On March 1, 2018, President Trump held a meeting with steel and aluminum executives where he made an announcement:
We’ll be imposing tariffs on steel imports, and tariffs on aluminum imports. We’ll probably have everything completed by next week.
These comments were noticed. Financial markets, already down for the day, fell lower:
Shares of auto makers and other big consumers of steel and aluminum added to their session losses after Trump said the U.S. would impose tariffs of 25 percent on steel imports and 10 percent on imported aluminum next week, while shares of U.S. steel and aluminum companies jumped.
Investors expressed surprise:
“We got in and out of monetary policy concerns pretty well and this caught us by surprise,” said Art Hogan, chief market strategist at B. Riley FBR in New York.
I found myself a bit bemused at the market’s reaction.
After all, it wasn’t like this hadn’t been fully telegraphed.
Two weeks earlier I wrote a piece, A Very Telling Trade Meeting, that highlighted a televised roundtable with Members of Congress and President Trump’s Cabinet regarding our nation’s Trade Policies.
From President Trump’s February 13, 2018 opening comments:
My administration is now reviewing the reports and considering all options. And part of the options would be tariffs coming in.
I will make a decision that reflects the best interests of the United States, including the need to address overproduction in China and other countries.
I look at it two ways: I want to keep prices down, but I also want to make sure that we have a steel industry and aluminum industry.
I found the entire meeting fascinating.
One the one hand, you had President Trump’s focus on job creation and the revitalization of our manufacturing industry while keeping an eye on input costs.
Then you had the side of the Congressmen, who – with a few notable exceptions – appeared nearly unified around obtaining lower input costs for corporations.
Both labor and raw materials – to the exclusion of all else. Jobs and middle-class workers seemed to be an afterthought – at best.
For the sake of clarity, I am not generally in favor of tariffs. I’m in favor of free trade. But free trade is something we have not had for a very long time – if ever.
It should also be noted that tariff’s are not truly the President’s focus.
President Trump was attacking long-standing trade inequities as a means to revitalize our domestic manufacturing capacity.
A re-balancing of our entire trade policy.
President Trump is looking at short-term, tactical use of targeted tariffs – but not for the sake of having tariffs. He is looking to use them as a bargaining chip leading to a more balanced playing field and increased domestic production.
The ultimate goal of his plan is no tariffs at all.
As President Trump noted during the February 13, 2018 Trade Meeting:
I think we should have a reciprocal tax. That’s called fair trade. It’s called free trade. Because ultimately, what’s going to happen — either we’ll collect the same that they’re collecting, or they’ll end up not charging a tax and we won’t have a tax.
And that becomes free trade.
You may have a higher price or maybe a little bit higher, but you’re going to have jobs. In the other case, you may have a lower price, but you’re not going have jobs; it’s going to be made in China and other places. So those are big decisions. But, to me, jobs are very important.
The Wall Street Journal slammed President Trump’s proposal:
The immediate impact will be to make the U.S. an island of high-priced steel and aluminum. The U.S. companies will raise their prices to nearly match the tariffs while snatching some market share. The additional profits will flow to executives in higher bonuses and shareholders.
And quoted an oft-used, but misleading statistic:
The national security threat from foreign steel is preposterous because China supplies only 2.2% of U.S. imports and Russia 8.7%. But the tariffs will whack that menace to world peace known as Canada, which supplies 16%.
It’s fair to note that prices will move up slightly. They will. Jobs will also increase.
Consider this overly simplistic statement from the WSJ editorial board:
The U.S. companies will raise their prices to nearly match the tariffs while snatching some market share. The additional profits will flow to executives in higher bonuses and shareholders.
How that actually plays out depends on perception.
Is this a short-term move that increases prices in the short-term only. Or is it part of a broader strategy to level the playing field and reduce subsidized dumping by Chinese steel companies over the longer-term.
This is a crucial distinction.
If domestic steel companies believe that President Trump is interested in leveling the playing fields (as I do), then these same companies will be looking to expand domestically through increased capacity and hiring. The market share gains are likely to be perceived as structural changes that are permanent.
Note that WSJ was making exactly the opposite argument in relation to lower taxes:
With a lower corporate tax companies will be able to compete more effectively and payrolls will increase.
With lower taxes, companies would spend the money, expand and hire – benefits would be shared by all. With market share gains from a more level playing field, steel companies would behave in a predatory fashion and all benefits would accrue to management and shareholders.
I think these changes will prove to be structural in nature. I think the steel companies believe the same thing.
Another point. The 2% China import number is nonsense. And the WSJ knows it.
China produced 128 million tons of steel in 2000. China produced 823 million tons in 2014.
China has been a net exporter of steel since 2006 and shipped a staggering 100 million tons of steel abroad in 2015.
China now produces 50% of the world’s steel. The United States produces 5% of the world’s steel.
The United States is the largest importer of steel. The value of steel shipped into the US was just over $29 billion in 2017.
Canada is technically the largest supplier of steel to the United States. South Korea and Mexico are effectively tied for second place.
An undetermined, but very significant, portion of that steel is coming via indirect shipments from China in a process known as transshipping. Transshipping is the shipment of goods to an intermediate destination before shipping to the final destination.
Chinese steel is sold into Canada and Mexico. That steel is then fabricated and resold by Canada and Mexico into the U.S. markets. Canada shows up as the exporter but the steel is Chinese in origin.
The same process occurs with finished or semi-finished goods comprised of Chinese steel that are shipped into our country from Canada, Mexico and elsewhere.
NAFTA “rules of origin” encourage this process.
