Supply chains of steel: How tariffs will disrupt downstream manufacturing
When President Trump announced the steel and aluminum tariffs on March 8, those workers cheered. Many others, however, scratched or shook their heads, concerned about how the tariffs will impact the supply chain for downstream manufacturers. Some are concerned about adequate availability of domestic steel and the increased pricing of both domestic and imported steel products, especially since so many specialty steel products are not made in the United States.
The tariffs left much of the country scrambling to figure out how the country’s steel supply chain works and how the tariffs will impact different industries, states and the economy in general. Steel touches every part of the supply chain, from sourcing the raw material, to manufacturing products, to building the trucks and ships that transport goods to consumers.
As a primer, steel is an iron and carbon alloy, including small amounts of manganese, silicon, sulphur, oxygen and phosphorus. About 50% of all steel is used for buildings and infrastructure, and it’s the major component in the world’s 17 million shipping containers and steel ships that transport cargo. Aside from ocean shipping, steel is a big component of cars, trucks and trains (and to a lesser extent, airplanes). By weight, appliances are about 75% steel. Steel is most useful in developing economies still building their infrastructure.
The U.S. imports many types of steel products, including flat products, long products, tubes, pipes, semi-finished, stainless steel and steel parts.
Steel sourcing, by the numbers
The U.S. imported about 32.6% of steel used in the country last year, a figure which fluctuates a few percentage points each year. The Commerce Department said in its 232 report that it wanted to increase U.S. domestic steel production from 73% of capacity to an 80% operating rate.
Of all steel imported globally, the U.S. is the top importer, at 8% of all global steel imports in 2016. U.S. imports rose in 2017, but figures weren’t available for the full year. In terms of total goods imported to the U.S., though, steel represents only 1%.
While the U.S. imports steel from 85 countries and territories (a good portion of it is from NAFTA partners), the world’s top steel producers aren’t necessarily where the US gets most of it steel. For example, in 2017, China was the largest steel producer, at 808.4 million tons produced. Yet the U.S. imports only 2% of its steel from China, relying on Canada (17th place in the world for production tonnage) for 16% of imports.
The world's top steel producers are not always top US exporters
|Top steel producing countries||Steel production (million tons)||Percent of U.S. imports|
|India||95.6||not in the U.S. top 10|
|Ukraine||24.2||not in the U.S. top 10|
In fourth place for U.S. imports is Mexico, providing 9% of imported steel. Mexico produces 18.8 tons and is 13th place in world production. At the last minute, Trump exempted the country from the tariffs. According to the World Steel Association — a nonprofit representing 160 steel manufacturers — Canada, Brazil, South Korea and Mexico are the U.S.’s top importers (16, 13, 10 and 9%).
While the tariffs went into effect March 23, the Commerce Department started accepting tariff exclusion requests on March 19, from U.S. companies using specialty steel products not available in the U.S. or those concerned the U.S. won’t have the domestic capacity to supply the necessary quantity. Countries like Japan may argue that their entire steel industry is specialized and the country as a whole should be excluded from the tariffs.
Downstream manufacturers become less competitive, lose jobs
Manufacturers buying steel will either pay more for the domestic product, pay more for imported steel or move manufacturing out of the country — ironically the opposite of Trump’s stated goals of moving factories back to the U.S.
The tariffs will be disruptive. New sourcing from domestic steel companies takes time and effort. Auto manufacturers have to go through a time-intensive process to qualify steel manufacturers for auto parts production.
“You just can’t switch companies quickly; you have to requalify the supplier,” said Laura Baughman, president of the Trade Partnership, which provides economic analyses and testimony before U.S. government agencies about the likely impacts on competitiveness of trade policies. “It’s very complicated, particularly in the auto industry. There are rigidities in the sourcing system.” Goldman Sachs calculated that GM and Ford will each lose $1 billion each this year from the tariffs.
There are positive job effects from the tariffs on the steel industry [but] overall there’s a huge loss. Everyone else loses.
President, Trade Partnership
As raw material prices increase, downstream U.S. manufacturers may become less competitive. Increased pricing of materials (domestic or imported) makes products more expensive to produce, and some companies may move factories out of the country, importing finished products. That happened in 2002-2003, when President George W. Bush instituted steel tariffs and imports of finished goods went up.
That impacts jobs outside of steel and aluminum manufacturing. The Trade Partnership analyzed the effects tariffs will have on jobs in various industries and states, finding a negative impact especially in the machinery and auto industries. “Our modeling is saying output and (steel and aluminum) jobs will go up. There are positive job effects from the tariffs on the steel industry,” Baughman said, but “overall there’s a huge loss. Everyone else loses.” In addition to job losses in fabricated metals, motor vehicles and parts and trade/distribution, the partnership estimates job losses in processed foods, construction, business and professional services, financial services and recreational services.
For every job gained in steel and aluminum, 18 jobs will be lost, said Baughman. Her research showed that the tariffs will increase steel and aluminum employment by 26,346 jobs. Between tariffs and retaliation, those in downstream industries and the rest of the economy, though, would lose 495,136 jobs.
Christopher Plummer, managing director of Metal Strategies put it another way to NBC News: The steel industry employs 140,000 workers, while 6.5 million work at downstream manufacturing companies using steel.
That steel employment figure isn’t just steel manufacturing workers. “Nearly every state has steel employment,” said Baughman, but sometimes it’s just a sales office in Alaska, or lobbyists in Washington DC. Service jobs can be classified as steel. Rather than building the turbine, the workers may be selling services like monitoring the turbine in another country and sending maintenance messages.
Manufacturers have gotten more efficient over the years, from needing an average of 10.1 man-hours per finished ton of steel in the 1980s, to many North American plants doing this in less than one hour in 2015, according to the American Iron and Steel Institute. Jobs that used to go to humans are sometimes going to robots, and that will only increase as technology improves.
Trump’s tariffs target one relatively small group of workers with the aim to boost domestic steel and aluminum production. But it may harm even more in manufacturing. “Politics tends to trump economist modeling,” said Baughman. “President Bush fell victim to it. Reagan fell victim to it. Trump campaigned on this. It’s not a surprise to see he did it. I do believe he means well and cares about lost steel jobs and closed factories. I worry he’s going to get sideswiped with more damage in similar manufacturing communities, when product manufacturers have to start laying people off. It’s the unintended consequence.”
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