Steel tariffs hit everything made of steel

Customs officials on 19 June moved the Section 232 steel tariffs of 25 to 50 per cent onto a "full-value" basis for thousands of imported finished goods, a heavy blow to American fabricators and the factories they supply.

A tax on every machine

Under the full-value rule, which has applied since 6 April, the duty is charged on the whole invoiced customs value of an imported product, rather than only on the raw steel inside it. Take an imported industrial stamping press or a heavy excavator worth $250,000. If it contains any foreign steel, down to a bracket or a fastener, the full $250,000 pays the 25 to 50 per cent tariff at the port.

The arithmetic is brutal. At the lower rate the duty on that machine comes to $62,500, and at the higher rate to $125,000, payable in cash before the equipment leaves the port. Under a metal-content basis the importer would have paid only on the value of the steel, which for a complex machine full of motors, electronics, hydraulics and software is a modest share of the total. The change turns a levy on a raw material into a levy on engineering.

How a steel tariff grew

Section 232 of the Trade Expansion Act of 1962 lets the president restrict imports that the Commerce Department finds threaten national security. It sat largely unused for decades until 2018, when it was invoked to impose a 25 per cent tariff on imported steel. The logic then was to protect domestic steelmaking capacity. Each extension since, from raw steel to derivative products and now to finished goods valued in full, has moved the tariff further from that logic and closer to a general duty on manufactured imports.

The administrative burden has grown with it. An importer must now establish whether any foreign steel is present in a product at all, which for a machine assembled from hundreds of parts sourced from dozens of suppliers is a significant compliance task in its own right. Where the answer is uncertain, the safe course is to assume the tariff applies, which pushes the effective reach of the rule wider than its text.

Factories pay more to upgrade

Domestic manufacturers trying to modernise production lines or replace worn equipment have had to tear up their capital budgets. Buying advanced machinery now means handing tens of thousands of dollars in unrecoverable border charges to the federal government. For many specialised machines there is no domestic alternative: high-precision machine tools, industrial robots and some heavy construction equipment are made mainly in Germany, Japan, Italy, South Korea and Switzerland.

The effect runs through the cost of capital. A firm deciding whether to replace a machine compares the productivity gain with the annual cost of owning it, which depends on the purchase price, depreciation and financing costs. Raising the purchase price by a quarter or a half raises that annual cost in proportion, and at today's interest rates financing the extra outlay is not cheap either. Projects that cleared the hurdle rate in January no longer do.

What happened last time

The closest precedent is the safeguard tariffs on steel that President George W. Bush imposed in 2002. They raised costs for steel-using industries, which employ far more Americans than steelmaking does, and were withdrawn in December 2003 after the World Trade Organization ruled against them and the European Union threatened retaliation. The tariffs of 2018 prompted similar findings: research by Federal Reserve economists concluded that the gains to protected steel producers were outweighed by higher input costs and retaliation elsewhere in manufacturing.

The full-value rule makes that trade-off worse. The earlier tariffs taxed an input; this one taxes the capital equipment that makes American factories more productive. The damage shows up more slowly, in investment deferred and productivity forgone, and it is correspondingly harder to measure.

The distribution of gains and losses is lopsided. Domestic makers of machinery and equipment gain, because their foreign competitors now face a large border charge. Domestic steel mills gain indirectly, since foreign equipment makers wanting to avoid the duty have a reason to source American steel or assemble in America. The losers are the much larger group of firms that buy equipment: fabricators, contract manufacturers, construction companies, farmers and utilities. Foreign exporters of machinery lose sales, and some will respond by building assembly plants in America, though that takes years.

Some of the cost will reach consumers. Construction firms paying more for excavators and cranes will bid higher for contracts, farmers paying more for tractors and harvesters will look for higher prices for their crops, and utilities that pay more for turbines and transformers will seek to pass the cost on through regulated tariffs. None of these effects is large on its own, but together they add a steady upward push to prices at a time when the Federal Reserve is already worried about inflation.

The case for the rule

Defenders argue that the full-value basis closes a loophole. Under a metal-content rule, foreign producers could embed tariffed steel in finished goods and ship it in with little penalty, undercutting both American mills and American equipment makers. A broad rule is also easier to administer than one that requires customs officers to verify the steel content of every product. Those points have merit, but the remedy is out of proportion to the problem, since it charges the tariff on engineering and electronics that have nothing to do with steel.

What would change the call

Relief could come through several channels: an exclusion process for goods with no domestic substitute, trade agreements that exempt allies, or litigation challenging the scope of the rule. Business lobbying will be intense, and the capital-spending data in quarterly GDP reports and the Census Bureau's durable-goods orders will show whether the damage is spreading.

Charging the steel tariff on the full value of finished goods turns it into a tax on factory investment, and American manufacturers, the people it was meant to help, will probably delay upgrades until it goes. Expect orders for imported capital equipment to weaken in the second half of the year, and the productivity cost to outlast the rule itself.