03.05.19 | Berdon Industry Insights
On June 1, 2018, President Donald Trump imposed a 25% tariff on steel and a 10% tariff on aluminum imports into the United States. The tariffs were imposed pursuant to Section 232 of the Trade Expansion Act of 1962. Tariffs are now at levels not seen since 1971. According to Bloomberg, Swiss investment bank UBS says, “The global average import tariff is now poised to increase by 93 basis points to 4.06 percent, the highest level since 2001 … U.S. actions account for most of the increase.”
In September 2018, the Office of the U.S. Trade Representative (USTR) announced a further round of sanctions against China at 10%, to the tune of $200 billion on Chinese imports. Starting January 1, 2019, additional tariffs were slated for an increase of 25%.
The Administration’s justification for the imposition of the new steel and aluminum tariffs is twofold.
First, low-priced imports are said to “threaten to impair” U.S. national security. In order to counteract that, Secretary of Commerce Wilbur Ross declared that “The only effective means of removing the threat of impairment is to reduce imports to a level that should … enable U.S. steel mills to operate at 80 percent or more of their rated production capacity.”
Second, the tariffs were put in place to prevent “cheap” metals imports from flooding the market and to help spur growth in the domestic steel and aluminum industries. While many economists—not to mention, close U.S. allies—have questioned the Administration’s rationale, others argue that the benefits of the 2017 Trump tax cuts—which were aimed to accelerate growth and investment—would be offset by the burden put on American businesses by the new tariffs.
Yet, the question remains: Are the new tariffs spurring capital spending, or are they dragging on economic growth?
First, some good news. Some industries have benefited from the tariffs and are in the process of expanding. United States Steel Corporation is reportedly spending $750 million on upgrading a plant in Gary, Indiana, while aluminum alloy manufacturer Braidy Industries, Inc., is adding 600 jobs at a new plant in Kentucky. John Ferriola, CEO of steel producer Nucor, recently observed that the tariffs have been successful in “removing artificially low-cost foreign imports from the market and restoring a level playing field.” According to Ferriola, “The tariffs are having their intended impact by curbing unfairly traded imports. They are sending the message that the United States Government is serious about achieving compliance with the rules of trade.”
Yet, further down the supply chain, the steel and aluminum tariffs have come with some significant downsides. Caterpillar’s chief financial officer, Andrew Bonfield, told CNBC that “In all, material costs were up about 2 percent on higher steel prices and the impacts of tariffs.” Caterpillar estimates the tariffs will cost the company roughly $1 billion in 2019. Meanwhile, in the time since the initial passage of the tariffs, investment in capital goods slowed to just .4%.
Wisconsin based, Harley-Davidson, is also struggling with the impact of the tariffs. The company announced it is planning to shift some of its production out of the U.S., as the 25% tariff on steel imports could result in a manufacturing cost increase of $30 million per year. Moreover, the subsequent response by Harley-Davidson’s second largest market, the European Union (EU), in imposing a tariff on U.S.-made motorcycles, could push costs up by an additional $15 million. Alan Rappeport, of the New York Times, warns that, “…the White House approach could backfire as American companies increasingly rely on overseas markets for materials, production and sales.”
Small manufacturers are taking a hit as well, and are now faced with the dilemma of whether to pass the costs of the tariffs to their customers or absorb such costs and hope that the trade war ceases.
Newton’s third law of motion states that for every action there is an equal and opposite reaction. What holds true in physics would seem to hold true in international trade. In response to the Trump administration’s June 2018 imposition of tariffs on imports from the EU, Canada and Mexico, the EU imposed its own 25% import duty on $3.2 billion worth of American commodities, ranging from steel and aluminum products to agricultural goods and liquor. American tariffs will be attached to over $7.5 billion worth of EU products. EU Commissioner for Trade, Cecilia Malmström, said: “The rules of international trade, which we have developed … with our American partners, cannot be violated without a reaction from our side.”
For its part, Canada imposed a 25% tariff on U.S. steel imports, starting October 25, 2018. According to the Canadian Department of Finance, the tariffs were applied to seven steel products —heavy plate, concrete reinforcing bar, energy tubular, hot-rolled sheet, pre-painted steel, stainless steel wire, and wire rod. This is the second “retaliatory” round by Canada. On July 1, 2018, Ottawa began imposing import duties on $16.6 billion worth of American steel, aluminum, and other products, such as beer kegs, whiskey, and toilet paper.
On a more positive note, the U.S., Canada, and Mexico have come to terms of agreement on a successor to the North American Free Trade Agreement (NAFTA). Most of the key provisions of the new U.S., Mexico, Canada Agreement (USMCA) will go into effect in 2020. However, negotiations on steel tariffs will continue on a separate track, and are not addressed by the new agreement.
While the Trump administration’s new trade policy has roiled traditional friends and allies, such as Canada and the EU, it has sparked an “out-and-out” trade war with America’s largest trading partner, China. So far, the U.S. has imposed three rounds of tariffs on Chinese products, totaling $250 billion worth of goods, and more could be on the way. While China has already “retaliated” to the tune of 25% on $50 billion in U.S. imports, the President has threatened that he may impose further tariffs on $267 billion worth of Chinese products should China add on more tariffs.
And so far, the effects on the American economy have been mostly negative.
According to Nicole Bivens Collinson, President of the Sandler, Travis & Rosenberg International Trade and Government Relations Group, “The U.S. will suffer more than China.” And a trade war certainly does not bode well for consumers. A study conducted by the National Taxpayers Union found that while “tariffs may afford some short-term protection for domestic industries by shielding them from foreign competitors, they do so at the expense of others in the economy, including consumers and other industries, resulting in less economic output on net.”
Relief, however, may be on the horizon. At the 2018 G20 Buenos Aires summit, President Trump and President Xi declared a moratorium in the U.S.-China trade war. The deal they reached included a commitment from the U.S. to postpone the scheduled January 1, 2019 tariff increase on $200 billion in Chinese imports to 25% from 10% for 90 days, in exchange for talks on issues relating to forced technology transfers, intellectual property protection, and cyber-theft. According to the White House, China also pledged to purchase “a very substantial amount of agricultural, energy, industrial, and other products from the United States, to reduce the trade imbalance between our two countries.” However, as the March 1st deadline approached, President Trump delayed the planned increase further, due to “substantial progress” of ongoing trade talks with China. No new date has been set.
All told, the next few months will be crucial in deciding the length and severity of the trade war between the U.S. and China.
Berdon LLP New York Accountants and Advisors