Trump steel tariffs: Causes and concerns

By Arthur S. Guarino

The tariffs on Chinese steel imports could lead to a trade war that will have far-reaching economic and political implications.  But the tariffs have causes and concerns that keep economists and policymakers very worried.

The tariffs that the Trump Administration will impose on imported steel to the United States are aimed to help the American steel manufacturers regain market share.  The Trump Administration is very concerned about reviving the manufacturing sector in the United States even if it means hurting trade with countries such as Canada, Mexico, China, and regions such as the European Union.  The Trump Administration is very concerned about reviving sections of the United States where the steel industry has suffered severe losses in jobs, company revenue, and economic growth.

But a key aspect of the Trump Administration policy is in keeping with their agenda of “America First” even if it means stifling trade with traditional trading partners such as Canada, Mexico, Germany, and Japan.  The Trump Administration has adopted a protectionist policy that has been used in the past by other presidents and the hope is that it will force foreign steel companies and other nations to change their tactics in selling steel and steel-by products in the United States.

The Trump Administration is also imposing these steel tariffs for political reasons.  Many of the steel companies and their manufacturing plants are located in the American Midwest which voted for Donald Trump in his presidential campaign in 2016.  President Trump is now trying to fulfill his campaign promises to these voters who are largely blue-collar, white, male voters who want to see manufacturing jobs return to the United States and specifically the Midwest.  This includes states such as Michigan, Wisconsin, Ohio, Pennsylvania, and Indiana.  Manufacturing plays a key role in the economies of these states and many jobs have been lost in the past 20 to 30 years to overseas competition.

Even before Donald Trump made his announcement to run for President in June 2015, he was denouncing the impact that foreign competition was having on the American economy.  As the Washington Post reported on June 16th, 2015 when Donald Trump announced his candidacy for the Republican presidential nomination, he was expected to cast himself as an entrepreneur and outsider eager to tangle with the party establishment and the United States’ economic rivals abroad, such as China.  These tariffs on steel, as well as aluminum, should not come as a surprise to anyone who has followed Donald Trump for many years, even back to his younger days as a builder of high-rise towers which heavily depend on steel and aluminum.  Now that he is president of the United States he is putting into play his long-held philosophy.

Reasons behind steel tariffs

There are a number of reasons for the steel tariffs that the Trump Administration is imposing on foreign steel products.  Some of the reasons are political and others are economic.

Trump is not a new technology president: If there is one key factor in understanding Donald Trump it is that he is still geared toward old economic ways of doing things.  His background is mainly in construction, whether it is high-rise towers containing offices or condominiums, golf courses or luxury resorts, he is more comfortable with those items he can feel, hold, touch and see.  He is regarded as part of the “old school” when it comes to economic principles and concepts since that is his background and how he was raised by his father who was also a developer of buildings in New York City.

Donald Trump does not readily embrace new technology as a step to the future regarding economic development for the United States.  His only real use of technology is the use of Twitter and his cell phone.  But he fails to see how the development of artificial intelligence (AI) will have more long-term impact on the economy of the United States as opposed to the growth of its steel industry.

Donald Trump wishes to placate blue collar voters:  Donald Trump readily knows where his votes for the presidency came from in 2016.  These are blue-collar voters and their families in the industrial Midwest and the entire South of the United States.  Donald Trump knows that if he is to run again in 2020 (which he most likely will) he needs to keep his base happy and always on his side.  This means providing them minimum wage jobs, factory work, a steady paycheck, and employee benefits that will take care of these workers and their families.

These workers have been through periods for the past 10 to 15 years of low employment, job cutbacks, factory closings, a shrinking economy, a shifting economy, and lower wages when they are able to find new jobs.  Many of these workers are really concerned about providing their families with the basic necessities of life such as a home, whether rented or purchased with a mortgage to pay, food on the table, a vehicle or two in their driveway, and a possible chance to see their children attend college for a better future.  This means having a job, mainly manual labor in a manufacturing plant that produces a tangible product they can readily identify with.  It does not matter if there is no intellectual development or to be challenged mentally on a daily basis, such as an engineer or a scientist, but being able to punch in and out every day and perhaps get some overtime pay when possible.

