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  First Thoughts

    Dan Gilmore


    Supply Chain Digest

March 8, 2018

Supply Chain Comment: Just How "Tariff-ying" is It?

Tariffs Could Threaten Good Economic Times for Sure - but There is Something to be Said for Fair Trade

Well, at least no one should be surprised. Donald Trump won the presidency in part based on vowing to reverse what he said were unfair trade arrangements with many countries around the globe.

So here we are: based on earlier recommendations from the US Commerce Dept. that imported steel and aluminum were damaging US producers, the Trump administration is going to enact as by now we have all heard of 25% on imported steel and 10% on aluminum – though as I write this details are being finalized and are rumored to perhaps allow exemptions for some countries, especially Canada and Mexico.

Gilmore Says....

Many of course are noting that far more US companies and workers may be harmed from the tariffs than will benefit from them in steel producing rust belt states.

What do you say?

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From a pure political perspective, I think this is high drama indeed. There has been growing backlash against globalization in many quarters, while other "globalists" view such opinions as not much above neaderthal status. So here were have Trump forcing the point, in what clearly could be an inflection point either way when it comes to imports and global trade

More than 100 House Republicans just sent Trump a letter asking him to reconsider the tariffs. Democrat majority leader Chuck Schumer says the moves may be on the right track generally, but should be aimed more specifically at China and a few other countries, not at long term allies.

Certainly, and justifiably, there are concerns the tariffs could hurt the currently almost booming US and global economy, and lead to a trade war that could do even more damage. It is worth noting that the Smoot–Hawley Tariffs enacted in the US at the start of the Great Depression supposedly to protect US manufacurers are considered by most economists to have deepened and extended greatly the downturn.

Could history repeat itself?

So, as always I am going to take a more factual approach to this, and try to stay largely out of the politics of it all.

Earlier this week, we wrote a news article that took a look at the current state of the steel and aluminum industries.

According to the monthly industrial output numbers from the Federal Reserve, US production of steel for consumer durables (cars, appliances, etc.) had an index value of 101 in December, versus a baseline score of 100 for the average month in 2012.

In fact, the index hit an all-time high in March of about 110. Compare that to output in 1995, when the index hovered around 90, meaning that current US steel output in this category is up more than 10% since the mid-1990s. That surprised me, actually.

Production of steel for construction projects is fairing even better, with an index value of 122 in December, near the all-time high of 133 seen in January 2008, and up 22% from 2012. In 1995 the index was around 70, meaning US output is up 74% since then. Meanwhile, raw steel production has been flat since 1990.

Aluminum is a different story. The output index for primary aluminum was only 40 in December, down 60% from 2012. In the early to mid-1990s, the index was in 140-150 range, meaning production has fallen even more dramatically since then.

The story is much better, however, for the category of secondary smelting and alloying aluminum products, with the index around 125 for all of 2017, versus hovering around 72 in 1995.

But China has simply swamped the market in terms of aluminum capacity, as shown in the chart below from Bloomberg in 2016.


And even though the situation appears better for steel, clearly dozens of mills have close in the US in recent decades, partly due to significant gains in efficiency, partly due to a flood of foreign steel, much of it from Asia, that has not only taken much share in the US and Europe but has also at times driven down prices to a point where steel mills in Western countries were bleeding red ink.

Many US and Western steel companies have complained Chinese companies especially are "dumping" steel into their markets at below their cost to produce, and/or benefitting from a range of government subsidies.

In May 2016, for example, thousands of German steel workers protested outside the European Parliament over alleged dumping by China. They oppose among other things China being declared a market economy under the World Trade Organization.

"China produces steel with public subsidies, far below the actual costs of production and without consideration for the environment and on-the-job safety," one worker told Euronews.

We will also note that a few years ago the contract for the steel to build a new massive bridge in the city of Oakland was awarded to a Chinese producer because no US company had the capacity to produce the steel in the quantities needed for the project.

So there are some issues, and I think we can agree having some baseline of domestic steel and aluminum needs to be maintained domestically for strategic (economic, national security) reasons. The question then becomes how do you ensure that? Are tariffs in fact the answer? Or mandates that say anything the government or DoD procures must be made from US metals?

Many of course are noting that far more US companies and workers may be harmed from the tariffs than will benefit from them in steel producing rust belt states.

We are down to about 150,000 combined workers in steel and aluminum production in the US currently, versus millions in everything from aerospace to car production to aluminum using Campbell Soup that are likely to see their costs rise as a result of the tariffs. And of course, US farmers and others are at risk from retaliatory measures by affected countries.

I will also not the story of the story of Voestalpine AG's steel plant in Austria. A Bloomberg News story from June 20, 2017 reported that the plant needs only 14 employees to make 500,000 tons of steel wire per year. The same mill in the 1960s would have needed as many as 1,000 workers to produce a similar amount, albeit of lesser quality.

"We have to forget steel as a core employer," Voestalpine CEO Wolfgang Eder told Bloomberg. "In the long run we will lose most of the classic blue-collar workers, people doing the hot and dirty jobs in coking plants or around the blast furnaces. This will all be automated."

I agree with all that. But what I don't agree with – from the perspective of someone who has lived nearly all life in my beloved rust belt state of Ohio - is that this means that the status quo should be maintained as is.

The UK's The Economist magazine ran a front page story in mid-2017 asking "Does China Play Fair?" The unsurprising answer: No.

China is warning about its expected retaliatory measures as a result of the tariffs. But we ran a story a few weeks ago how Tesla car imports into China are subject to – interestingly – 25% tariffs.

So maybe Teslas should start making its e-cars in China itself. But after many months of negotiations with the Chinese government, a deal has not been reached – because as usual China wants its companies to own a significant part of the business, and the technology that comes with it.

China's central government says a proposed new plant near Shanghai must be a joint venture with local partners, while Tesla wants to own the factory completely. Currently, all foreign automakers must partner with Chinese companies in order to manufacture locally.

So in the end, I believe the tariffs need reconsidered. They could screw up the current economy. But that doesn't mean the status quo should simply be accepted either. There is something to be said for pushing aggressively for "fair trade" – and taking some actions if that cannot be achieved.

What are your thoughts on these new tariffs? What are the risks? But do we need more truly fair trade? Let us know your thought at the Feedback section below.

Your Comments/Feedback




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