Numbers: The Steel Tariffs

I plan to make articles about ‘numbers’ a regular feature on this blog. The world is a complex place, but I believe that if we can examine it in terms of numbers and statistics it makes it somewhat easier to understand. I don’t want anybody to take my articles as being the final word on any of these subjects. I have to harvest my numbers from the Internet from the best sources that I can find. That is not however, a guarantee that they are completely accurate. But I will never knowingly put up something that is inaccurate.

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In the spirit of science, if anybody believes that there are problems with my numbers, I would welcome any feedback and I would be more than willing to publish retractions and corrections as required.

I have to say that doing the research for this article made me realize just how difficult it is to find good information. I tried to use the International Trade Administration, US Labor Department, and the steel industry association for the data. But even there the difference is that I was seeing between their numbers and what was published in articles from sources I would consider to be fairly reliable, like Reuters and Bloomberg, was not insignificant. And it was very difficult to find data that is consistent. It was very common to find articles talking about the same subject, that used different numbers. In one example, I found that an article, when talking about the total amount of steel imported, were talking about a sub-set of steel (flat steel), rather than all steel (flat, round, stainless, etc.). That kind of thing. However, I am confident the big picture portrayed in this article is correct.

In this article I look specifically  at the steel industry in the United States. Although the Trump tariffs affect both steel and aluminum, I will only address the steel for the sake of simplicity.

So, first of all, what is the steel industry? And what are the basic numbers that define the steel industry in the United States?

Steel is iron mixed with a variety of other elements (primarily carbon) in minute quantities. These quantities drastically improve the characteristics of the material in terms of strength, malleability, corrosion resistance, etc. It is used extensively all around the world in a myriad of industries, such as construction, automobile, manufacturing, etc.

Domestic_Vs_Import_Steel.png

How much steel does the U.S. use? And how much of our requirements do we import?

So, our steel imports are approximately 44.1% of our total requirements.

Global steel production is approximately 1.7 billion metric tons, almost 50% of which is produced by China. So, the U.S. only uses approximately 6.9% of the world’s output although it is the world’s largest importer of steel. But although we are the largest importer, the amount we import is only 2.1% of the global production.

Who do we import from?

TopSteelImporters.png

The % is based on total imports of 35 million metric tons of steel for 2017. As you can see, China, one of the biggest suppliers of steel, doesn’t even make the top ten. It is ranked #11.

Which industries use steel in the United States?

SteelUseByIndustry.png

 

What I would note here is, that if the defense and military category only uses 3% of our total steel demand, I am unsure as to how the steel imports comprise a threat to national security.

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What portion of the working population is employed by the steel industry?

Now look at the overall employment breakdown.

‘Goods-producing, excluding agriculture’ is that the category that includes the steel and aluminum industries. Below are the breakdowns with numbers.

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Below are the sector breakdowns with numbers rather than percentages.

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The steel industry employs about 0.75% of the people in its sector (147,000 out of 19.6 million). At the risk of grossly oversimplifying, the industries in that sector (goods-producing) that employ the other 99.25% of the 19.6 million people, are at risk from higher steel prices. Why? Because a preponderance of them such as construction, auto manufacturing, etc. USE steel as a component material. From an economic standpoint, raising the prices of aluminum and steel will cause these industries (which have millions of employees) to take cost-cutting measures. And what cost-cutting measures do industries normally take? They cut their payrolls. Or they will raise their prices. Or a combination of both.

Some estimates I have seen (Business Insider) project that although employment in the steel and aluminum industries might increase by about 26,000 jobs, it might cost as much as 495,000 jobs in the rest of the U.S. economy. Other, lower estimates still project 100,000 – 150,000 jobs being lost if steel and aluminum prices rise. Economics is by no means an exact science. It will be interesting to see what actually happens.

Trump’s punitive tariffs are to be 25% on imported steel. Including against our closest allies; Canada, the European Union, and Mexico (who between them, supply approximately 50% of our steel imports). Factoids to put things in perspective; the average tariff rates on goods EU-US is less than 3%. Canada, the EU, and Mexico are the United States 3rd, 1st, and 4th largest trading partners respectively.

I would suggest that the threadbare excuse of national security is utter bollocks (Trump wrote that he agreed with Commerce Secretary Wilbur Ross’ finding “that steel mill articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States."). There is portion of the Bloomberg Opinon article (link at bottom of this article), that suggests that Wilbur Ross should not be counted on for providing objective input.

Elementary common sense would suggest that national security is enhanced by having good relationships with one’s trading partners, especially one’s allies and neighbors. It is far more difficult to have a conflict with somebody that you do a lot of business with than with an entity that you are in conflict with over trade. I am hoping that nobody needs to have that explained any further.

What is next? Canada, the European Union, and Mexico are all threatening retaliatory tariffs on billions of dollars’ worth of goods that they normally import from the United States. We’ll have to see what happens.

There is in fact, a problem with global steel markets. Overcapacity. Too many factories, making too much steel. But the real culprit is China and not our main trading partners. Our allies. The problem is a complex one, I don’t dispute that. But beating up your closest allies with tariffs instead of working with them to try to bring China into line… I have no other words for that other than “rank stupidity”. Especially when China is only our 11th largest steel importer?