An example of this is a steel manufacturing plant in Granite City, Illinois, run by United States Steel Corporation (U.S. Steel).  The plant underwent reduction in its operations resulting in the layoffs of hundreds of workers.  U.S. Steel laid off 1,500 workers just over two years ago.  This also meant that many of the ancillary companies that supplied materials and parts to the manufacturing plant suffered layoffs.  It also resulted in reduced business for other firms that supplied lunch deliveries to the workers as well as stores that sold work boots and clothing to the plant workers.  The local Chamber of Commerce reported that at least 26 businesses closed within one year of the plant’s downsizing resulting in a local economic depression.  Trump feels that by imposing tariffs on foreign steel imports, then these manufacturing plants in the industrial Midwest will reopen and prosper once more.

But the real question is: Will they?  Many of these plants will probably reopen but with fewer workers since companies such as US Steel are using more technology, automation, and robotics to produce more steel at a lower cost, more efficiently and effectively than in the past.

The protectionism of Commerce Secretary Wilbur Ross: Wilbur Ross was appointed Commerce Secretary by President Trump in 2016 and many of his ideas and views are protectionist in nature.   Secretary Ross is an American investor and before he was appointed, was a banker known for restructuring failed companies in industries such as steel, coal, textiles, foreign companies, and telecommunications specializing in leveraged buyouts and distressed businesses.

On the subject of foreign trade, Ross has said: “I am not anti-trade. I am pro-trade, but I’m pro-sensible trade. [Being anti-trade] is a disadvantage of the American worker and the American manufacturing community.”   Ross has also said that the government “should provide access to our markets to those countries who play fair, play by the rules and give everybody a fair chance to compete. Those who do not should not get away with it – they should be punished.”

In 2004, The Economist described Ross’s views as protectionist.   German Chancellor Angela Merkel has also voiced concerns during the 2018 World Economic Forum in Davos over Ross and the Trump administration views as “not the proper answer”.   Secretary Ross, at the 2018 World Economic Forum, responded to concerns by noting that “There have always been trade wars. The difference now is U.S. troops are now coming to the ramparts.”

Secretary Ross has appeared on national news programs in the United States promoting and defending the Trump Administration’s steel tariffs and he feels that such actions will have little to no impact on the price of products, for consumer or industrial use.  There are numerous economists and policy analysts that feel this is not the case and that in the long-run not only will the price of products using steel and aluminum increase but may have an impact on the Consumer Price Index (CPI) or commonly known as inflation.

Secretary Ross feels that the attacks on the steel and aluminum import tariffs have not been justified.  In fact, in an interview with National Public Radio (NPR) the day after the tariffs were announced, Secretary Ross stated, “Let me give you again the actual number, not the theoretical hypotheses. On a can of soup, on a can of beer, on a can of soda, the total impact of the increase in metal cost will be less than one half of one cent. All these products sell for $1 or $2 a can. A fraction of one cent isn’t going to change life.”  He added, “On an automobile it will be under one half of 1 percent of the price of the car. People buy cars very infrequently. Prices of cars go up and down all the time by a lot more than one half of 1 percent.”

The protectionist policies of Peter Navarro: Peter Navarro, Ph.D., is an American economist, who currently serves as the Assistant to the President, Director of Trade and Industrial Policy, and the Director of the White House National Trade Council, a newly created entity in the executive branch of the U.S. federal government.   A professor emeritus of economics and public policy at the Paul Merage School of BusinessUniversity of California, Irvine, Navarro is the author of over a dozen books, including Death by China.

