The impact of steel tariffs: Who’s right?

Commerce Department clashes with industry economist. Will US steel capacity utilization tank or rebound is at the heart of the controversy? Or is it something else…

A report undertaken by a steel industry economist and released on April 18, 2018, has drawn fire from the United States Department of Commerce in an attempt to impugn the source as well as the substance of the report. The report was unveiled at an event which launched a coalition of U.S. manufacturers opposed to the tariffs imposed by President Donald Trump on steel imports. 

At the core of the report, authored by economist Dr. John C. Martin of Martin Associates, was the argument that steel capacity utilization would head downward as a result of the tariffs, precisely the opposite effect that the Commerce Department said it was hoping to achieve when it recommended that the president apply that measure. 

The Commerce Department’s report, upon which the president based his decision to hit steel imports with tariffs, stated that the “Secretary has determined that the only effective means of removing the impairment is to reduce import levels that should, in combination with good management, enable U.S. steel mills to operate at 80% or more of their rated production capacity. Due to the threat as defined in Section 232, to national security from steel imports, the Secretary recommends that the president take immediate action by adjusting the level of these imports through quotas or tariffs.” 

The report then laid out three alternative recommendations which included tariffs, quotas, and a combination of those two measures. The president opted to impose a flat 25% tariff on all steel imports, although he later carved out exceptions to that rule, an issue which is still a matter of contention between the U.S. and some of its most important trading partners.

US Steel Capacity Utilization 

Martin’s analysis showed there is not a relationship between steel imports and U.S. steel industry capacity utilization. Capacity utilization of the U.S. steel industry actually declined during the period in which Section 201 import tariffs were in force between March 2002 and December 2003, according to the report. 

In that case, President George W. Bush asked the International Trade Commission to investigate the potentially harmful impacts to the domestic industry of foreign steel imports. The tariffs enacted by Bush were lifted after less than two years after they failed to achieve their stated objective—to provide the domestic industry with some breathing space and allow it to become more competitive.

The critique of the report posted by the Commerce Department first attacked the messenger, mistakenly alleging that Martin was paid for the study “by a consortium of foreign steel companies and importers” and that the conclusions of the report “supports their interests.” Martin responded that his firm “received no compensation for this current analysis of the relationships between steel industry capacity utilization and import levels and the Section 201 tariffs.” 

Apparently, the Commerce Department was referring to a 2017 study prepared by Martin for the American Institute for International Steel on the impact of imported iron and steel on the U.S. economy. Martin asserted that the AIIS “represents the entire steel supply chain, including importers, and is not a consortium of foreign steel companies,” although it is known that AIIS advocates in support of steel imports.

On a more substantive level, the Commerce Department said that Martin “uses carefully selected data and incorrectly assumes causality between the selected items.” Martin countered that the report “does not assert causality, just the fact that the levels of capacity utilization and imports are positively related to the level of durable goods manufacturing output.” He also noted “that steel industry capacity utilization fell constantly during the 22 months in which the Section 201 tariffs were in effect. This raises the question of why capacity utilization would be expected to increase with the Section 232 actions.”

Martin’s study, the Commerce official continued, also “ignores the International Trade Commission’s 2005 evaluation of the Section 201 tariffs, which opined that the decline in capacity utilization in 2002 and 2003 was because both capacity and production increased during that time. Martin responded by reiterating that the intent of the Section 232 tariffs is to increase capacity utilization to 80% in order to ensure national defense readiness. Industry capacity utilization data is clear, he added, that “steel industry capacity utilization fell during the months Section 201 tariffs were in place. History does not support the fact that steel industry capacity utilization increases under tariffs.”

The Commerce report also attacked the Martin Associates study on the grounds that it focuses only on “short-term variations in capacity utilization rather than longer-term data,” while the Section 232 tariffs, the official continued, “are designed to address a long-term issue.” Martin’s report was therefore “flawed because it ignores other factors that would influence capacity utilization, imports, or production levels” and “doesn’t take into account other reasons why capacity utilization was low in 2002, most notably the recession.”

Martin countered that his study used quarterly data from 2001 through 2016. “Sixty data points between 2001 and 2016,” he added, “is a significant set of data and includes the impact of the 2009 recession. Actually, during the 2002 recession, industry utilization was higher, averaging 88.8%, than in 2003, when it averaged 84.9%.”

Long Term Issues

Another response to Commerce’s same point might be to question whether the Trump tariffs having anything to do with addressing a long-term issue. Originally to be applied across the board, the president first exempted Canada and Mexico from the measures, and later carved out other exemptions for some U.S. allies such as the European Union, Australia, and South Korea (although not others, such as Bahrain.) The most recent exemptions, which were to expire on May 1, were then extended by the president for another 30 days.

The president himself has suggested that he was using these exemptions—and his ability to withdraw them—as bargaining chips in negotiations over NAFTA and other issues. If that’s the case, the Section 232 tariffs were never put in place to address a long-term issue, nor, for that matter, to help the domestic steel industry or to enhance national security, but only to help Trump win some unrelated argument.