Steel tariffs squeeze American manufacturers

The White House has put a 25 per cent tariff on imported steel and aluminium and scrapped the exemptions that long covered friendly suppliers. The effect on American manufacturing was immediate. Domestic smelters welcomed the protection. The thousands of fabricators, car-parts makers and machinery firms that buy steel as a raw material now face a sudden squeeze on margins.

Section 232, restored and widened

The legal route is familiar. In 2018 the first Trump administration used Section 232 of the Trade Expansion Act of 1962, a national-security provision, to impose 25 per cent duties on steel and 10 per cent on aluminium. Over the following years Canada and Mexico were exempted, and the European Union, Japan and Britain negotiated quota arrangements. This week's proclamations sweep those deals away, raise the aluminium rate to match steel and take effect on March 12th, so buyers have a few weeks to decide how much to stockpile at old prices.

Canada is the largest foreign supplier of both metals to the United States, so the end of its exemption does most of the damage. Aluminium is the tighter market, because only a handful of primary smelters still operate on American soil and imports cover most of the country's needs.

Two quieter changes may matter more than the headline rate. The proclamations close the process under which American companies could apply to have specific products excluded from the duty, a route thousands of firms used after 2018 when domestic mills could not supply a grade they needed. They also widen the list of derivative goods, from wire and fasteners to other semi-finished items, that count as steel or aluminium for tariff purposes. A fabricator that once won an exclusion for a speciality alloy now has no one to appeal to.

Forty downstream jobs per mill job

Downstream fabricators employ forty times as many Americans as the primary steel furnaces do. For a company stamping car frames, welding parts for heating and cooling systems or assembling farm machinery, raw steel makes up thirty to fifty per cent of the bill of materials. Domestic mills cannot quickly supply many of the specialised alloys these firms need, so fabricators pay inflated local spot prices. Most sell on fixed-price contracts and cannot pass the increase straight on to customers.

The arithmetic is unforgiving. If steel is 40 per cent of a part's cost and the price of that steel rises by a quarter, the part costs about a tenth more to make, which can wipe out the whole margin of a firm earning mid-single-digit returns on sales. The squeeze lasts until contracts are renegotiated, and small suppliers to carmakers have little bargaining power when they are.

Why home prices rise too

A tariff does not only raise the cost of imported metal. Domestic mills price against the landed cost of imports, so when that cost jumps by a quarter they can lift their own prices most of the way without losing customers. That is how the protection pays the mills, and it is why a fabricator buying only American steel still feels the tariff. Aluminium buyers are already paying more: the Midwest premium, the surcharge American users pay above the London benchmark, has jumped since the tariff was announced. Coca-Cola's chief executive said this week that the company could lean more on plastic bottles if cans became dearer, which is the sort of substitution that shrinks the market the smelters were meant to win.

Imported machines escape the levy

Foreign manufacturers, meanwhile, keep buying steel at world benchmark prices, around half what buyers in the Midwest now pay. Finished goods shipped into the United States carry no equivalent tariff on the steel inside them, so an imported machine can undercut one assembled at home. The protection therefore runs backwards along the supply chain: it shields the first stage of production and penalises every stage after it.

What the last round showed

Both earlier experiments point the same way. The steel safeguard imposed in 2002 was withdrawn within two years after a World Trade Organisation ruling and loud complaints from steel-using industries. A study by Federal Reserve economists of the 2018 round found that manufacturing employment fell overall, because higher input costs and foreign retaliation outweighed the gains to the protected industries.

Retaliation is the second cost, and it is already being prepared. After the 2018 duties the European Union hit bourbon, motorcycles and other American goods, and later suspended those countermeasures as part of a truce whose suspension runs out at the end of March. Brussels and Ottawa have both said they will respond to the new tariffs. The goods they choose will not be steel, which means the pain lands on American farmers and consumer brands that have nothing to do with the metal trade.

The mills have a fair argument of their own. Global steel capacity, much of it in China, far exceeds demand, and without a barrier cheap exports would keep undercutting American plants whatever their efficiency. The trouble is that a blanket tariff treats Canadian and Japanese suppliers the same as the source of the glut, and the cost falls on American firms that had no part in it. The treatment of Japan is especially awkward after President Biden blocked Nippon Steel's purchase of US Steel in January, a deal the buyer had pitched as a way to modernise American plants with Japanese money.

What would change the call

The administration has left room to extend the duty to more finished products that contain steel, and a broad extension would narrow the edge enjoyed by importers of machinery. A revival of country exemptions before March 12th would ease the squeeze on fabricators. The spread between Midwest and world steel prices is the running measure of the damage. The list of goods the EU and Canada choose for retaliation will show how widely the cost spreads beyond the metal trade.

Until one of those things happens, the burden falls downstream. Shielding the smelters costs the far larger fabricating industry more than it saves the mills, and downstream manufacturers will probably see their cash flows shrink while the tariff stays in place, with some losing orders to imported machinery by the second half of the year.