30.11.2018 - Comments

Trade war’s missed goals: the case of steel products


Is US protectionism a gain game?

In a recent simulation study, Zoller-Rydzek and Felbermayr show that while customs duties on Chinese imports distort consumer decisions by US citizens, the transfer of customs effects to Chinese suppliers means that the US as a whole would achieve a net advantage of 18.4 billion US dollars.1 Accordingly, US protectionism would prove successful. However, this simulation calculation seems to excessively simplify reality, as this paper of the effects of protectionism on steel imports shows.

US tariffs on steel imports

In terms of trade effects, Figure 1 shows that the trade balance of both iron & steel mill products and iron & steel producing sectors continued to deteriorate after the imposition of tariffs, which is in contrast with the expected effects. 2

Figure 1. Trade balances in steel producing sectors, in millions US dollars.

 

Since April 2018, the growth of aggregated weekly working hours for production and non-supervisory workers in the primary metals sector (iron and steel production accounts for the largest share there) has also slowed from its cyclical high of March 2018. It follows that after nine months in force, tariffs on steel have not reached their main goal.

What has happened in other interdependent sectors of the US economy, especially steel processing, machinery, metal products, vehicles and parts and electrical equipment? There is no evidence of a direct impact of tariffs on steel products on production volumes. At the same time, the production costs expressed in terms of the Producer Price Index (PPI) showed a remarkable dynamics. This is particularly true for iron and steel processing from purchased steel, where PPI inflation reached 25.7% in October 2018. However, the manufacture of metal products, electrical equipment and machinery also experienced a significant acceleration in PPI inflation after March 2018, exceeding historical averages. An exception to this is transport equipment, where PPI inflation rose relatively moderately from 0.8% in April to 1.9% in September.

If producer prices have accelerated, is there any evidence that the damage has been absorbed by the workers? Although total weekly working hours growth for metal products and electrical equipment has become somewhat less dynamic, the picture does not yet show clear damage. It is conceivable that the occurrence of this negative effect will take some time. It is less likely that this negative effect would be passed on through higher export prices.

Conclusions

Trade wars are not as good and easy to win as Donald Trump claims. The case of the steel import tariffs shows that although no major damage has occurred so far, the first unintended negative effects are becoming visible in the steel processing industry in the USA. The longer the protectionist measures are in place and the broader they are, the more likely it is that they will soon have a more significant impact. More importantly, protectionist measures on steel have not been able to achieve their goal of supporting domestic production and employment in the protected sector. Ironically, employment dynamics in this sector have slowed since the introduction of protectionist tariffs.

 


1 Zoller-Rydzek, B. und Felbermayr, G. (2018), „Wer bezahlt Trumps Handelskrieg mit China? Ifo Schnelldienst 22/2018, 71. Jahrgang, 22. November 2018.

2 Imports of iron and steel products remained largely stable in the second and third quarters of 2018, so that the negative impact on the sectoral trade balance is mainly due to falling exports of both product categories by 9.6% and 16.3% respectively in the third quarter of 2018.

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