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How Tariffs and Trade Wars Impact Practically Everything

How Tariffs and Trade Wars Impact Practically Everything

Craig Donofrio — Break It Down

  Photo via Getty Images

Photo via Getty Images

In June, President Donald Trump enacted a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum from all countries except South Korea, Argentina, Brazil, and Australia. Next came a tariff on $50 billion worth of goods from China, accompanied by the threat of a tariff on another $200 billion in the future. In response, China, Mexico, the European Union, Canada, and India slapped their own tariffs on billions of dollars’ worth of U.S. exports, from whiskey to machine parts to dried fruit.

But are these tariffs really bringing back American steel—or helping our economy? Ask someone who works in the American steel and aluminum industry, and they’ll probably be thrilled. But industries like farming, manufacturing, and agriculture are taking a huge hit—and consumers likely will soon, too.

What’s a tariff?

A tariff is a tax a country imposes on an import, typically to protect domestic industries from being flooded with cheaper products from other countries. Tariffs are nothing new; the Tariff Act of 1789 was literally the first major act passed by Congress.

More recently, facing a struggling domestic tire industry, the Obama administration levied a 35 percent tariff against Chinese tires. According to a 2012 Peterson Institute for International Economics study, the tariffs saved a maximum of 1,200 jobs at the cost of more than $900,000 per job. When job losses in the retail sector were considered, the tariffs cost the U.S. economy an estimated 2,531 jobs.

Tariffs are good for American steel companies

American steel and aluminum manufacturers are booming. With a 25 percent tariff jacking up the price of imported steel, U.S. steel companies can raise prices and still be cheaper than foreign competitors. A spokeswoman for steel supergiant Nucor described the tariffs, which work in its favor, as “restoring a level playing field.” A study by Trade Partnership Worldwide found that over three years, the steel and aluminum industry could create 26,280 jobs.

Some of these effects can already be found. Alcoa Corp.’s aluminum smelter in southwestern Indiana has been partially restored, rehiring 275 positions; 600 people were laid off, repositioned, or given severance packages when the smelter closed in 2016. U.S. Steel is set to restart two blast furnaces and steelmaking facilities in Granite City, Illinois, and expects to add 500 jobs. A U.K.-owned steel company with a steel mill in Georgetown, South Carolina, is reopening it in a move to circumvent the tariffs, with plans to employ 125 people on launch.

While that’s good news for steel workers, the same report by Trade Partnership Worldwide predicts that for every job in the steel industry gained, 16 other jobs would be lost. Meaning the tariffs would impose a net loss of 400,445 jobs over a three-year period.

Already, businesses are feeling the crunch.

The tariffs are bad for everyone who needs steel

The biggest problem with the steel tariffs is the increase in prices for every industry that uses steel. Kevin Williams, an interactional trade law lawyer with Clark Hill in Chicago and an adviser to a U.S. trade representative, estimates the cost of steel has gone up “around 30 percent” across the board. The auto industry is being particularly roughed up by the steel tariffs. General Motors slashed its earnings outlook in late July and its shares fell 5 percent; Business Insider notes the company faces an increase in costs of $600 million to $700 million due to steel prices.

Additionally, the current tariffs on goods from China—which include tariffs against industrial machinery and robotics—compound matters. Williams has already seen companies outsource labor to avoid the tariffs. He says a Michigan company had ordered a machine from China which would produce auto parts; but as it was set to arrive after the tariffs would be implemented, the company was then facing a new duty cost of somewhere around $250,000.

“They decided to divert the machine to Canada and subcontract it up there to produce the auto parts,” he says.  

A blow to the breadbasket

Other industries, particularly those working in and around agriculture and food, are feeling the squeeze from tariffs imposed by other countries in response to Trump. Matthew Baron, e-commerce director of Gourmet Nuts and Dried Fruit based in New Jersey, says his company is facing increased prices in everything from almonds and pecans to dried figs, partly due to China’s retaliatory measures, a sliver of which targets imported nuts and fruits. China is also taxing dozens of other agricultural products, from apples to wheat; some analysts believe these tariffs are a targeted measure as they mainly damage red states which helped elect Trump.

Farmers will also face the rising cost of machinery and Chinese retaliatory tariffs. Corn, wheat, rice, sorghum, beef, pork, poultry, fish, dairy products, vegetables, and soybeans all face 25 percent tariffs by China. In early July, a ship laden with soybeans made a dramatic dash to Chinese borders to beat the clock before the tariffs went into effect; it failed. The European Union, Canada, Mexico, and Turkey are also targeting food in response to Trump’s steel tariffs. From coffee to bourbon to even pizza, it’s hard to find a food that isn’t getting taxed. Even pig offal, which has a huge market in China but virtually none in the United States, has been slapped with a 25 percent tariff and 25 percent duty tax, forcing pig farmers to sell their once useful export for pennies as dog and livestock filler food.

In response, some companies are raising prices and laying people off. Caterpillar, which provides heavy industrial equipment used for farming, says it will increase prices to offset the tariffs. Deere & Co. will both raise prices and cut costs. Other companies, like Mid-Continent Nail, the country’s largest nail maker, laid off 60 workers in early June and predicted it might be out of business by Labor Day.  

Weathering the storm

If businesses don’t want to increase prices or lay off employees, they’ll have to dig into their own profits to weather the trade war. Riverdale Mills Corporation, a manufacturer of welded mesh wire fabrics, like Aquamesh used by lobster trappers, is already facing pressure. CEO James Knott Jr. says he doesn’t want to increase the price of Aquamesh as that “would undoubtedly force trap makers to pass that cost along to lobster fishermen” and hurt the lobster industry. But it hasn’t been easy.

“Since January, the price of both foreign steel with its tariffs and domestic raw steel without tariffs has almost doubled,” says Knott. His company is particularly hurt because finished goods—like wire mesh traps—can be imported without being subjected to the steel tariff because the tariffs target raw steel, not finished goods. Knott says that this new foreign competition puts them at a disadvantage and is worried that Riverdale Mills “will lose substantial market share to offshore wire mesh companies.”

While companies wait for the tariffs to lift, there’s another Hail Mary play—exemptions.

Companies can dodge certain tariffs if they’re approved for an exemption. Knott filed for 41 exemptions in early June, but so far he has only been notified that the requests have been received. The process is “extremely onerous,” says Knott.

And it might even be corrupt. According to The New York Times, steel companies can object to other companies’ exemption requests (on the grounds that they can make that product). According to The Times, 20,000 tariff exemptions have been filed, while 2,700 objections to those exemptions have been filed by steel giants like Nucor, United States Steel, and AK Steel Holding Corporation.

What comes up won’t come down

If businesses do have to increase product costs, those consumer-facing prices are here to stay, whether it’s washing machines or farming equipment.

“Once prices go up, they’re somewhat inelastic. It’s hard to get them back down,” says Williams.

However, it will take some time before the trade wars de-escalate and the effects are truly known. In August, China said it was ready to “endure hardships” rather than give in to Trump’s trade war. After Trump threatened to impose an additional $200 billion in tariffs on the country, China said it would create an additional $60 billion in tariffs.

Williams says he, like his clients, is concerned and hopes the tariffs will soon be settled, but he hasn’t seen much positive movement in that direction. “My concern is if this drags on, it’ll impact the economy—which is never a good thing, especially when we’re in a period now when the economy is doing pretty good. It wouldn’t make much sense to mess it up.”

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