Experts React: Steel Tariffs
March 20, 2018
Senior Associate (Non-resident), Energy and National Security Program, CSIS; and Managing Director, ClearView Energy Partners, LLC
Oil and Gas Seem Unlikely to Be Early Casualties of Trade War
President Donald Trump’s plan to impose 25 percent tariffs on imported steel could spark retaliation by China and the European Union. Together, Beijing and Brussels command considerable economic might, accounting for roughly $527 billion (66 percent) of the $796 billion U.S. trade deficit in goods last year, according to U.S. Census Bureau data, and approximately $414 billion (27 percent) the $1.54 trillion in gross U.S. exports. Even so, countermeasures seem unlikely to target U.S. oil and gas exports.
To begin with, both China and the European Union are net importers of oil and gas. During CY2017, net imports accounted for 8.3 million barrels per day (70 percent) of Chinese oil consumption and 8.8 billion cubic feet per day (39 percent) of Chinese gas consumption, according to Chinese customs data. In the European Union, net imports accounted for 10.5 million barrels per day (90 percent) of oil consumption on a trailing, 12-month (TTM) basis through August and 34.5 billion cubic feet (74 percent) of gas consumption on a TTM basis through November, according to Eurostat data.
Moreover, U.S. energy exports are a small part of trade with both markets. U.S. gross energy exports of all kinds—oil, gas, coal, biofuels, and natural gas liquids (NGLs)—added up to $9.2 billion of CY2017 outbound U.S. trade with China (7 percent of the ~$130 billion total) and $20.9 billion of outbound trade (7.4 percent of the $284 billion total) with the European Union. At least during the early skirmishes of the coming trade war, Harley-Davidson motorcycles and Kentucky bourbon appear to face considerably more trade risk than oil and gas.
That said, an escalating trade war could undermine the Trump administration’s exports-based conception of “energy dominance” by limiting U.S. producers’ access to overseas markets. So, too, could an Iran sanctions face-off with the European Union. Both outcomes could prove undesirable just as dominance dollars are starting to flow: Bureau of Economic Analysis data indicate that the value of U.S. petroleum, natural gas, NGL, and coal exports increased $45 billion between CY2016 and CY2017.
The Trump administration’s decision to levy tariffs on imported steel and aluminum is further evidence of the president’s preference for symbolic gestures rather than systemic change. Technically, the steel and aluminum tariff decision was made on national security grounds, and my colleague, Andrew Hunter, evaluates the decision on its national security merits below. In reality, the administration’s decision was driven by a desire to protect steel manufacturers in the United States from a market environment where overcapacity in steel manufacturing in China has put competitive pressure on the United States and other steel producers. Here the steel case example is like the approach taken in the recent solar panel tariff decision in three important ways:
- The administration chose to protect only one small part of an industry with a much broader reach and impact in the U.S. economy. On both solar and steel, the administration targeted manufacturing, representing 15 percent of jobs in the solar industry and 9 percent of jobs in the steel-intensive industries, to the potential detriment of other portions of the industry. The solar industry’s impact on the broader economy is much smaller than that of steel of course, but the economic “hit” taken by both industries and the broader economy, is widely believed to be larger than the economic benefit provided to the manufacturing portions of the industry.
- It is not clear that either tariff remedy will do very much to make even the targeted portion of the industry more competitive over the long run. In both the steel and solar industry, long-term competitiveness is about innovation, the costs of capital, and labor. Tariffs may provide a near-term boost for manufacturers, but if they do not take the steps to address the long-term competitive pressures facing their industry, then the tariffs are simply temporary reprieves from the relentless pace of industrial progress in an increasingly digitalized and automated world. The tariff may achieve its stated goal of increasing U.S. steelmaking capacity utilization to 80 percent from 73 percent, but it’s not likely to make the industry as a whole more competitive.
- The administration took the “middle of the road” path on both tariffs and left room for compromise. On solar, the 30 percent tariff was neither the strongest, nor the weakest option recommended by the Office of the U.S. Trade Representative. Moreover, carve outs were offered for certain small cell manufacturers and for the first 2.5 gigawatts of solar cells imported every year. On steel, the administration similarly did not levy the highest and broadest tariff recommended by the Department of Commerce and, while first signaling that no country would be exempt, has conditionally exempted Canada and Mexico and will entertain exemptions from specific companies and industries that use steel.
For an administration, and president, with virtually no governing track record, determining patterns of behavior is important. The pattern of behavior so far seems to point to symbolic protectionist gestures on trade with mixed and mostly negative economic impacts and very little in the way of addressing underlying competitiveness issues (tax reform is an exception to this rule, but one can argue that was more the doing of Congress). It is a pattern of economic behavior that favors the near term over the long term and a focus on alleviating symptoms of problems rather than solutions. In each instance, the trade partners targeted by the measures have pursued institutionally and diplomatically mainstream paths of recourse in an effort to dampen the potential for a broader trade war. If there is an accumulation of these sorts of trade measures, that approach is unlikely to last.
