11 Oct

Trump Steel Tariffs: Will History Repeat Itself?

WRITTEN BY Mohit Oberoi, CFA
  • Last year, President Trump slapped a 25% tariff on US steel imports. The steel tariffs were expected to help the domestic industry.
  • More than 18 months into the tariffs, the results look mixed. The initial euphoria over President Trump’s steel tariffs has fizzled away. In 2002, President Bush also imposed tariffs on steel imports. However, the decision was reversed within two years.

Trump steel tariffs

President Trump imposed steel tariffs more than 18 months ago. He imposed the tariffs under Section 232 of the Trade Expansion Act of 1962. The Section gives the president the power to impose tariffs on national security considerations. With the tariffs, the Department of Commerce aimed to bring down steel imports and lift domestic steel production. As we look through the rearview mirror, President Trump’s steel tariffs had a mixed impact.

US steel imports and production

US steel imports have come down sharply since the tariffs. After falling last year, imports have fallen YoY (year-over-year) in the first eight months of 2019. According to the World Steel Association, US steel production has risen 4.1% YoY in the first eight months of the year. Last year, Nucor (NUE) and Steel Dynamics (STLD) announced new greenfield plants. U.S. Steel (X) also restarted two of its US blast furnaces. Nucor and Steel Dynamics posted record earnings last year. US steel prices reached a decade high in the first half of the year. U.S. Steel and AK Steel also reported a YoY rise in their respective 2018 earnings. Notably, that’s the brighter side of the tariffs.

Darker side of Trump’s steel tariffs

Now, we’ll discuss the darker side of President Trump’s steel tariffs. The tariffs led to a spike in US steel prices. While higher steel prices lifted US steel companies’ earnings, they had a negative impact on downstream steel users’ competitiveness. Higher input costs impacted automotive companies like Ford (F) and General Motors (GM). After spiking in the first half of 2018, US steel prices have fallen sharply. Falling steel prices have a negative impact on steel companies’ earnings. US steel companies’ earnings peaked in the third quarter of 2018. Since then, the companies’ earnings have fallen sequentially. Last year’s plant restarts have given way to plant closures. U.S. Steel and ArcelorMittal (MT) have curtailed some of their US facilities this year amid falling steel prices.

Less US steel production growth 

The US steel industry’s capacity utilization ratio has fallen below 80%. With the tariffs, the Department of Commerce intended to increase the ratio to 80%. The growth rate has slowed since the initial spike in US steel production. In August, US steel production increased 0.4% YoY. For US steel production, the growth has lagged global steel production growth this year. However, all of these negatives aren’t exactly due to tariffs. That said, President Trump’s trade war is one of the reasons behind sagging global manufacturing activity. Lower manufacturing activity impacts steel end-user demand.

President Bush tried steel tariffs too

In 2002, President Bush also imposed steel tariffs. However, the decision was reversed within two years. As things stand today, President Trump might not lift the tariffs. However, the tariffs have been eased gradually, especially with the exemption for Canada and Mexico. As the Trump administration moves forward on trade deals with other countries, it might have to relax the steel tariffs. Incidentally, Section 232 tariffs were among the major stumbling blocks in USMCA.

Will history repeat itself? Will President Trump lift the steel tariffs like President Bush? The steel tariffs will likely remain due to President Trump’s support base. There are several differences between President Trump’s steel tariffs and President Bush’s steel tariffs. Read Will Trump’s Steel Tariffs Fail Like Bush’s Tariffs? to learn more.

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