Will Trump Tariffs Help Steel in America’s Rust Belt?: QuickTake

(Bloomberg) -- President Donald Trump has been known to change policy positions on the fly. But throughout an often volatile political career, he’s held fast to the notion that Chinese policies have unduly wiped out U.S. jobs, often citing the steel industry as Exhibit A. His administration says cheap steel imports constitute a threat to national security and the U.S. needs to build a trade wall. Despite enraged responses from around the world, Trump seems determined to proceed with an across-the-board 25 percent tariff on steel.

1. Does the U.S. steel industry need protection?

U.S. steelmakers say their plants have been ravaged by global overproduction, particularly by China, and that’s depressed prices and created an urgent need for remedies. But Andrew Cosgrove, a senior analyst for Bloomberg Intelligence, notes that the U.S. steel industry has had positive free cash flow in 14 of the past 19 years. While some companies with aging or less-efficient plants — such as U.S. Steel Corp. and AK Steel Holding Corp. — have struggled, others are profitable. Nucor Corp. has had negative free cash flow only once in the past 20 years.

2. How much has the U.S. industry shrunk?

It went through a difficult reorganization in the late 20th century as the pace of U.S. industrialization slowed and emerging markets, particularly in East Asia, began their meteoric rise. In the 21st century, U.S. steel jobs have continued to disappear, partly because older plants are being replaced by more efficient ones. While the Commerce Department says employment declined 35 percent from 1998 to 2016, U.S. steel production capacity has been largely unchanged since 2001. Some struggling U.S. factories have been purchased and reorganized by global steelmakers such as Luxembourg-based ArcelorMittal and Brazil’s Gerdau SA.

3. Why does the U.S. import so much steel?

Check the price tags. In some countries, steelmakers have enough economic advantages that, even after adding shipping costs, their steel products are cheaper than ones made in the U.S. About 30 percent of America’s steel comes from abroad, with Canada as the biggest supplier. Despite China’s reputation as world bogeyman, its exports to all countries have slumped dramatically since 2015, and Chinese steel was just 2.5 percent of all U.S. steel imports in January in terms of volume.

4. Are other countries subsidizing their steel?

The U.S. government says both direct and indirect foreign steel subsidies have eroded U.S. businesses, and it sees offenders everywhere. As of January, the Commerce Department had 164 antidumping and countervailing duty determinations in effect for steel, and another 20 were under investigation. No country gets more blame than China, which alone can produce as much steel as the rest of the world combined. China has countered that its subsidies adhere to World Trade Organization rules and the growing overcapacity in steel markets is a global problem that must be solved in a collaborative effort.

5. Are there other reasons U.S. steel has trouble competing?

U.S. wages are higher than in emerging markets like China, and legacy pension plans weigh on the balance sheets of some integrated steel mills. U.S. power costs also are generally higher, whereas many Chinese mills get cheaper energy contracts, part of the rationale for the argument that Chinese steel is subsidized. The Americans also have to face stiffer environmental regulations than the Chinese, though that gap is narrowing thanks to a recent crackdown by the Chinese government.

6. Can U.S. companies meet total domestic demand?

No — at least not in the near term. If the U.S. cut its exports, it could boost its steel mill utilization of 74 percent last year to 80 percent and reduce its import needs to under 20 percent from 30 percent now, according to ING Groep NV. But U.S. companies may not be willing to expand capacity, as that would require them to commit a lot of capital with no guarantee that the tariffs would be permanent.

7. But tariffs could mean more jobs, right?

Nucor CEO John Ferriola said March 1 after meeting with Trump that the tariffs would allow his company to increase investment at a more rapid rate, which could mean more U.S. jobs. But even if more production was shifted to the U.S. over time, the reality is that the industry has been rapidly embracing automation in recent years and modern steel plants are unlikely to be the mass employers they once were. Austrian producer Voestalpine AG cautioned last year that the industry would eventually lose most classic blue-collar jobs.

8. What’s likely to happen?

A backlash from U.S. manufacturers and other countries — and a global stock selloff a day after Trump’s March 1 comments that he would add tariffs of 25 percent on imported steel and 10 percent on aluminum — underscored concerns over the economic impact of the moves. Despite discord in the White House and Congress over whether to exempt any products or countries, it’s likely the president will follow through with a formal tariff announcement soon. Then the open questions will be whether any potential benefits will be outweighed by supply-chain disruptions, trade retaliation, new headaches for negotiators at the North American Free Trade Agreement talks, and a battle royale at the WTO.

The Reference Shelf

• The cases for saving U.S. steel and aluminum, from the Alliance for American Manufacturing, a partnership between manufacturers and the United Steelworkers union.
• Bloomberg News articles on Trump’s claim that a trade war would be “easy to win” and how the tariffs now hang over Nafta talks.
• In Bloomberg View, Stephen Mihm traced how the U.S. lost its steel superiority and Justin Fox looks at what tariffs might mean for jobs.
• Bloomberg QuickTakes on how steel became a national security issue, Trump’s “Buy America” initiative, and free trade and its foes.

--With assistance from Joe Richter

To contact the reporters on this story: Joe Deaux in New York at jdeaux@bloomberg.net, Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net, Steven Frank in Toronto at sfrank9@bloomberg.net.

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Anne Cronin, Steven Frank

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