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How to Not Sell Cars: More Steel Tariffs Coming Up

It is extremely foolish to think steel tariffs will increase employment or reduce the deficit. But here we go anyway.

Jobs at Risk

There are about 6.5 million workers at manufacturers that use a lot of steel, but only 140,000 steelworkers, says Moody’s.

“Workers in these consuming sectors will likely be hurt by higher steel prices,” Moody's said. “Domestic manufacturers could also eventually switch to importing whole components of finished products that are made from steel to reduce their product costs, which would lead to reduced domestic steel demand in the long term.”

Losing States

When measured by total volume, the nation’s largest states dominate steel and aluminum imports. Texas, California, Illinois, Michigan, Louisiana, Pennsylvania, Ohio, and New York all import more than $2 billion annually in steel and aluminum products, together accounting for 60 percent of the nation’s total. Aside from Texas, California, and Louisiana, these states concentrate in the Northeast and Midwest’s Rust Belt. Given the large size of their economies, disruptions to trade in these states have significant potential to influence national economic growth and key industry sectors like automotive manufacturing, chemicals, and oil and gas production.

Louisiana presents a particularly notable example. Oil and gas drillers and petrochemical producers in that state rely on imported steel and aluminum to support their operations. The Port of New Orleans imported 2.48 million tons of steel in 2017, accounting for 30 percent of its tonnage.

Illinois, the nation’s second largest importer of steel products, imports 41 percent of its steel from Brazil. Illinois also imports 29 percent of its aluminum from China, as aluminum is increasingly used as a substitute for steel in the U.S auto industry.

Midwest at Risk in NAFTA Feud

Exports contribute significantly to the U.S. economy, today representing 12.3 percent of U.S. GDP.

At stake in the NAFTA talks are giant export markets for Heartland producers in Canada and Mexico. These nations are leading export markets for the 11 Midwestern states, which together account for 48 percent of all U.S. exports to Canada, and 21 percent of all U.S. exports to Mexico.

The share of Michigan’s exports to Mexico ranks third-highest in the country. Canada is the leading importer of Wisconsin goods. And Pennsylvania is the top state for exports of transportation equipment and confections to our North American neighbors.

By weakening NAFTA and imposing new tariffs on critical imports, President Trump would threaten the well-being of the very workers and communities that supported him most.

Tariffs Will Kill 45,000 Auto Jobs

We’ve analyzed historical data to estimate the impact of Trump’s proposed 25 percent steel tariffs on auto sales and employment. For the technically minded, you can follow the details of our calculations in the endnotes.

We estimate that an average car requires 2.4 tons of steel to build. Given that tariffs tend to increase import prices (which determine domestic prices) by at least as much as the tariff, we calculate that a 25 percent steel tariff will increase the price of new passenger vehicles manufactured in the United States by an average of 1.3 percent.

Now, based on recent research into the sensitivity of auto sales to price, we estimate that a 1.3 percent rise in the price of American-made cars would translate into a 4 percent decline in global sales of such cars.

The historical relationship between U.S. auto sales and employment is tight, as shown below.

Based on this relationship, we would expect a 4 percent decline in sales to result in auto-industry job losses of 45,000 by the end of 2019.

The total expected job loss from Trump’s steel tariffs in the U.S. auto industry alone is equivalent to almost one-third of the entire U.S. steel industry workforce.

In short, Navarro is wrong—deeply so. Employment in the U.S. auto industry will suffer from Trump’s tariffs to a vastly greater degree than it could possibly benefit in the U.S. steel industry.

Not Measurable

Given huge auto-losses are likely coming anyway, it will be hard to evaluate the CFR's claim.

How much decline was baked into the cake anyway? Sales are already slowing.

Nonetheless, the idea is valid, as is Brookings'. These tariffs are pure folly.

US Steel Mill Workers (4 State Total)

People are so enamored with the absurd notion of "fair trade" they are willing to risk 6.5 million jobs in steel-using manufacturing to protect 140,000 steel workers (if that). I suspect the above chart is a better presentation of reality.

Job Losses by State

Kindergarten Arithmetic 101

If Trump extends his wall to cover the entire border, instead of just the one shared with Mexico, and then bans or punitively tariffs every single good that uses steel as an input, recursively, as well; he just may succeed in driving up the domestic price of final goods to the point where both nominal labor compensation and nominal raw materials prices can be increased at the same time.

In doing so, he will ensure that not a single American made product of any kind, will be internationally competitive over time. This is exactly what the Latin American import-substituting “structuralists” did back in the 50s and 60s.

Mathematical Explanation of Deficits

For a mathematical explanation of trade deficits, please see Trump's Tariffs Show He's "Clueless About Trade".

Winning Big!

Economic Madness

The bigger the "win," the deeper the next recession.

Lost in the madness of this discussion is the irony that many of those who believe inflation is bad policy now beg for inflation in the name of "fair trade".

It's economic madness to protest getting something too cheaply!

Addendum: As originally posted, I mentioned a 266% tariff increase. That was under Obama . We are adding more tariffs now.

If a 266% tariff increase did not save steel jobs, what will?

Mike "Mish" Shedlock

Unit cost goes up, so does the retail price.

Inflation is a stealth tax. A tariff is just plain a deceitful one. The end user must pay it.

A tariff on a construction input allows domestic producers to raise prices. Meanwhile, foreign producers tend to lower theirs, to partially offset the tariff. Thus, for domestic producers, they see rising prices of steel and aluminum, which they have to pass along as price increases. Meanwhile, foreign producers see falling prices for steel and aluminum, which they pass along as price cuts. That puts products made in America at a substantial cost disadvantage to products made overseas. As if that weren't bad enough, American steel producers can't make enough steel to satisfy domestic demand, so American producers still have to buy some from overseas at dramatically higher prices, or put up with shortages.
Unless you are one of the few actual steel makers, this is bad, bad policy. It hurts American pocketbooks, it hurts American manufacturing jobs, and helps overseas manufacturers.
If you want to have a trade war, at least be smart enough to put the tariff on manufactured products, not on manufacturing inputs.

Don't think Trump is going to follow through on these. This is just the opening salvo in trade renegotiations...

"These tariffs are pure folly." Unless they accomplish something that Trump wants to happen. On the surface at least, kim Jong Un seems to have changed his tune. Do foreign countries want to lose business with America, by cutting off their noses to spite Trump's tariffs? or will they move to open up their markets more to American goods?

I read a Op Ed in the WSJ by Wilbur Ross, he said the tariffs may add like $4 to the cost of a car. OMG $4 whole dollars! Less then the cost of a Venti Latte.

Sorry RonJ. The US doesn’t trade with North Korea. Trumps tariffs are meaningless to Kim. As for “Do foreign countries want to lose business with America?” Of course not. That’s why they don’t want to see Trump’s tariffs. And that’s why if Trump hurts them, they will respond with their own tariffs on select American products. If you want more access to foreign markets you need to negotiate more free trade agreements with other countries. Instead, Trump pulled out of TPP and keeps threatening to tear up NAFTA.

Mtngoat. If steel prices go up by 25% and the price of a car only goes up $4, that means there is only $16 of steel in a car. And you believe that?

An average car has 2400 lbs of steel by the way.

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