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In Focus: Steel Tariffs to Prevent U.S. Economic Growth

The recently enacted tariffs on steel and aluminum have created an uncertain investment climate for both domestic and foreign firms, causing companies to rethink their supply chain strategies and put their expansion plans on hold.

Q2 2018
In an aggressive trade move, the White House announced and enforced a 25 percent tariff on foreign-made steel and 10 percent tariff on aluminum. Reaction has been fierce from U.S. trading partners to international companies with large supply chains.

Canada, Mexico, and the European Union (EU) received temporary exemptions, which expired June 1. In retaliation, the EU has said it will issue a 10-page list of tariffs on U.S. products including bourbon, motorcycles, and food products. Mexico responded with promising tariffs on U.S. exports including pork bellies, apples, cranberries, grapes, certain cheeses, and various types of steel. Canada also followed suit with a $12.8 billion surtax on American steel, aluminum, coffee, candy, pizza, and quiche.

China, who is also involved in another trade negotiation with the U.S., was not granted an exemption and took its case to the World Trade Organization (WTO). The EU, Canada, and Mexico have joined this complaint along with Russia, Hong Kong, and others. India has also filed its own retaliation claim seeking to recoup $31 million levied on aluminum exports and $134 million on steel.

Korea, Australia, Argentina, and Brazil have secured permanent exemptions upon modifying their trade agreements with the U.S.

Real Issues
Many are speculating the tariffs were announced to spur the renegotiations of NAFTA. Whatever the reason, some real issues are presented.

For starters, does the U.S. economy truly benefit from these tariffs? The steel industry is touting job creation, but the actual numbers may tell a different story. While some steelmakers have already spoken out about adding jobs, other producers that rely on specialty steel products not made in the U.S. have pointed out that job loss is inevitable.
Barry Zekelman, executive chairman and CEO of Zekelman Industries and Stephen Gray, CEO of Gray Construction, discuss their reactions to President Trump’s decision to impose tariffs on allies such as Canada.
Research shows steelmakers are currently comprised of some 160,000 jobs. Compare this to the more than 12 million jobs that make up the manufacturing sector and over seven million that are in the construction industry, both of which rely heavily on steel. Trade Partnerships Worldwide estimates some 26,000 would be gained from the tariffs but more than 495,000 would be lost.

While some steelmakers have already spoken out about adding jobs, other producers that rely on specialty steel products not made in the U.S. have pointed out that job loss is inevitable. Volkswagen’s Chief Financial Officer Frank Witter indicated the tariffs create a “complicated matter.” He explained how the U.S. and other markets are important, but given their existing contracts and expectations, short-term flexibility in their supply chain is limited.

A spokesperson for Hyundai also pointed out that the tariffs could have a “negative impact” on their U.S. operations and further expansions. As a result, they are forced to rethink their production strategy.

Of significant concern is the impact the tariffs pose on foreign direct investment (FDI). More than 70 percent of Gray Construction’s current business is with international customers. Could the tariffs discourage further investment and expansions from international companies? The answer is unknown at this point.

The U.S. has established itself as a destination for new investments with factors ranging from the U.S. consumer to the stability of American business climate. The recent passing of the Tax Cuts and Jobs Act helped to advance this establishment, and manufacturers are already responding by reinvesting in the economy.

The tariff initiative, on the other hand, could push the U.S. off track and result in businesses feeling forced to invest, as opposed to voluntarily wanting to be part of the American business community.

An Uncertain Future
As an industrial engineering, architecture, and construction company that utilizes 100 percent of domestic steel, we’ve already been notified that steel prices are increasing. This translates into a lot of uncertainty. Granted, the full percentage of the tariff won’t be felt in total project cost, but it does have an effect.

Gray has implemented a mitigation plan that strategically accounts for potential steel price increases to prevent a total cost impact on the project. In a proactive approach to the pricing increases, we are engaging in open dialogue with our customers to communicate the realities of the tariffs. Our goal is to ultimately meet our customer expectations with as little impact as possible on their projects.

The greatest risk regarding the tariffs is simply the doubt and insecurity that is influencing further investment. This is a real problem and could have a detrimental effect on the U.S. economy for years to come.

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