As of this week, we finally have a prospective date for tariffs on steel, and mainstream financial news media is starting to pick up on what could be an impending disaster for U.S. manufacturing. If tariffs on steel imports go into effect, car and plane manufacturers and domestic brick and mortar retailers are going to take a big hit, since these are leading U.S. exports.
The date is April 11, when President Donald Trump must make a decision regarding the national security application of Section 232 of the Trade Expansion Act of 1962. Section 232 of the Trade Expansion Act says the following:
“For the purposes of this section, the Director and the President shall, in the light of the requirements of national security and without excluding other relevant factors, give consideration to domestic production needed for projected national defense requirements, the capacity of domestic industries to meet such requirements, existing and anticipated availabilities of the human resources…”
Passed at the height of the Cold War, specifically five days before the Cuban Missile Crisis nearly destroyed the planet, the objective of this section of the Act was to preserve domestic industries that would be essential to any war effort against the Soviet Union. Now, Trump is looking to use it in order to impose tariffs against potentially every country in the world in order to balance the trade deficit, which he believes is a national security issue.
This move is a bit strange if predictable, given that Trump seems to be OK with record federal deficits of over $1 trillion a year, which does not seem to be a national security concern for him.
In any case, what happens if steel tariffs pass? The price of steel will go up for American manufacturers and consumers. Manufacturers who import steel will see their costs rise, and they will have to cut costs elsewhere in order to balance out. This means fewer jobs in industries that import steel.
The largest of these industries are car manufacturers like Ford Motor (F, Financial) and General Motors (GM, Financial), companies which also rely heavily on low interest rates to keep their enormous debts sustainable. Passenger cars also happen to be the biggest U.S. export, making Ford and GM possibly direct targets of retaliatory tariffs by other countries if steel tariffs are passed by the Trump Administration.
Steel tariffs then, are a two-pronged attack on American manufacturing jobs. They will at the same time raise the cost of manufacturing and expose the passenger car industry to direct retaliation from other countries.
For American consumers, the prices of anything containing steel will also go up, whether that steel is imported or not. This will harm brick and mortar retailers especially, who are already reeling from years of competition with Amazon.com Inc. (AMZN) and other internet retail giants.
Looping back to national security, rising prices will show up in the Consumer Price Index and push inflation numbers higher, which will in turn push interest rates higher and faster than they would otherwise rise, hampering the Federal government’s ability to borrow over $1 trillion dollars a year, a low cost through the end of Trump’s first term.
Yes, domestic steel manufacturers companies like American Steel Corp (X, Financial) and AK Steel Holding Corp. (AKS, Financial) will see a boom, which is why their stocks skyrocketed last week. But these gains will be at the expense of other U.S. manufacturers that rely on cheap steel.
Disclosure: No positions.
