Steel tariffs double

On 4 June the White House doubled baseline tariffs on imported steel and aluminum, from 25 per cent to 50 per cent. Few had expected it. Spot prices for hot-rolled coil jumped in domestic markets, and industrial fabricators across the country took an immediate hit to their cash flow.

From 25 to 50 in three months

The escalation has been rapid. The metal tariffs date from 2018, when steel was charged 25 per cent and aluminium 10 per cent, with exemptions later granted to many allies. In March those exemptions were scrapped and the aluminium rate raised to match steel. The president then announced the doubling at a rally at a US Steel plant near Pittsburgh at the end of May, days after blessing a deal with Japan's Nippon Steel. Britain, which is negotiating its own arrangement, was left at 25 per cent.

The duties reach well beyond raw metal. They also apply to the steel and aluminium content of a long list of derivative products, from nails and fasteners to parts of appliances and machinery. Importers must now calculate and declare the metal content of goods that used to cross the border as finished products, which adds paperwork and delay to the higher cost.

No domestic plate to buy

At a 50 per cent duty, foreign steel no longer makes sense for American manufacturers. Domestic mills cannot fill the gap. Blast furnaces and electric arc mills already run close to practical capacity, and they cannot quickly ramp up output of specialized alloys, electrical steels or heavy plate. Makers of industrial machinery, storage tanks and transport equipment now pay far more for their inputs and have no domestic supplier to turn to in the near term.

Aluminium is in a worse position. America smelts only a small share of the metal it uses and imports much of the rest from Canada, whose hydro-powered smelters cannot be replaced by any domestic plant. A 50 per cent duty on Canadian aluminium falls straight onto the cost of drinks cans, car bodies and window frames. Food canners, who rely heavily on imported tinplate, face the same problem with steel.

How the price moves

The mechanism in the metal markets is quick. American buyers of aluminium pay the London Metal Exchange price plus a regional surcharge, the Midwest premium, which reflects the cost of getting metal to an American factory, tariff included. When the duty doubles, the premium rises to match, and domestic producers who pay no tariff lift their own prices towards the new landed cost of imports. The same happens in steel, where American coil already traded far above world prices before this week. Protection raises the price of every tonne sold in the country, not only the imported ones.

That is why the gain to the mills is so much larger than the tariff revenue suggests. Every domestic tonne is repriced upward, and the buyers pay the difference whether or not a single tonne crosses the border.

What 2002 and 2018 showed

The record of earlier steel protection is not encouraging. In 2002 George W. Bush imposed safeguard tariffs of up to 30 per cent on steel, then lifted them in December 2003 after the World Trade Organisation ruled against them and the European Union threatened retaliation. After the 2018 tariffs, economists at the Federal Reserve found that any gains in manufacturing jobs from protection were outweighed by losses from higher input costs and from retaliation abroad. Steel-using industries employ many times more workers than the mills, which is why the arithmetic tends to come out that way.

Exporters lose out

The larger cost falls on American exports further down the chain. An equipment maker paying twice the global benchmark for structural steel will struggle to win orders in third markets against European, Korean or Japanese rivals who buy their steel at world prices.

Retaliation adds to the damage. Canada has imposed 25 per cent counter-tariffs on American steel and aluminium since March, and Ottawa is under pressure to respond again. The European Union suspended its planned countermeasures in April while talks continue, but it has said it is ready to act if negotiations fail. American exporters of farm goods, motorcycles and whiskey learned in 2018 how quickly the costs of a metals dispute can spread to industries that have nothing to do with metal.

The case for the mills

Shares in domestic steelmakers rose on the news, and the administration argues that secure domestic supply of steel is a matter of national security that justifies some cost. There is a real investment response: Hyundai Steel announced plans in March for a new mill in Louisiana. New mills take years to build, however, and they tend to add commodity capacity first rather than the specialist grades that fabricators most need.

The national-security argument is also weakest where the dependence is greatest. The largest single source of American steel and aluminium imports is Canada, a neighbour bound to America by a trade agreement and a military alliance. A tariff that punishes that supplier does little to protect against a disruption from a hostile power, and it encourages Canadian producers to find other customers for their metal.

Signals to watch

The signals to watch are hot-rolled coil prices, fabricators' order books and margins, retaliation from Canada and the European Union, and whether Britain's lower rate survives its trade talks. The higher tariff will fatten margins at domestic smelters. The bill goes to the much larger manufacturing base that uses their metal, and over the coming year that probably means thinner margins for equipment makers and some factories scaled back. The first casualties are likely to be small fabricators and canners, who cannot pass on the cost quickly and will feel it in their second-half results.