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Does Trade Theory Back Up Trump’s Steel Tariffs?

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Recent research from the National Bureau of Economic Research has found that Donald Trump’s tariffs have been almost entirely passed onto US consumers—except for his steel tariffs. The study found that effects of the tariffs, apart from Trump’s steel tariffs, contradict trade theory. Trade theory says that tariffs applied by a large country such as the US should force foreign companies to lower their prices. Do the steel tariffs follow trade theory? We’ll explore in this article.

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Trump’s steel tariffs

In March 2018, Trump announced a 25% tariff on steel imports and a 10% tariff on aluminum imports. He imposed the tariffs after two separate investigations by the Commerce Department flagged steel and aluminum imports as a national security threat. Trump, in fact, imposed even harsher tariffs than what the Commerce Department suggested. U.S. Steel Corporation (X) and AK Steel (AKS) fell sharply in 2018 despite the steel tariffs. U.S. Steel closed with losses last year as well and underperformed the broader steel space.

In 2002, then-president George W. Bush also imposed tariffs on steel products. However, he lifted the tariffs in 21 months. To learn more, read Will Trump’s Steel Tariffs Fail Like Bush’s Tariffs.

Trade tensions kicked off in 2018, starting with tariffs on solar panels and washing machines. A global trade war then broke out, with the Trump administration imposing tariffs on steel and aluminum imports from most trading partners. Trump slapped tariffs on billions of dollars of Chinese imports as well and followed up with more tariffs last year. However, in December, some tariffs were eased as part of phase one of a US-China trade deal. The two countries agreed to the trade deal last month.

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Study on tariff impact

Several economists have said that US consumers are paying for the tariffs. However, Trump has said that China is footing the bill. In fact, in May 2019, Trump floated the idea that the tariffs collected on Chinese imports could be used to alleviate global poverty.

The National Bureau of Economic Research’s recent paper shows that US consumers are paying for Trump’s tariffs, except for his steel tariffs, contradicting trade theory. According to trade theory, foreign companies should lower their prices in response to tariffs by a big country. While the study found that foreign producers have lowered steel product prices in response to Trump’s steel tariffs, that’s not the case for other products.

Steel companies and Trump’s tariffs

In its paper, the National Bureau of Economic Research added, “This is likely good news for U.S. firms that demand steel, but bad news for workers hoping that steel tariffs will bring back jobs.” Last year, there were job losses in the US steel industry despite Trump’s tariffs.

Whereas commerce secretary Wilbur Ross defended Trump’s tariffs last month, steel tariffs came under scrutiny after U.S. Steel Corporation said it expects negative EBITDA in the fourth quarter. It also announced capacity curtailments and layoffs. Furthermore, in June 2019, U.S. Steel announced it would idle two US blast furnaces. The company made the announcement at the worst possible time, just as Trump was kicking off his 2020 campaign.

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Does the study arrive at the correct conclusion?

While the study finds Trump’s steel tariffs follow trade theory, that might not necessarily be the case. According to the study, “The data show that U.S. tariffs have caused foreign exporters of steel to substantially lower their prices into the U.S. market. Thus, foreign countries are bearing close to half the cost of the steel tariffs.”

However, foreign producers lowering their steel prices may have been due to steel prices falling globally, and not necessarily Trump’s steel tariffs. Interestingly, the study excluded petroleum imports “because of the sensitivity of oil import values to fluctuations in oil prices, which add a lot of noise.” In my view, it should have also excluded steel products. Steel is a commodity like petroleum, and its import prices vary based on underlying commodity prices.

All said, Trump’s steel tariffs have had a mixed impact on US steel companies’ fortunes. US steel imports have fallen since the tariffs were imposed. However, the fall in global steel prices has more than offset the positive effect of fewer imports. Global steel prices affect US steel prices as well. While Trump’s steel tariffs have helped widen the spread between US and international steel prices, they can not make the US steel industry immune to global developments.

While Wall Street looks pessimistic on the US steel industry, it could be a contrarian bet. To learn more, read Could US Steel Stocks Be a Contra Play in 2020?

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