The slippery slope of steel tariffs

Tariffs on imported steel and aluminum were initially ordered by President Trump in March, but subsequently pushed off until June 1. While nothing has been imposed yet, tariffs were top-of-mind for U.S. corporations during first-quarter earnings calls. 

Roughly a third of companies within the S&P 500 mentioned tariffs during their quarterly call, with half of those being unconcerned about the impact of tariffs on their industry, and the other half expecting tariffs to have a negative impact. Mentions were concentrated in the industrials industry, likely due to the fact that it contains many steel input companies that would be taking the biggest hit. 

While the tariffs were initially announced as a measure to create jobs in the struggling steel industry, which has been in decline for 20+ years, the adverse effect of such a move will hurt steel input industries such as automobiles, aerospace and construction. Those industries are estimated to employ 80-times as many people as steel companies. Research by Trade Partnership Worldwide estimates net job losses will total 150,000; for every one job created, five will be lost. Due to the high level of competition around the globe for companies making steel components, some analysts suggest the impact to jobs could be almost immediate as increasing costs make them less competitive.

However, companies tend to be good at restructuring their supply chains to minimize disruption due to tariffs, and that might be truer now than of other periods. U.S. companies have a lot going for them; they have a ton of cash on their balance sheets, corporate earnings have been coming in strong, they just received a huge tax cut and the economy is relatively strong. 

Companies shouldn’t have to lay off workers as a result of the tariffs in the near-term, but that doesn’t mean they won’t. We could also see a scenario in which all of the bonuses and raises companies handed out as a result of tax cuts are not repeated in the future as they try to offset the higher cost of steel inputs. 

Most retrospective analyses of the George W. Bush Administration’s 2002 steel tariffs concluded that they were unnecessarily costly when compared to the jobs they saved, but did not prompt any sort of major economic disaster (see “Steel tariffs case study”). The chart shows that for a year after steel tariffs were imposed, employment in that industry plateaued, but then continued its descent due to a global trade war. President Bush officially lifted the tariffs in December 2003, and steel industry employment again remained steady.

There is also the impact on consumers. Tariffs will inevitably lead to more expensive goods. However, the expectation is that the price increases would be relatively moderate, and the U.S. consumer is very healthy now and likely could handle it. 

Regardless, job losses or increases in the cost of certain goods are not the biggest problem. That would be the ripple effect these tariffs will have if affected countries decide to retaliate by enacting tariffs on American goods, which would hurt all U.S. exporters. Affected countries may retaliate by carefully targeting their tariffs on American goods to cause the utmost economic or political pain in sectors such as agriculture. Beyond that, these measures could undermine the entire system of global trade, which the United States helped build.