president simply impose tariffs on his own?
This is indeed true about taxes, but in trade bills that Congress has passed from time to time, it delegated authority to the president to impose tariffs under specific circumstances, including for reasons of national defense and in the face of “dumping” by a foreign country. These provisions preceded the WTO and are narrowly legal under its rules. Other countries and the EU have imposed similar tariffs for the same flimsy reasons. But if applied when the stated criteria really are not true, affected countries can seek dispute resolution from the WTO. This takes some time and the U.S. has a very spotty record, to put it politely, in complying with rulings that go against it.
(Note that such power of a legislative body to delegate actual tax-rate-setting authority to the executive branch is clear at the Federal level but is currently the subject of controversy in Minnesota over whether or not the setting of actual rates of a new tax on opioids can be delegated to the Department of Health.)
Shouldn’t we impose tariffs when other countries “dump” steel at below their cost of production?
First, “dumping” involves the deliberate selling of a product into some market at a lower price than it is sold domestically and with the deliberate objective of driving a competitor out of business. Simply selling at world prices, when these prices are not high enough to cover all costs, including amortization of all fixed costs for producers, is not dumping. If it were, then every bushel of U.S. corn, beans or wheat exported in the last decade was “dumped.” And if any government subsidy is evidence of special evil intent, then all U.S. grain and oilseed exports over the last 60 years were dumped.
There is no evidence that Canadian, Brazilian, Mexican or European steel producers are dumping in any sense. They are simply selling in a saturated world market just like corn producers are now.
China is a special case. It still is part centrally planned, but also is part market driven. There still are ministries that claim to be directing industries and trade. Chinese steel capacity has expanded greatly in the last decade, but mostly in the non-state sector. China accounts for a small fraction of U.S. steel imports. And the idea that shiploads of Chinese steel are going to Canada to be relabeled as coming from that country are fantasy. China is dealing with the hangover from decades of excessive growth in several sectors, of which steel is one.
If there is excess steel capacity today, isn’t that the fault of China and other countries that have overbuilt?
That is what the English said when German steel output eclipsed Britain and what Europeans said when the United States surged past the old continent. It is what Brazilians said when coffee output grew in Africa and now in Vietnam. U.S. corn production is 65 percent above what it was 20 years back and soybeans up 80 percent. Are we responsible for the current world glut? Or is it the Argentine farmers who switched from wheat to these crops? Or is this simply a market outcome?
Why is it that tariffs are always “slapped” on imports?
Why are all hard surfaces for airplanes are now called “tarmac” by the media even though all are concrete and, for a century, “tarmac” properly referred to asphalt paving invented by Scottish engineer Thomas MacAdam that was used only on hastily constructed airstrips in World War II? Journalists somehow love trite expressions and once one becomes popular, everyone uses it.