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

Comments (36)
No. 1-36
BMCrider
BMCrider

Can't believe KY is not in that state list of steel/aluminum imports. Train load after trainload of steel and aluminum going to Toyota and Ford plants here

Six000mileyear
Six000mileyear

There is an opportunity to design parts made from carbon fiber composite to replace steel. A fiberglass bridge doesn't rust.

Bam_Man
Bam_Man

No problem. I'm sure that 108 month, 125% LTV auto loans will completely take care of this.

2banana
2banana

An average car requires 2.4 tons of steel to build????

Um...no.

2banana
2banana

Not even close

Realist
Realist

I’m hoping that Trump is all talk and little action. He has backed down on tariffs for Mexico and Canada and opened the door for exemptions for others as well. Perhaps cooler heads will prevail.

Sechel
Sechel

the tariffs are not about jobs, they are about votes. this is not an economic solution but a political one.

AWC
AWC

Spot on. Notice how Donny took all the bite out of the matter before signing off on it?

AWC
AWC

They run this stuff up the flagpole to see if it gets saluted. If not, they fill it full of holes and let it slide.

AWC
AWC

Imagine the press feeding frenzy over a convoy of domestic steel and aluminum users converging on Washington DC to air their grievances? That's why it will likely be defanged further.

AWC
AWC

@Mish, "If a 266% tariff increase did not save steel jobs, what will?" 'bout all it did was put higher demand on blue tarps and shopping carts in all the existing Obamavilles across the country. A real growth sector that.

Greggg
Greggg

Sechel & AWC This could be more in line with national security. With the war mongering narrative coming from the CFR, we have got to know there is more going on than meets the eye. We already have opened up a national security vulnerability in the rare earth manufacturing industry to where our military is dependent on China to supply our defense industry with critical components for guided missile systems, aircraft ect. The problem has remained out of the news and the Obama Administration refused to answer questions about the problems back as far a 2014. https://www.americansecurityproject.org/wp-content/uploads/2011/02/Rare-Earth-Metals-and-US-Security-FINAL.pdf

Sechel
Sechel

There is no national security issue. just take a look at the top 9 nations that export steel to the u.s. and they are all allies. The national security argument is a false narrative used to justify the tariff in the first place because that's a clause that the president can use., but nobody really buys it. Are we saying we need to protect a domestic steel industry in case we're at war, will be cut off from Canada and have to build an aircraft carrier which takes about four years? The war would be over before the first one would be delivered.

Sechel
Sechel

i believe the Gerald R Ford class takes even longer than four years

Greggg
Greggg

Sechel - It's not now, but the landscape is changing. If a war broke out now, would we have the capacity to supply ourselves when shipping came under attack? Alliance advantages are changing and the ones we rely on now, may not be there tomorrow.

Sechel
Sechel

So you're planning on a potential long drawn out war with Canada? Maybe Trump's NAFTA rhetoric is worse than I thought. I doubt our military planners are even giving this one iota of concern.

AWC
AWC

If the threat of a real war is the issue, steel won't be needed. The aircraft carriers are already built, to be instantly taken out by the nukes,,,,which are also already built. Only one use will be necessary. Besides, wouldn't it make more sense to save the pentagon money by importing much less expensive foreign steel, to throw back at the supplier? Nah, it's all politics. The days of EE Cummings 6th St El are long past.

Carl_R
Carl_R

Good article, Mish. This is exactly what I've been saying in every post you've made on the tariff issue. It may save jobs in the steel industry, but it will cost many, many more jobs in manufacturing that uses steel. If they are going to put a tariff on steel, they have to put a matching tariff on all products that contain steel, or American manufacturers are dead.

AWC
AWC

Who knows, this could even be a conspiracy between Jay at the Fed, and Donny on the Throne, to goose prices, thereby firing up some animal spirits, convincing folks to run out and buy that Ford quick, before prices go up. Kinda late in the "Cycle" for that though.

AWC
AWC

Humor me this. Got a Dodge Ram, with a German made fuel injection pump, the truck made in Mexico. Then, the old Tundra, with an American made radiator, truck made in Indiana. Guess some bureaucrats are going to need to disassemble each vehicle, weigh each part, then determine how to tax each component by % of weight and by country of origin? Oh, to make it easy, neither came with a buggy whip as an option, so we need not go all the way back to the stone age of earlier protectionist tariffs.

hmk
hmk

If the primary intent of the tariffs is to protect the steel industry for the purpose of national defense wouldn't it be easier to subsidize the steel industry like other countries do or help them build competitive modern facilities?

AWC
AWC

Any industry that needs to be subsidized needs to find another line of business. Subsidies breed inefficiencies, as China's steel industries are finding out now, as they cut back production due to overcapacity. A subsidy is not much more than an early step towards nationalization. We see how that has turned out in all the Socialist Utopias around the world. Eventually, the subsidy becomes too much for taxpayers to bear, and the dependent business fails anyway. Bailouts only prolong the inevitable, to wit, our zombie banking sector.

AWC
AWC

Google "Creative Destruction"

Carl_R
Carl_R

Everyone thinks about cars because there is a lot of steel in a car. There are lots of less expensive products that use steel that will be affected.

AWC
AWC

Construction will be hammered. Oh, well, just tack it on the the purchase price?

AWC
AWC

Unit cost goes up, so does the retail price.

AWC
AWC

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

Carl_R
Carl_R

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.

sachvik
sachvik

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

RonJ
RonJ

"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?

MntGoat
MntGoat

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.

Realist
Realist

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.

Realist
Realist

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?

Realist
Realist

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