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Steel Tariffs and U.S. Jobs Revisited

By and ·February 6, 2020
Harvard University and University of California, Davis

The Issue:

It has been nearly two years since the Trump administration first imposed tariffs on steel and aluminum. New data and research are beginning to emerge on the impact that these tariffs, which are taxes on foreign steel and aluminum, have had on steel and other U.S. manufacturing industries. Tariffs are often presented as trading off domestic producer gains against consumer losses, but applying tariffs on goods used as inputs into production can magnify losses as price distortions pass through the supply chain. While the 2018 tariffs did reduce steel imports, a stated goal, they also caused steel prices for U.S. firms to rise, putting downstream U.S. manufacturing industries at a disadvantage relative to foreign competition. The Trump administration has announced that it will now expand tariffs to cover certain derivative products that use steel and aluminum, such as nails, tacks, wire and cables, to protect them against competition from foreign suppliers who do not pay tariffs on steel. So far, the job losses created by putting these steel-using industries at risk appear to be substantial, and well in excess of any jobs that may have emerged in the steel-production industry as a result of the tariffs.

The 2018 tariffs caused steel prices for U.S. firms to rise, putting downstream U.S. manufacturing at a disadvantage relative to foreign competition.

The Facts:

  • Steel tariffs imposed under national security provisions in Section 232 of the Trade Expansion Act of 1962 now have been in place for nearly two years. The 25 percent tariff on steel products was first imposed in March 2018, in response to recommendations from the U.S. Department of Commerce. Canada, Mexico, and the European Union were exempted from the tariffs until the end of May 2018, and the U.S. reached a deal with Canada and Mexico to remove the tariffs in May 2019. South Korea, Australia, Argentina, and Brazil were granted permanent exemptions to the tariffs until December 2019, when the Administration threatened to reinstate steel tariffs against Brazil and Argentina. 
  • Additional Section 232 tariffs that cover derivative products made of steel and aluminum are slated to take effect in days. On January 24, 2020, the Administration announced that further tariffs will be put in place starting on February 8, 2020 to protect against imports of steel-using products like nails, tacks, and parts for cars and tractors. According to the presidential proclamation, the “net effect of the increase of imports of these derivatives has been to erode the customer base for U.S. producers of aluminum and steel,” backfiring against the ultimate goal of protecting aluminum and steel makers. 
  • The steel tariffs were put in place to increase demand for domestic steel, but their impact on employment in steel-producing industries has been muted. The latest data on the number of jobs in production of new steel (NAICS 3311) shows roughly 1,000 more jobs in November 2019 than in March 2018 when the tariffs were implemented (the same increase reported by the U.S. Secretary of Commerce). The tariffs may have led to this increase in steel jobs, as well as prevented some additional steel jobs from disappearing during the recent softening in the global market for steel as trade tensions and other factors weighed on global growth. Even should demand for steel strengthen however, the effect on employment in steel production is likely to be muted by technological innovation. Technological progress plays an important role in displacing workers in steel production, similar to many areas of manufacturing, as new technologies have allowed steel companies to produce more with fewer workers (see here). 
  • Higher domestic steel and aluminum prices have adversely affected other U.S. manufacturing industries that depend on steel as an input to production. About half of the Administration’s 25 percent tariff on steel passed through into U.S. domestic prices of steel according to a recent study by researchers from Columbia University, the Federal Reserve Bank of New York, and Princeton University. This increase in the cost of steel in the U.S. puts U.S. exporters at a disadvantage, as they compete against foreign rivals who pay the lower price of steel in the global market when buying materials for production. Indeed, increased costs of inputs into production due to recent U.S. tariffs, including steel, is associated with lower growth in export sales for U.S. firms according to recent research by economists at the Federal Reserve Board of Governors, the U.S. Census Bureau, and the University of Michigan. The increase in the cost of steel also puts U.S. firms at a disadvantage when they compete with foreign rivals at home, as described in the administration’s announcement of the additional Section 232 tariffs.
  • U.S. firms that make products using steel have been seeking exemptions from the Section 232 tariffs to escape the cost disadvantage. Since the steel tariffs were put in place, hundreds of companies throughout the country have filed nearly 100,000 requests for exemptions from steel tariffs. The process has not been smooth. About one-third of the requests were still pending as of December, with bipartisan concern over lack of transparency contributing to "the appearance of improper influence" in the approvals.