Dr. Navarro is regarded as a staunch critic of Germany and China and a strong proponent of reducing American trade deficits. He has accused Germany and China of currency manipulation. Dr. Navarro has called for increasing the size of the American manufacturing sector, setting high tariffs, and repatriating global supply chains. He is also a strong opponent of the North American Free Trade Agreement and the Trans-Pacific Partnership.

In 2016, he was a policy adviser to Trump’s 2016 presidential campaign.   Dr. Navarro and Commerce Secretary Wilbur Ross authored an economic plan for the Donald Trump presidential campaign in September 2016.   In October 2016, with Wilbur Ross and Andy Puzder, Dr. Navarro coauthored the essay titled “Economic Analysis of Donald Trump’s Contract with the American Voter”.

On December 21, 2016, Dr. Navarro was selected by President-elect Trump to head a newly created position, as director of the White House National Trade Council.   He outlines President Trump’s trade policy as aiming to create jobs, revive the manufacturing sector, and improve the country’s trade balance.  He feels that trade deficits could jeopardize the United States’ national security by allowing unfriendly nations to encroach on American supply chains.

Dr. Navarro argues that the decline in US manufacturing jobs is chiefly due to “unfair trade practices and bad trade deals. And if you don’t believe that, just go to the booming factories in Germany, in Japan, in Korea, in China, in Malaysia, in Vietnam, in Indonesia, in Italy—every place that we’re running deficits with.”  He is totally against trade deficits and abides by the ideas of mercantilism.

A matter of national security: The Trump Administration has stated that the steel tariffs are a matter of national security.  That is, in case of a military confrontation with a nation that makes steel products for the United States, it would be a very dangerous situation.  As Donald Trump recently stated in announcing the tariffs, “Today, I’m defending America’s national security by placing tariffs on foreign imports of steel and aluminum.”  The President’s authority to impose the tariffs is based on a rarely used provision that gives the president the power to restrict trade because of national security interests. After a recent investigation, the Commerce Department reached the conclusion that steel and aluminum imports threaten national security by undermining the long-term viability of those industries.

Protecting jobs and the American steel industry: The Trump Administration has stated that it wishes to protect American jobs and the American steel industry and that tariffs on imports is a key starting point.  For example, in the Midwest, Indiana is regarded as the highest steel-producing state in the nation.  Indiana is also the highest manufacturing intensive state in the country in which it is a leader in the production of truck and auto parts relying on steel and aluminum.  According to Scott Paul, president of the Alliance for American Manufacturing, “Indiana certainly has more to gain than any other state if this relief is put into effect.”  Other states such as Ohio, Pennsylvania, and Michigan also benefit from the use of tariffs on imported steel.

What’s next?

The big concern among economists and policymakers is the next step the Trump Administration may take in order to further their economic agenda.  The problem is that, unless this agenda is carefully though out, there could be serious economic, financial, and political implications for the United States in numerous ways.  There could be other tariffs and policies put in place in order to protect other American industries and thereby causing a serious trade war with China, the European Union, and other nations.  These implications may actually mean that more American jobs could be lost and plunge the United States and the global economy into a serious recession.

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Arthur Guarino

Arthur Guarino is a finance professor at Rutgers University in New Jersey. Professor Guarino’s professional career has been deeply involved in the financial services industry with such corporations as TIAA-CREF, Met Life, and The Bank of New York Mellon. He has held various positions in the financial services field including sales, training and development, administration, product development, customer service and relationship, and management. His teaching experience as a full-time instructor has been at Stevens Institute of Technology in Hoboken, New Jersey, and currently at Rutgers University in Newark. His teaching background includes graduate and undergraduate courses in macroeconomics and microeconomics, as well as managerial accounting, financial management, corporate finance, portfolio theory, financial institutions and markets, and investment analysis. Professor Guarino received his B.A. in Political Science, M.B.A. in Finance as well as a graduate certificate in International Business all from Seton Hall University. He also has a Master’s degree in International Relations from the Maxwell School at Syracuse University and received his J.D. from Rutgers University School of Law in Newark.

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