The Dumb Way for Trump to Help Steelmakers
There are two ways the federal government could help the U.S. steel industry boost production: a smart way and a dumb way. Are you surprised to learn that the administration of President Donald Trump is barreling down the dumb route?
The smart way to improve conditions for American steelmakers is to generate work that requires lots of steel -- for example, a major government-funded infrastructure plan that creates incentives for using domestic building materials. When he was running for president, and during his early months in office, Trump vowed to push through an $1 trillion plan that would have done wonders for the steel industry and would have created, as the president promised, “millions of jobs.”
In anticipation of an infrastructure initiative on that scale, shares in steel companies rose between Election Day and the end of February. But you know how it is with Trump: tweets, Russia, golf, ineptitude -- and the immensely foolish decision to make repealing Obamacare the top priority -- pushed infrastructure to the back burner, where it will probably remain for the foreseeable future. (I’m being generous.)
Even Trump’s so-called “infrastructure week” in early June didn’t advance the ball, subsumed as it was by the congressional testimony of James Comey, the man he fired as director of the Federal Bureau of Investigation.
Infrastructure week also made it obvious that the White House doesn’t have a coherent idea of what an infrastructure plan might consist of. As Matthew Miller of CFRA Research put it to his clients recently, “Any infrastructure-related premium that steel names benefited from following the election has been completely eliminated." 1
On the other hand, most steel stocks remain significantly higher than they were before the election. Why? Because Trump, hellbent on helping the steel industry no matter what the cost to the rest of the country, has left the smart way behind, and has moved on to the dumb way.
According to Axios, an online news site, Trump is planning to impose tariffs on steel. This would of course make American steel cheaper relative to imported steel, something the steel industry has wanted for years. It would also lead to higher prices on everything made with steel, starting with automobiles. It would create new and unnecessary friction with allies, risk a damaging trade war with China, and has the potential to wreak havoc on global trade rules that have brought prosperity around the globe. But, as Axios notes, it will make Trump’s base happy.
The first thing to understand about why this is a dumb move is that it is not your standard steel-dumping case, the kind where one country accuses another of allowing steel exports to be sold below cost. Those cases take years to play out, and they are narrowly focused on a single country. Even if such a case succeeds in reducing, say, Chinese exports, it’s as likely as not that the slack will be picked up by other exporters, such as Canada, Japan or Turkey.
The Trump administration wants to reduce all steel exports, so that customers will have no choice but to purchase steel from American companies.
“We’re groping here to see whether the facts warrant a more comprehensive solution to deal with a wide range of steel products from a wide range of countries,” said Commerce Secretary Wilbur Ross in April. (Ross ran a steel company for three years during his Wall Street days.)
The “grope,” if you want to call it that, consisted of an investigation under Section 232 of the Trade Expansion Act. It’s meant to determine whether a certain category of imports has a damaging effect on national security. Although the Commerce Department is supposed to have up to 270 days to complete the investigation, Trump said he wanted it done in 50 days when he announced it in April. In truth, it could have been done in three days, because, while the results are not yet out -- any day now! -- we all know what the answer is going to be. Guilty as charged.
Back in April, Ross complained that steel imports had risen 19.6 percent in the first quarter and that China had captured 26 percent of the U.S. market. More recently, Joe Deaux of Bloomberg News interviewed John Ferriola, the chief executive of Nucor, the country’s largest steelmaker.
Ferriola told Deaux that for the industry to be “sustainable,” it needed “to operate at a utilization rate that is somewhere between 85 to 87 percent” -- compared to the current average of 74 percent, according to the American Iron and Steel Institute. To get there, he added, “You have to have imports limited to 10 to 15 percent of the market share here in the United States.”
Section 232 gives Trump tremendous leeway to impose not just tariffs but import quotas. Given that the U.S. is the world’s largest importer of steel, buying it from over 110 countries, according to the International Trade Administration, reducing imports by as much as two-thirds is likely to have enormous repercussions: starting with angry allies like Canada, which is the largest exporter of steel to the U.S., and trade retaliation that could hurt American consumers. It would be likely to bleed into other areas of foreign policy. It could start a spiral that might lead to an out-and-out trade war. The negative consequences are endless.
And what happens if some countries complain to the World Trade Organization, which is the business of ruling on trade disputes? It’s pretty obvious that the Trump administration is using national security as an excuse to help the steel industry. As Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, put it to a USA Today reporter, “The Pentagon, on its own initiative, has never asked for restraints on steel.”
Since the real rationale is economics, the W.T.O. wouldn’t be likely to look kindly on the move, despite having a carve-out for trade restrictions that are national-security-related. In which case, the Trump administration would have to decide whether to abide by a W.T.O. ruling or ignore it.
I know which way I’m guessing. The steel industry might wind up happy, but it looks like a disaster for the rest of us.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Jonathan Landman at email@example.com