  • Industries that use steel most intensively are at the highest risk of job losses and plant relocations due to the imposition of steel tariffs. There are more than 12 million jobs in industries that use steel in their production process. Almost 2 million of these jobs are in industries that use steel intensively, where “intensively” means that steel inputs represent 5 percent or more of the industry’s total (input) requirements. This criterion includes both the industry’s direct use of steel and its indirect use through inputs made of steel, like machinery and equipment. Steel-intensive U.S. industries include manufacturers of auto parts and motorcycles; household appliances; farm machinery; machinery used in mining, oil extraction, and construction; batteries; and military vehicles. (See our previous EconoFact memo for more.) 
  • What has been the impact of steel tariffs on jobs in these industries thus far? Estimates from a study released in December by Aaron Flaaen and Justin Pierce at the Federal Reserve Board of Governors show that by mid-2019, increased input costs due to the steel and aluminum tariffs are associated with 0.6 percent fewer jobs in the manufacturing sector than would have been the case without the tariffs. We compute that this amounts to about 75,000 fewer jobs in manufacturing attributable to the March 2018 tariffs on steel and aluminum, not counting additional losses among U.S. exporters facing tariffs other countries levied in retaliation. It is not yet possible to parse out exactly what fraction of this decline is due to steel versus the aluminum tariffs, but the higher duty on steel products (25 percent) compared to aluminum (10 percent), and observations that filings for exclusion from the steel tariffs far outpace filings for exclusions for aluminum, suggests that a substantial portion of the job losses are driven by steel tariffs. Additional tariffs aimed at preventing imports of goods made with steel and aluminum that manufacturers turned to as substitutes after the tariffs went into effect are likely to magnify these job losses.
  • Increased uncertainty brought about by the rounds of tariffs and retaliation provides another channel by which tariffs can have negative impacts on steel-related industries. Estimates from economists at the Federal Reserve Board of Governors, the International Monetary Fund, the OECD, and the World Bank, indicate that tariffs and uncertainty from the trade war have weighed on investment growth and expectations of global economic growth. Weakness in investment, industrial production, and in global growth more generally appear to be depressing the global demand for steel and dampening steel prices. A recent study by an economist at New York University has shown a decline in domestic purchases of autos in U.S. counties most affected by retaliatory tariffs in the trade war. The automotive industry is a major user of steel as an input into production.
  • Using tariffs to protect the domestic steel industry fails to address the underlying problem of global overcapacity, which is the biggest challenge to the steel industry in the United States and across the world. Previous administrations have tried to address this problem; President George W. Bush levied tariffs on a range of steel imports and focused attention on multilateral negotiations through the OECD, while the Obama Administration used a multi-pronged approach, with trade acts in 2015 to enable tighter enforcement of anti-dumping rules and countervailing duties. The Obama Administration also intensified bilateral and multilateral efforts, helping establish the OECD Global Forum on Steel Excess Capacity. Although it initially was critical of the Forum, the Trump Administration more recently has supported its work and Japan’s effort to prevent the dissolution of the forum, following China’s planned exit. The aluminum industry has called for a similar multilateral forum to address market distortions.

What this Means:

Tariffs on goods used by a large number of U.S. firms, like steel, make it difficult for U.S. producers to compete against foreign rivals, both at home and in export markets. Tariffs on steel may have led to an increase of roughly 1,000 jobs in steel production. However, increased costs of inputs facing U.S. firms relative to foreign rivals due to the Section 232 tariffs on steel and aluminum likely have resulted in 75,000 fewer manufacturing jobs in firms where steel or aluminum are an input into production. In addition, depressed global demand for durable consumption and investment goods related to policy uncertainty and increased costs from the trade war may be dampening demand for steel and weighing on steel prices. Tariffs on additional inputs into production made with steel are likely to exacerbate these adverse effects on the manufacturing sector.

Topics:

International Trade / Manufacturing / tariffs
Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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