In May 2017, the European Union imposed tariffs on China for exactly this reason:
The duties of 29% to 55% were imposed after an investigation found that Chinese firms were dumping steel into Europe at unusually low prices that hurt local competitors.
Excess [Chinese] production has been sent abroad and sold at very low prices, making it difficult for U.S. and European producers to compete.
China has an excess of people that need to be employed. One mechanism to accomplish this is via government subsidies aimed at steel production. China produces massive quantities of steel and dumps the excess production abroad at uneconomic or artificially low prices. Chinese workers are nominally paid – but they are paid. It becomes a lower cost method of state welfare for China.
It’s not just steel. China does this in other industries as well.
The end result is the United States gets cheap input materials but we do so at the expense of manufacturing jobs.
The United States lost 41 percent of its manufacturing jobs between June 1979, when manufacturing employment peaked and December 2009, when it reached its recent low point. The last decade saw the most severe manufacturing job losses in U.S. history. Manufacturing’s share of total employment fell from 13.2 percent in January 2000 to 8.9 percent in December 2009.
There are a number of meaningful benefits that come from manufacturing jobs:
Manufacturing is a source of high-wage jobs for virtually all types of workers, but especially for those who would otherwise earn the lowest wages.
Low-wage workers benefit the most from manufacturing jobs, indicating that manufacturing helps reduce wage gaps between high-, middle-, and low-wage workers.
Manufacturing not only pays high wages; it is also more likely than non-manufacturing industries to provide employee benefits.
Manufacturing provides a disproportionately high number of jobs for less-educated workers. About 48 percent of manufacturing workers, but only 37 percent of non-manufacturing workers, have no formal education beyond high school.
Research indicates that the main reason why manufacturing wages and benefits are higher than those outside of manufacturing is that manufacturers need to pay higher wages to ensure that their workers are appropriately skilled and motivated.
Some will maintain that we are fully transitioning to a service economy and manufacturing jobs are outdated or unnecessary. I disagree.
In January 2018, the unemployment rate was 4.1 percent. The number of unemployed persons was 6.7 million.
The number of long-term unemployed (those jobless for 27 weeks or more) was 1.4 million in January and accounted for 21.5 percent of the unemployed.
The labor force participation rate was 62.7 percent.
The employment-population ratio (% of the total US working-age population employed) was 60.1 percent
The number of persons employed part time for economic reasons (involuntary part-time workers) was 5.0 million in January.
Involuntary part-time workers are those who want full-time employment and are working part time because their hours had been cut back or because they were unable to find a full-time job.
An additional 1.7 million persons were marginally attached to the labor force.
These individuals wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
So, while our unemployment rate is at 4.1 percent – the immediately available pool is essentially double that figure.
6.7 million unemployed Americans.
5.0 million involuntary part-time workers.
1.7 million Americans who have temporarily given up looking for work.
13.4 million Americans looking for full-time employment.
And there’s another pool of workers that can supplement the 13.4 million number.
President Trump sometimes references 100 million Americans not in the workforce. This is factually correct – the actual number for January was 95.6 million.
About half of the 95.6 million – 46.7 million – are retired.
Another 13.8 million are on some form of disability. The disability number is widely acknowledged as swollen.
Another 6.4 million are Social Security beneficiaries who are neither aged nor disabled (for example, early retirees, young survivors).
15 million were either in school or in job-training.
The remaining pool of ~13.7 million Americans were care-givers of some nature.
There are currently 13.4 million Americans looking for full-time employment. Add to this workers from the ranks of the “retired but willing to work” along with excesses from our disability ranks and one can see that we have far more flexibility within our employment levels than the stated rate of 4.5% would suggest.
Here’s another way to look at the employment scenario:
The percentage of Americans expected to pay no Federal Income tax in 2018 is ~45%.
The actual number for 2016 was 44.3%.
For me, that’s the most telling number of all.
45% of Americans paying no federal income tax implies a lot of folks who are under-employed and might be inclined to work for higher paying jobs – if they were available.
Jobs like those offered from manufacturing.
Peter Navarro discussed the proposed tariffs with Tucker Carlson:
And then with Maria Bartiromo:
Wilbur Ross discussed the issue of higher steel costs on Fox Business:
And Gordon Chang discussed Chinese trade practices on Fox Business:
.@GordonGChang on new tariffs: “For too long China has been taking advantage of the United States… If we don’t do something, we know that China is going to completely flood our markets while closing off theirs and that’s completely unacceptable.” pic.twitter.com/mphC5Sdv0D
— FOX Business (@FoxBusiness) March 1, 2018
Public support for President Trump’s policies are stronger than many anticipated:
H/T @Baba9773 for sharing graphic: But this says it all, and I’ve said it for too long. Immigration AND trade. That’s how @realDonaldTrump won. I’m beating a dead horse here. But some people are too disconnected to grasp that those issues are about the economy. pic.twitter.com/jYykEeEicn
— Richard Baris (@Peoples_Pundit) March 1, 2018
But ultimately, it’s about this:
It’s all about a level playing field. The GOP purist free trade wing believes tariffs are blasphemy. They’re wrong. It’s a tool to be used to fight back against countries like a China dumping cheap crap into our economies hurting our businesses. It will have to be done smartly.
— Calvin ಠ_ರೃ (@analyticalps) March 1, 2018
Lots of theorists who never held a working class job have a lot to say about these tariffs. But I find it funny how 1st, 2nd and 3rd generation steel workers in SE Ohio have a much different opinion.
It’s all about a level playing field. The GOP purist free trade wing believes tariffs are blasphemy. They’re wrong. It’s a tool to be used to fight back against countries like a China dumping cheap crap into our economies hurting our businesses.
It will have to be done smartly.