Senior Associate (Non-resident), Energy and National Security Program, CSIS; Head of Policy Analysis, Bloomberg New Energy Finance (BNEF)
Most of the mainstream press has focused on the impact that the steel and aluminum tariffs will have on the automotive and oil and gas sector. It’s true that the fabrication and assembly of vehicles and oil and gas production, refining, and distribution require a fair amount of steel and aluminum, but so does the renewable energy industry. My colleagues and I at BNEF, estimated the impact of the tariffs as follows:
- President Trump’s steel tariffs will cause a modest increase in U.S. wind and solar project costs and complicate the policy environment for electrified transport.
- The cost impact on an onshore wind turbine will be 2.7 percent to 3.5 percent, depending on which turbine components are affected by the tariffs.
- Expect up to a 2 percent capital cost impact on a new utility-scale solar project using single-axis tracking.
- The metals tariffs also add to headwinds for the U.S. electric vehicle market, which faces a Trump administration rollback of motor vehicle fuel efficiency and greenhouse gas standards for 2022–2025 models.
These estimates assume that tariffs are imposed at the rates announced by the president and do not take into account specific exemptions or retaliatory measures that might occur. Actual tariffs may exceed the levels announced by Trump in order to hit Commerce Department targets for a domestic steel capacity utilization rate of 80 percent (versus 73 percent now) and a domestic aluminum capacity utilization rate of 80 percent (versus 48 percent now).
Director, Defense-Industrial Initiatives Group and Senior Fellow, International Security Program, CSIS
An unusual feature of the president’s tariffs on steel and aluminum is that they are being imposed under statutory authority designed to counteract imports that impair national security. Two primary questions are raised by this aspect of the tariffs: how is the connection made between these metals and national security, and what will the national security impact of these tariffs be?
The connection between steel and aluminum and national security is straightforward. The Department of Defense (DoD) is a large consumer of both metals and having access to them is critical to producing U.S. military systems. This is particularly true for certain very strong alloys and specially manufactured grades of steel and aluminum. The exceptional capabilities of many U.S. weapons systems depend upon these exceptionally strong and highly engineered materials, including nuclear-powered aircraft carriers and submarines, tanks and other armored vehicles, and advanced fighter jets. DoD doesn’t buy much steel and aluminum directly. Instead, it procures hundreds of thousands of tons of steel and a sizeable quantity of aluminum through the construction of its weapon systems, especially ships. As a result of the Buy America Act and other domestic source requirements for specialty metals, the overwhelming majority of steel and aluminum bought for national defense comes from U.S. producers. These purchases are a relatively small share of U.S. production, however, at least with respect to steel. The published report on the Department of Commerce’s investigation omits most of the data on DoD’s aluminum usage. Based on expectations of increasing production rates of weapon systems in coming years, DoD estimates that it needs approximately 3 percent of domestic steel production. This relatively low market share presents little indication of a near-term supply shortage, and the trends in steel production and import penetration identified in the Commerce Department’s investigation do not suggest that DoD’s steel requirements are heading toward any significant danger of going unfilled. The situation with aluminum is less clear due to the lack of data on DoD’s demand and the higher level of import penetration, but the bulk of aluminum imports come from Canada, which is considered part of our national technology industrial base for defense purposes. The actual national security risk of steel and aluminum imports is low. And imports also can provide benefits. Canada provided critical surge capacity in steel when the United States embarked on a crash program to produce Mine-Resistant Ambush Protected (MRAP) vehicles for the wars in Iraq and Afghanistan.
So how are tariffs likely to impact national security? The aluminum and steel tariffs are likely to impose national security costs in three ways. The first cost is direct. Although DoD buys very little imported steel and aluminum, the price of domestic metals will rise after the tariffs are imposed. The entire purpose of the tariffs, after all, is to allow domestic producers to raise their prices. DoD will pay increased prices for these metals for as long as the tariffs are in place. The second national security cost is also financial, but indirect. It depends on how other nations react to the tariffs. Other nations may retaliate against tariffs based on national security by targeting U.S. defense trade. They may see the United States as a less reliable partner and hedge against that risk by buying more key equipment from other nations, or they may follow the tariffs logic themselves and require higher percentages of content from their own suppliers in U.S. systems (a phenomenon called offsets). If other nations respond to the tariffs in these ways, reduced international defense trade would cause DoD to have to pay a larger share of the defense industry’s overhead costs. The third cost applies to our alliances. Allies hit with tariffs may be less likely to join the U.S. in diplomatic endeavors like imposing sanctions or to volunteer assistance in sharing the burden of rebuilding in places like Afghanistan. If U.S. defense exports are impacted by the tariffs, the U.S. military would also lose some of the relationship building that defense trade generates. In the final analysis, the impact of the tariffs on national security is likely to be negative. The benefit of the tariffs is, at best, a marginal reduction in risk. The direct costs are real, though likely small. The indirect costs are harder to predict, as they depend in large part on the decisions made by other nations, but they have the potential to be significant.
For more: The President's New Steel Tariff, Steel, Aluminum, the Policy Process, and the Trading System, and Resisting the Specter of Smoot-Hawley
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