Higher prices, layoffs, and economic nosedives — Quartz

 In U.S.

For the last three decades, Donald Trump has ranted that America is getting stiffed on trade. But as president, he’s done little to back up his “America First” slogan—until now.

On Thursday (Mar. 1), the US president announced tariffs of 25% on imported steel and 10% on imported aluminum. The move is aimed at recouping the billions of dollars “lost” each year to other countries as the US imports more than it exports from countries like China and Mexico. Coming on the heels of tariffs on washing machines and solar panels, the new trade barriers may be just the start of a bigger effort to overhaul global trade. Trump is already threatening to slap tariffs on European cars. More ominously still, the president is boasting that his tariffs will ignite a trade war:

Trump’s tariff is good news for US steel and aluminum producers. A tax on imports makes the domestic equivalent relatively cheaper. But it’s bad news for anyone who consumes steel or aluminum, since it makes those metals more expensive. That’s just one of the ways that everyday Americans may lose out as a result of Trump’s proposed trade action, which poses a threat to the very people whose economic interests he claims to champion. And if he succeeds in launching his longed-for trade war, the entire global economy will suffer as a result.

Who pays the price?

While Trump’s announcement may hearten the country’s steel and aluminum producers, it’s bad news for the much bigger sector of the US economy that buys those metals to use them in the goods they produce.

Take steel, for instance, which is used to make cars, cans, trains, and planes. The pillars of American infrastructure are made of steel, from office buildings to bridges; so are the cranes, excavators, and other machines that build those things. Steel equipment extracts the oil and gas needed to produce all this stuff, and forms the pipes through which they flow. US steel-consuming manufacturers dwarf the US steel industry, with more than 6.5 million workers. (The steel industry, meanwhile, employs about 140,000 workers, says Moody’s.)

Facing higher prices for foreign steel under the Trump tariffs, steel consumers have three options. They can absorb the cost and fire workers. They can absorb the cost and lower their profit margin. Or they can pass on the cost to customers.

Most people are worried about the last option. That said, a 25% increase in the price of foreign steel, even if fully transferred to the consumer, probably won’t make everyday canned goods all that more expensive. A can of Campbell’s, a popular American soup brand, has 2.6 cents worth of steel. If the cost of that input rises by 25%, that adds an extra six-tenths of one cent onto the price of soup. Who wouldn’t be willing to pay that?

That’s the logic Wilbur Ross, the US secretary of commerce, is using to beseech the American people to please calm down. In a way, he’s right. The direct effect of the tax is most likely that prices will go up only marginally.

But Ross’ calculus ignores all the possible indirect effects of a tariff. For example, imagine American companies want to switch from using (now more expensive) foreign steel to US steel, which is the point of a tariff in the first place. Can the US steel industry handle the surge in demand? A trade sanction on steel from one of Trump’s predecessors offers some intriguing clues.

Case study: Bush steel tariffs

In 2002, the Bush Administration hastily slapped a tax on foreign steel, ranging from a 30% tariff on sheets to a 15% tariff on bars and rods. At the time, most steel-consuming manufacturers were small businesses, with less than 500 workers. They were what economists call “price takers”—companies too small to demand that customers pay more, for fear of losing out to the competition. These firms rushed to cancel foreign steel orders and buy up American steel.

By April, a month after the tax went into effect, some producers were rationing sheet steel to buyers because their main plants were near capacity and their rolling mills, booked full through June. The US steel industry went from running at 70% capacity to near 100% in just under two years, supplying over 90% of the market, when 80%- 85% was more standard. Ultimately, US steel producers couldn’t meet the demand (pdf).

The end result of all that demand-side pressure? Steel prices soared—spot prices for steel were up more than 60% four months later. A producer price index for steel and iron rose 11% over the next year; by the end of 2004, the index had climbed more than 60%.

In the brief time the Bush tariff was in effect, 200,000 Americans lost their jobs to higher steel prices, according to one analysis. The lost jobs represent about $4 billion in foregone wages. (At the time, only 187,500 workers were employed in the steel industry.)

Inflation… or deflation?

Nowadays US steelmakers supply only two-thirds of what US businesses demand. If US steel consumers were to switch to buying exclusively American, the industry would have to serve 26.9 million metric tons of extra steel a year to keep pace with foreign imports from 2017. America’s steelmakers now sit at about 75% capacity, so the industry has less space to expand than it did in 2002. Much of imported steel is also in the form of products that US factories aren’t equipped to make. American producers will need to adapt production to different grades of steel.

These investments are part of why Campbell’s, for example, suspects its soups will get more expensive. “Any new broad-based tariffs on imported tin plate steel—an insufficient amount of which is produced in the US—will result in higher prices,” said a Campbell’s spokesperson.

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