U.S. tariffs on steel and aluminum imports will apply to all countries including Canada
Shakespeare immortalized March 15 as the Ides of March, the date of Julius Caesar’s assassination. President Donald Trump on March 1 stuck a knife into the world trade regime by announcing he would impose tariffs on imports of steel and aluminum. He further said the tariffs would be in effect for a long period. Specifically, he wants to impose a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminum imports. The tariffs will apply to all countries including Canada and Mexico.
The U.S. Department of Commerce previously set out options from which Trump could choose. One option was a global tariff of 24 per cent on all steel imports and a global tariff of around 8 per cent on all aluminum imports.
A second option was a 23.6 per cent tariff on imports from select countries, excluding Canada.
A third alternative was a global quota on imports of steel and aluminum equal to around 87 per cent of existing imports. The commerce department recommended these options after concluding that imported metal threatened U.S. national security by degrading America’s industrial base.
So what’s it all mean for Canadians?
By choosing to impose a global tariff, the Trump administration has made another provocative trade move against Canada, its largest trade partner. Prior to making his formal announcement of the new tariffs, President Trump assured Americans that foreign exporters would “eat a lot of the tax” because they want to keep their people working. His assurance is highly questionable. Total world steel production in 2016 was around 1,630 million metric tonnes, while U.S. imports amounted to around 30 million metric tonnes. Hence, U.S. imports of steel account for less than 2 per cent of world output.
This makes the U.S. a “price-taker” in the steel market. Economists identify a price-taker as a participant in a market with too small a share of that market to influence price by the amount it buys. A similar conclusion can be drawn for U.S. imports of aluminum.
In short, since U.S. tariffs increase the cost of supplying the U.S. market, U.S. buyers will pay higher prices for steel and aluminum. Indeed, if Trump’s dream of having more domestic production of steel and aluminum is to come true, domestic prices for those products must increase. Excess capacity in the U.S. steel and aluminum industries reflects the fact that the prices received by U.S. producers are below average variable cost, which sets what’s called the “shutdown output rate.” Additional domestic production will come on-line only if prices increase above average variable costs.
Will higher domestic prices for steel and aluminum improve U.S. national security by strengthening that country’s industrial base? Only in Trump’s fantasy world. Steel tariffs were tried before—by President Bush in 2002. An economic study concluded that more U.S. workers lost jobs due to higher costs imposed on their employers by higher tariffs than were employed by the entire steel industry.
Raising costs across a wide range of domestic industries in pursuit of upgrading international competitiveness of U.S. companies is the proverbial circle that cannot be squared. Indeed, if national security is ultimately the goal of tariffs, it’s telling that the Pentagon argued against the measure on grounds that the tariffs could disrupt economic and security ties.
As the largest single exporter of steel to the U.S., Canada once again faces economic challenges posed by a mercantilist U.S. administration. The latest U.S. trade action bodes poorly for a successful outcome to NAFTA negotiations. It also underscores the importance of trade liberalization among federal and provincial governments and the need to address interprovincial trade friction and barriers.