Much Ado About Tariffs

Much Ado About Tariffs

Recently announced tariffs on steel & aluminum imports has created an economic commentary uproar. Seemingly every day a host of academics and economists deliver stern warnings about the start of a “trade war” with our trading partners. Should we be concerned? What impact might steel tariffs have on your investments?

Going back in time a bit, readers may remember driving through smog filled air in steel producing US cities like Pittsburgh, Bethlehem, Buffalo, or Gary Indiana in the in 1960s or early 1970s. Not so today, many of those plants are long ago shuttered (the inset photo is a closed Bethlehem steel facility). The few that remain have learned how to produce in an environmentally friendly way. While strict environmental protection laws have cleaned the airways and waterways in America, China’s pollution abounds. Pollution bad enough that the citizenry wears breathing masks to walk down the street creates special longer-term problems. However, in the here and now China’s lack of environmental compliance and its costs gives China a big competitive advantage (see link here). Add to that a currency that is more or less pegged to the US dollar, a communist government controlling and supporting industry and many (if not most) companies, and suddenly the competitive advantage is really big.

According to Global Steel Trade Monitor (link here) published by the International Trade Administration, China produces nearly half of the world’s steel. Global steel output is forecast to grow to 1.648 metric tons (MT) in 2018 outstripping forecast demand of 1.548 MT. When supply outweighs demand for any product or market, prices decline, and capacity must be shuttered.

Based on the current outcry, one might think trade duties and tariffs are a new concept or idea – never before implemented by a sitting US president. In fact, in 2002 then President George Bush imposed 8%-30% tariffs on steel. In 2009 then President Barack Obama imposed duties on Chinese steel and tires. In 2016, President Obama again levied a tariff on Chinese steel, this time a 266% penalty.

Additionally, the use of tariffs by virtually all countries is well documented. The World Trade Organization (WTO) tracks and publishes trade duties and tariffs by country, commodity, and amount. In 2017 China had tariffs or duties as high as 65% on certain US agricultural goods such as wheat, barley and corn. China also had 2%-10% penalties on numerous types of flat rolled steel, steel tubing, bars and ingots. Likewise, US trading partners like the European Union (EU) and Canada had tariffs or duties on some agricultural products like wheat, barley or corn.

So, if duties & tariffs have been around since the beginning of international trade and every country has its own set of duties or tariffs, why is this particular tariff so concerning? Globalism. There seems to be a battle playing out between unfettered globalism and populism. Scotland tried to leave the UK, British citizens voted to leave the EU, US citizens elected Donald Trump, Catalonia tried to succeed from Spain, and there are others.

It makes sense that global trade is good. Certain countries have natural advantages due climate, location, access to minerals, agriculture, or production capabilities built up over the years that others may not have. However, when every country produces the same thing, produces more than it needs, and has unfair advantages, then global trade may not be so good.

In summary, does any country really want to lose vital companies or an entire industry due to unfair global trade? No, so what’s the solution? Tariffs, duties, quotas or restrictions or some combination of each. Is the solution perfect? No, but neither is the global trade playground. In time, economies, prices, and markets will adjust, and time will march on. In the interim, focus on your goals, manage your risks, and live the life of your dreams.

other sources:

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