If Trump Taxes Foreign Metals, It’s Americans Who Will Pay the Price

By Michael KellerMichael Keller and Joe DeauxJoe Deaux

As a candidate for president, Donald Trump promised he’d protect American jobs by weeding out cheap foreign steel and aluminum. To make good on that promise, he has launched investigations into whether those imports are hurting domestic production to the point that they're a threat to national security.

The administration is seeking new tariffs, quotas or both on these metals through a little-used power referred to as a “big sledgehammer”: Section 232 of the Trade Expansion Act. The 1962 law lets the Commerce Department investigate if an import threatens U.S. security and gives the president authority to act without Congressional approval if the investigation concludes that it does. A decision is expected imminently; Commerce Secretary Wilbur Ross said he hoped to have the steel investigation finished by the end of June.

The Trump administration is arguing that a strong steel industry is critical to national security. There has never been a successful 232 investigation finding a national security threat to metals. Such investigations have happened only 26 previous times, with the last one in 2001. Of those, eight found a credible threat to national security—and they were all related to oil. Only five actually resulted in a president imposing new tariffs.

Outcomes of past 232 investigations

  • National security threat
  • No determination
  • No national security threat
  • Pending
  • Punitive measures implemented

Source: Department of Commerce, Bloomberg reporting

Obama also filed a WTO complaint in the final days of his administration against Chinese subsidies of raw aluminum production, alleging it was encouraging overproduction that was boosting a global glut of the metal. Aluminum is headed for its biggest annual gain since 2009, and is one of the best performing metals this year.

Complicating the administration’s argument: The amount of steel and aluminum used for defense is a small portion of total demand. The defense industry consumes about 1 percent of aluminum, which includes a form of high-grade aluminum for aircraft. Domestic aluminum production accounted for 15 percent of total demand in 2016, and there’s not enough to fulfill domestic demand without foreign supply.

Source: CRU Group

Domestic steel production accounts for a much larger portion of U.S. demand but still must be supplemented by imports to meet total needs. The defense industry accounted for less than 5 percent of steel demand in 2016, according to KeyBanc Capital Markets Inc.

Source: Wood Mackenzie, KeyBanc Capital Markets Inc.

If the administration moves ahead with more restrictive trading measures, it has a few options. A tariff-rate quota would impose a duty on supplies purchased after a certain threshold is reached. Industry sources don’t think that would have much impact on prices. But an across-the-board tariff could increase the price of a host of consumer goods among other effects.

The prospect of rising prices prompted a bipartisan group of Senate and House members to send letters to the Commerce Department and Defense Secretary James Mattis asking to limit the 232 inquiry to products with “national security applications.” Broad tariffs could increase the price of consumer goods, affect manufacturing jobs and cost the beverage industry hundreds of millions of dollars, the Senate letter said. Industry represenatives have echoed this sentiment, notably in the beverage industry, which is large purchaser of aluminum for cans.

Tim Weiner, senior commodity risk manager at Molson Coors Brewing Co. said, “If there are duties on aluminum coming to this country, it will obviously get passed on to us and the customer.”