A hefty tariff on steel and aluminum U.S. President Donald Trump plans to enforce could backfire on the broader U.S. economy, trade experts warned.
Trump wants to impose a 25% steel and 10% aluminum tariff, according to media reports, stemming from a national security issues review of the two sectors by the U.S. Department of Commerce.
The implication of imposing the tariff deeply divides U.S. industry leaders and experts, raising fears of a trade war.
Frank Lavin, a former Commerce Department undersecretary for former President George W. Bush, expressed doubts that a broad tariff would work the way the Trump administration wants.
"My first word of advice to any President, and I used to do this when I was in government, is be careful about this," Lavin said. The former undersecretary, as others for this story, spoke before Trump commented on plans to enforce a tariff.
"It's a textbook case of arguably good intentions that can take you the wrong way."
Lavin said the U.S. may shoot itself in the foot by lowering the competitiveness of local producers that depend on steel and aluminum imports for input by increasing their costs with a tariff. He acknowledged that the steel and aluminum industries may benefit directly from the move, but expressed concerns that the effect on the broader U.S. economy could be negative.
Kimberly Korbel, the executive director of the American Wire Producers Association, said potential tariffs that raise input costs in the U.S. would hurt manufacturers and kill business.
"We're extremely concerned that the draconian measures that are recommended by [Commerce Secretary Wilbur Ross] are going to severely damage the U.S. economy and have the opposite effect than President Trump has intended," Korbel said. "Our opinion, if the President wants to do a deal, the right deal, is to address global steel overcapacity in some way that's not going to harm the rest of the downstream industries."
Like Lavin, Korbel said that making some U.S. products more expensive with higher-cost steel and aluminum inputs will put U.S. industries at a disadvantage to foreign competition, including from China. She added that the U.S. steel and aluminum industries are largely dependent on local manufacturers as customers, but the industries may end up losing manufacturers as buyers if, with higher prices, they are forced to close shop.
"So where are their customers going to come from if they put us out of business?" she asked, adding that the tariffs would hurt steel and aluminum producers "without a doubt" as a result of damaging their own customers.
Persistent trade issue
Philip Bell, the president of the U.S. Steel Manufacturers Association, sees a tariff as potentially supporting local industry and addressing imbalances in the global metals market. In the U.S., China is widely viewed as overproducing metals such as steel and aluminum with government support, putting more market-driven enterprises at a disadvantage. It is a long-standing issue between the trading partners.
The U.S. accounts for about 5% of world crude steel production, while China dominates the sector, accounting for close to half of world production. The situation is similar for aluminum.
The issue is not simply a matter of direct exports to the U.S. from China, which is not one of the principal sources of raw steel and aluminum for the U.S. However, because of China's massive output relative to other countries, some see its industry as depressing prices and supporting cheap manufacturing in products that undercut U.S. companies.
"I think that the three remedy proposals will help with the persistent problem despite efforts to deal with overcapacity," Bell said, referring to Department of Commerce recommendations that included broad and more targeted tariff scenarios. "We still have a situation where steel producers are handicapped."
Jean Kemp, the Steel Manufacturers Association's senior vice president of government affairs and trade policy, expressed concern regarding the possibility of negative consequences for U.S. manufacturers and stressed the importance of preventing the U.S. steel industry from being hollowed out.
"We care about our customers," Kemp said. "We care about the whole supply chain. But we do not believe that low-priced steel resulting in unsustainable low-capacity utilization in the United States is the answer."
A key concern for trade leaders and for some past Department of Commerce officials is that a broad tariff could not only make U.S. industry less competitive by denying cheaper steel and aluminum from global markets but could also lead to trade retaliation.
Stefan Selig, a former undersecretary with the Department of Commerce during the Obama administration, sees the need for action on metal overcapacity in China but not necessarily through a tariff. He warned that the United States' trading partners may hit back where it hurts the most if the tariff is seen as unfair. A broad tariff, without exceptions, would also weigh most heavily on close trading partners such as Canada.
"What happens if there's retaliation?" he asked. "Obviously, the Chinese market is extraordinarily important for a whole host of U.S. industries. And you could imagine if we put on some form of protectionist measure that has a significant impact on China, they say 'Congratulations. We're going to do the same thing for soy beans, or sorghum, or something else.'"
Korbel also pointed to the potential for retaliation through the agricultural sector, where the U.S. is an important exporter.
"We have been hearing that a lot of our international trading partners have already communicated to the White House that the first retaliation that will occur are U.S. agricultural exports," Korbel said.
Lavin expects the response of other countries to depend largely on how fair they view the U.S. action. "I think the world watches when the United States acts, and we all live with the consequences," he said. "To the extent that the U.S. complaint is valid, we [may] get a better response."
He worries that the world may hit back if they see the tariff as unfair. "That gives other countries a green light to respond in kind, to say 'you're simply taking an unfriendly policy toward us,'" he said.