Leibowitz: The Great Debate—Section 232 Tariffs and Global Capacity

The lines are drawn between those who like the tariffs and those who want them gone. The current negotiations with the European Union, which need to be resolved in the next month, are focusing the attention of both groups. Europe wants the tariffs to be ended for European exports (and the UK is tagging along too). But domestic steel and aluminum producers are stoking fears that if the tariffs on Europe are ended, the demise of these domestic industries will be at hand. While the extreme views expressed are largely overreactions, there is likely to be some more thinking about what the tariffs accomplish and what they don’t. This is healthy.

We have had tariffs on steel and aluminum since March 2018. In 2019 and 2020, the OECD reports that global steel capacity increased by some 1.6% (about 37 million metric tons). North America (Canada, Mexico and the U.S.) increased in that time by about 2.1% (3.2 million metric tons). Capacity additions to 2023 will result in further capacity expansion (1.8-4.6% globally and 2.6-5.0% in North America).

There are two firm conclusions from this data: (1) North America and global capacity expansion will not stop; and (2) the Section 232 tariffs on steel have no effect on global capacity expansion.

Another conclusion is that “capacity” is impossible to measure with any degree of accuracy. For example, is capacity measured by maximum output (say, three shifts per day for seven days per week); does it include plants that have been shut down but not physically dismantled? The answer depends on criteria that are not entirely consistent. Most capacity measurements are compiled by groups with an agenda, so that “capacity” is measured to further that agenda.

Given the fact that “capacity utilization” is not a truly objective measurement, and that the Section 232 tariffs are not in any way influencing capacity expansion – however it is measured – we are left with the tariffs as protection for the U.S. industry against the big, bad world.

How is that working out? Do the tariffs really protect the U.S. economy from imports? Most studies indicate that tariffs do more harm than good for the U.S. economy, costing jobs and production in downstream industries. The steel and aluminum tariffs almost certainly have this effect, encouraging manufacturing companies to relocate production offshore to avoid the tariffs. Over time, this effect will certainly increase. The steel industry, which directly employs a bit over 100,000 in the U.S., supplies industries (construction, transportation, capital equipment and energy, among others) that employ about 60 times more jobs.

That comparison certainly does not mean that the steel and aluminum industries should be written off as hopeless. But it does mean that this country has an urgent need to examine the failings of those industries, the short- and long-term implications for the economy and the nation’s security of those industries’ demise, and solutions that will give our country a better chance of healthy growth. Tariffs are not working to reduce global overcapacity (as shown by the OECD) and they never will—nor will protecting a small industry and causing dislocations and outsourcing of larger industries serve as a long-term solution.

Then what will work?

A few initiatives could well start the ball rolling. A dynamic and robust economy will create millions of new jobs. How do we energize our economy? An industry such as steel that has declined as a job-creator and as a lynchpin of our national security for decades is not going to be sustained just with tariffs. If the domestic steel industry is vital to national security, it needs to get better and more competitive. We need to be honest with ourselves about what happened to steel and aluminum and try to fix them. State subsidies overseas have no doubt resulted in more capacity additions than would have occurred without them; but U.S. tariffs will not encourage countries to shut down manufacturing capacity. If U.S. companies retool to be more competitive for our industries as well as industries offshore, these industries’ place for the future will be more secure.

The current tariff regime has resulted in historically high prices at home (they are historically high in most global markets, too, but the prices in other markets are markedly lower than in the U.S.). With the profits generated by high prices, U.S. companies need to undertake modernization, not just be opening new capacity but by improving or shuttering capacity that is no longer competitive. All benefits should be matched by obligations to the country’s welfare.

Steel and aluminum producers should be encouraged to make common cause with their customers as well. That could encompass a wide variety of initiatives, including more public information about prices in various markets (such as long-term contracts), providing more opportunities for new companies to obtain favorable prices, and developing products that meet customers’ 21^st Century needs. In addition, many studies point out the need for steel and aluminum making to reduce emissions and lead to “carbon neutral” production.

The $3.5 trillion “Build Back Better” bill has a few of these ideas, but critics complain that the cost is more than we can afford. That may be; but there are ways to start the process and choose the initiatives that are most cost-effective and most likely to yield results. Our political system does not appear to make those choices as effectively as the marketplace, so we need to let government and the market work hand in hand.

The challenges are immense in all these areas; the continued reliance on the “blunt instrument” of tariffs and trade restrictions does not help reach those goals and in fact holds us back. It brings to mind the famous quote about the source of our problems: “It’s not true that life is one damn thing after another; it’s that life is the same damn thing over and over.”

Lewis Leibowitz

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