Even before Trump officially declared his presidential aspirations, trade was the cornerstone of Trumponomics…
Even before Trump officially declared his presidential aspirations, trade was the cornerstone of Trumponomics, and he lambasted global partners who ostensibly had taken the American people to the cleaners through the means of unfair trading practices, currency manipulations, and efforts to undermine US industry. One product his administration targeted was steel, and it applied 25 percent tariffs on imports from multiple countries and pledged an industrial resuscitation.
Has the president fulfilled his promise? Let’s just say that economics has reared its ugly head again.
A Dive into the Numbers
Recently it was reported that 80 employees at an NLMK steel plant in Pennsylvania were being let go. The leadership blamed tariffs for layoffs, calling it a failed policy. This comes about a month after US Steel Corp.confirmed that it was suspending operations of blast furnaces in Michigan, Indiana, and Europe until “market conditions improve.” Then there are the dozens of steel-consuming companies that have trimmed their workforce, such as American Keg and Element Electronics, which laid off ten and 134 employees respectively.
What a difference a year makes. This bearish and sour sentiment contradicts the ebullient consensus that cronyism and protectionism were going to open new plants, rejuvenate idled ones, stimulate output, and bring back steel jobs. Industry leaders gave speeches and appeared on business news networks, telling the world that American steel just needed businesses and consumers to pay roughly $900,000 for every steel job created or saved by the tariffs.
US steel-related stocks have been tumbling since touching highs when the import levies were applied. US Steel shares plunged from a 52-week high of $38.89 to a 52-week low of $11.67, and Nucor has declined from $69.84 to $55 per share. The New York Stock Exchange’s American Steel Index has slipped 12 percent over the last 12 months. The VanEck Vectors Steel Exchange Traded Fund (ETF) is down 13 percent in the same time period. Publicly traded firms are revising downward their profit expectations amid lower-than-expected demand levels.
As William Shakespeare wrote in Macbeth, “Oh what a tangled web we weave when at first we start to deceive.”
So what the heck is happening? It is an issue of economics.
The Economics of Steel Tariffs
In the immediate aftermath of the Trump tariffs, steel prices surged and US companies enjoyed a brief advantage over their foreign competitors, posting some of their best profits in years. The administration, Middle America, and the handful of pro-Trump media outlets took a victory lap — a premature one. Then reality set in. When prices skyrocketed, domestic demand for the material reduced, primarily from businesses that rely on this component for their products.
Producers have adapted to the shifting market trends, curtailing output. The latest American Iron and Steel Institute (AISI) data suggests that overall production has fallen to its lowest level of 2019. Without enough demand, US companies contribute to the global supply glut and bring down prices even further. It is true that production has recovered admirably since cratering to an all-time low back in 2009, and output is at an eight-year high. But these figures can be attributed to factories investing in automation and other technologies that replace human hands-on labor; it used to take ten man-hours to produce one ton of this material, but now it requires only 90 man-minutes. While an impressive feat for the second-largest manufacturing industry in the world, it is superfluous in 2019 when there is not enough of a market.
The worst thing about this entire ordeal is that it was anticipated by many conservatives and libertarians. You did not need to refer to the Mises Institute, economics textbooks, or the 1930s to prognosticate what was going to happen. You could have looked back to 2002 when then-President George W. Bush imposed tariffs on steel imports only to scrap those levies nine months later because they were wreaking havoc on the US economy.
The lesson from protectionism is that the country that partakes in this nineteenth-century practice is made worse off on net and endures the pain of net job losses.
President Trump famously tweeted that “if you don’t have steel, you don’t have a country.” This can be debated on multiple fronts, but the US economy had done remarkably well by residing in the top five of steel-producing nations — just behind India and ahead of Russia. Steel-consuming firms have depended on cheaper steel imports for years, allowing them to rein in operating costs, sell cheaper products, pad their bottom lines, and innovate products. This is not a bad thing at all, especially when considering that about 40 Americans work in industries that consume steel or aluminum for every one worker who produces these durable goods.
Are steel jobs coming back? Let’s put it this way: Total payrolls will not be what they were in 1943 or 1963. The industry has changed. You do not need dozens of employees earning $65,000 a year plus benefits to produce a few tons. This might have been the personification of middle-class life during the heyday of Leave It to Beaverand Father Knows Best, but because the US economy is so dynamic, we now have a different view of what middle-class employment looks like. It isn’t operating heavy machinery, but rather it is assisting senior citizens, running restaurants, and phlebotomy.
Will US steel be great again? It already is — the sector just looks different.