These tariffs will drive up the overall cost of steel and aluminum. And for the steel and aluminum industries in the United States, that of course will be beneficial for them, because they will be able to charge more for their output. The stock prices for those companies has already risen.

These tariffs, at least right now, only affect about $US46 billion of imports (Approximately 2% of the United States total imports). It is a very narrow tariff, affecting only steel and aluminum.

But although this is very narrow, the numbers above don’t bear out WHY this is being done. The national security reason just doesn’t fly. And our trading partners have stated that loudly and unequivocally.

What worries me is that Trump’s behavior is screaming to all our long-term allies that America can no longer be trusted. I have to ask how portraying America as an un-trustworthy ally bolsters our national security? As slow, inefficient, and sometimes ineffective as it is, the years since World War II have essentially relied on a multilateral framework for negotiations on trade. What Trump is doing, is saying ‘To hell with that, I (the United States) I’m going to make unilateral decisions about what I think is okay and what I think is not.’ And even a very shallow glance at the news will tell anybody that a sizable number of people inside the US government, not to mention many economists, disagree totally with what he is doing.

I would note that Trump likes making unilateral decisions far more than creating consensus and getting the Congress and the Senate on board. I think this is because his ego is so huge that he recoils from the idea that he has to explain anything to anybody. He simply wants to dictate actions and then force everybody to fall in line with his whims. So what he tries to do is find ways to get around the democratic process. And that is exactly what he did here. The legal basis cited in Trump's tariff order is Section 232 of the Trade Expansion Act of 1962 which under certain circumstances allows the president to impose tariffs based on the recommendation from the U.S. Secretary of Commerce if "an article is being imported into the United States in such quantities or under such circumstances as to threaten or impair the national security." This section is rarely used and has never been invoked since the World Trade Organization was established in 1995. He must have a team of people actively figuring out what he can do by fiat, without having to deal with all the resistance he is meeting in the Congress and the Senate.

https://www.lawfareblog.com/america-trades-down-legal-consequences-president-trumps-tariffs

I have seen a couple of articles that have compared what Trump is doing to the Smoot-Hawley tariff act of 1930 (which I wrote about in an earlier article), which was disastrous for the world as a whole as well as the United States. Comparisons between 2018 and 1930 must be made very cautiously of course, but still. “Those who do not understand history are doomed to repeat it”. I’m sure that’s probably not the exact quote but I’m sure my readers get the drift.

I have to wonder if he and his coterie of advisors really comprehend what a trade war will do to all sides? Does he not realize that trade wars are a no-win scenario? Presumably, going by his tweet of “Trade wars are good, and easy to win” … not.

Going back to the steel tariff issue, if you look at the employment breakdown by industry sector, it is blindingly clear that America is increasingly a service economy and is moving away from being a goods producing economy. When I was on the Bureau of Labor website and looking at the data it is clear that this is an consistent long-term trend. I.e. that the size of the service sector is increasing and that of the goods producing sector is decreasing. I am not saying that that is either good or bad. I do think it is a clear demonstration of comparative advantage and global trade. The United States is excellent in terms of providing service. It has enormous amounts of intellectual and human capital, and a work ethic that really knows how to deliver quality products (service as a product). Other countries are better (more efficient) at producing goods. Comparative advantage at work.

A few last quotes and links.

Greater demand for domestic steel may have a muted effect on employment in steel production because of technological innovation. Technological progress has played an important role in displacing workers in steel production, just as it has in many areas of manufacturing. A recent study (also summarized here) shows that while the U.S. steel industry shed about three-quarters of its jobs between 1962 and 2005, output per worker quintupled—largely due to a new production technology called minimills. The authors observe that this innovation has made “the steel sector one of the fastest growing of the manufacturing industries over the last three decades, behind only the computer software and equipment industries (p.132),” at the same time steel employment has declined. Indeed, even between 2006 and 2016, employment in steel production fell more than 10 percent, to 140,000 workers, while output per worker increased more than 20 percent, according to data from the U.S. Bureau of Labor Statistics. Thus, even if trade protection leads to increased domestic production, increases in employment may be far less than many hope.”

https://www.bloomberg.com/view/articles/2018-03-02/steel-tariffs-talk-ignores-effects-on-manufacturing-jobs

https://thistimeitisdifferent.com/us-trade-tariff-march-2018

And one parting shot … In my opinion, every person in the senior levels of government, and all politicians (in any country), should have a required, testable level of competence and knowledge of basic economic theory. And as can be seen by these lamentable protectionist actions carried out by our commander-in-chief just recently, it is absolutely clear that such is not the case.

The Great Courses Plus has two or three excellent courses on basic economics. Maybe if I bought a subscription for the Trump administration?

 If I had won that lottery of $550 million recently, I think I would have bought several million of these T-shirts for distribution to the population across the U.S. - I'm sure for that kind of bulk I could have gotten a significant discount :-) ... pun intended ... Plus a special distribution for all employees on Capitol Hill.

If I had won that lottery of $550 million recently, I think I would have bought several million of these T-shirts for distribution to the population across the U.S. - I'm sure for that kind of bulk I could have gotten a significant discount :-) ... pun intended ... Plus a special distribution for all employees on Capitol Hill.