by Chris Kuehl, managing director, Armada Corporate Intelligence
There are few things more certain than death and taxes, unless it is a debate over one or the other. The plan to impose stiff tariffs on steel imported into the US has been discussed and considered and argued over for years – decades even. Once upon a time, the US was perhaps the world’s biggest steel producer, but many things changed in that industry and there was too often a delay in responding and too many strategic mistakes.
It has never been a single-issue problem. It is true that labor costs have been a factor, and it is true that environmental laws have been a factor. It also is true that many other countries have sought to bolster their own capabilities when it comes to steel output, as this commodity has long been wrapped around a host of other issues. Nations do not want to be vulnerable to others when it comes to steel supply; this is an industry that still accounts for a lot of jobs – but not as many as in the past. It is a point of national pride to have a thriving domestic steel sector, and many governments have been subsidizing and protecting that sector for many years.
Over the last decade or two, the US steel sector has been under a great deal of stress for a variety of reasons. The costs of production are higher than in rival producer nations; there has been a steady decline in the amount of available scrap; and steel users have started to shift to other products (aluminum in cars and the growth of plastics). The recession hit the steel sector hard, with declines in many key steel-consuming sectors, such as vehicle manufacturing, construction and the like. That demand is only now starting to come back.
Right now, there are nine operating integrated steel mills in the US – down from 13 in the year 2000. There are about 112 mini-mills in the US, which use scrap metal as opposed to iron ore. The mini-mill sector accounts for about 60 percent of all the steel produced in the US, and the sector’s greatest challenge is that scrap is a harvestable resource – and one that is dwindling. There is less metal in vehicles to begin with, and they are not being scrapped as aggressively as in the past. The slowdown in construction activity has meant fewer tear-downs, and severe restrictions remain on scrapping ships in the US, as there are all manner of environmental hazards with which to contend.
These are the factors that led steel companies to seek some kind of shelter from global competition. The current drive to impose tariffs would not be the first time this tactic has been explored. Under George W. Bush, a 25 percent tariff was imposed on imported steel, but the effort was abandoned just two years later, as it was doing far more harm than good to the US economy. The two-year experiment created a host of issues for the US and invited retaliation from the affected countries – most of which were and are US allies.
The current effort is grounded in national security concerns (and that was the rationale used in 2002 as well). The assertion is that a country’s national security depends on access to steel – its own steel. That assertion is grounded in the kind of industrial production a country would need to engage in should there be a major conflict. Steel would be needed for ships and tanks and trucks and all manner of construction. Of course, there are many other commodities that would require similar protection these days – everything from aluminum to lithium and cobalt and all those rare earth minerals that are key to electronics.
The majority of the steel that comes into the US is from nations that are either allies or at least friendly to the US. The top exporter to the US is Canada (17 percent) and then Brazil (14 percent), South Korea (10 percent), Mexico (9 percent), Russia (8 percent), Turkey (8 percent), Japan (5 percent), Taiwan (3 percent), Germany (3 percent) and India (3 percent). The top 10 exporters to the US account for 80 percent of the steel the US brings in. The other 20 percent is spread among nations that export just a little to the US.
China has ostensibly been the target as far as limiting steel imports to the US, and it is the nation that always mentioned is as an unfair competitor. It is accused of dumping steel and cheating on a wide variety of global steel rules, but the reality is that China is not even in the top 15 suppliers of steel to the US. The bottom line is that imposing a stiff tariff would affect US allies and friends far more than it would impact nations of which the US is suspicious.
The impact of a steel tariff on the US domestic economy
The rationale behind these tariffs is threefold: to provide a boost to the US economy, to create (or at least to preserve) jobs and to support the businesses involved in steel production. Questions exist as to how effective the tariff would be in terms of achieving these goals, but the bigger issue for the US economy is that this tariff would have a profound and negative impact on those industries that use steel.
Studies from a variety of think tanks and government agencies assert that for every steel-specific job in the US, there are 60 jobs in steel-using industries – automotive, construction, machinery manufacturing and the like. It is hard to estimate the impact of something that has not happened as yet, and those who have tried must make assumptions that may or may not be accurate. The proponents of the tariff assert the impact will be minor, and those who oppose it can come up with catastrophic numbers.
The best assessment is to look back at the 2002 tariff as guidance. Two of the hardest-hit states were Michigan and Ohio, which lost 9,829 and 10,553 jobs, respectively. Both states rely heavily on steel to manufacture a variety of products. It is likely that several thousand jobs were preserved in states such as Indiana and Illinois, where the steel operations exist. On balance, the data showed that five time more jobs were lost than were gained or protected due to high-priced steel.
There is no doubt that the US steel industry has been hit hard by waves of unfair competition over the last few decades. There are countries that overtly subsidize the production of steel, and others that deliberately overproduce with the intent of dumping that excess capacity. China has been at the center of these debates, but it is not the only county engaged in these tactics. China consumed the bulk of the steel it produced in the days of double-digit expansion and thousands of projects all over the country. Every region wanted its own steel operation, and China had no issue with this, as it needed the jobs and the steel. Since then, the construction sector has slowed, and China no longer needs the steel. This has not stopped these regions from producing, as they still need to preserve the jobs.
The tariffs have been a political football in the last few months, with exemptions based on whether the countries are helping or hurting the US effort to control China. The latest deadline was down to the wire and then extended for another month. The uncertainty has been taking its toll, and steel prices have risen sharply – despite the fact that 85 percent of the steel imports and roughly 90 percent of aluminum imports are still taking place. The steel makers in the US are hedging their bets to some degree and seem to expect the tariff regime to be in place at some point. Meanwhile, the latest data on manufacturing show a sharp slowdown based on higher prices for steel and aluminum, and lately of oil as well.
Chris Kuehl is managing director of Armada Corporate Intelligence. Founded by Keith Prather and Chris Kuehl in January 2001, Armada began as a competitive intelligence firm, grounded in the discipline of gathering, analyzing and disseminating intelligence. Today, Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations.
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