Here is an S&D Worksheet (pdf) to help with the post. What is the relevant “market” for different pieces of the argument? Does D or S shift? right or left? where’s the new “e”?
On March 8, 2018, President Trump issued Proclamations 9704 and 9705 on Adjusting Imports of Steel and Aluminum into the United States, under Section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862), providing for additional import duties for steel mill and aluminum articles, effective March 23, 2018.
That’s a mouthful, if you have to read it out loud. The official notice also takes a while to get around to detailing the tariffs: 25% on steel, 10% on aluminum. So what? Now the aim of the Administration is to make imports more expensive, so that car companies and other users purchase more domestic steel, increasing jobs in US steel mills, many located in swing states. Let’s focus on the economics, though, and not the politics.
The average motor vehicle uses 2,400 lbs or just over 2 metric tons on steel. Ordinary steel is inexpensive, and cars use some, but to be crash-worthy and still light enough in weight to sip fuel frugally, a modern vehicle uses lots of specialty high-strength steel. So while automotive demand accounts for only about 15% of the market for steel, it’s by far the most profitable segment. So order of magnitude let’s assume an average cost of 50¢/lb. If half of that steel is currently imported, then direct impact of the tariffs is to add 2400 x 50¢ x 1/2 x 25% or $150 to the cost of LVs.note
First, steel is not homogeneous. That used in body panels is specific to each car company, with slightly different alloying compounds, rates of cooling, and hot and cold rolling processes. A different plant of a different company can’t precisely duplicate that, and so may not be useable. In addition, a “pour” of basic oxygen steel is near 300 tons. Once rolled into a 5 mm sheet, that’s enough to stamp out doors and fenders for a lot of cars. In other words, a car company sticks with the steel not just of a particular company, but of a particular mill. Now it’s generally possible to “tune” dies to modest variations in steel, to correct for it “springing” back differently and thus creating a panel not quite fitting the way it should. But car companies may stick with imported steel rather than try to tweak their factories in the middle of a model year. (Think of the problems Tesla is having, because they tried to rush production rather than taking the time up front to tune their dies.)
In addition, mills have a fixed capacity. With the domestic auto industry operating near capacity, domestic mills may not be able to fill additional orders for new types of steel in a timely manner. Anyway, we ought to expect steel imports to fall a bit.
Now we have an input to cars going up in price. A nice study from PIIE points out that the impact is not the same on all vehicles. Higher-volume vehicles – think the Honda CR-V, the Toyota Corolla, and the Ford Escape – tend to use more domestic parts and components for logistics reasons, and because they are made in Europe, the US and Asia, the number is high enough to allow specialty steel to be sourced from mills in each region rather than to be shipped around the world from one mill. That means low-volume producers (think Subaru in Indiana or Mercedes in Alabama) will be affected more than average.
New cars, even basic ones, are expensive. The median household income of purchasers of inexpensive LVs is $75,000. To put that in perspective, a two-fulltime-worker household where both earn $16 per hour, over double minimum wage, pull in $64,000 per year. Most households earn less, and can only afford to buy a used car. But a used car was made before the tariffs were imposed, and so cost less to make. So are the poor households who never buy a new car affected by the tariff?
Now this example focuses on the auto industry, but it’s not the only one to use steel – look at the old gym for an example of an industry that is a very large user of commodity steel! What other industries will be affected? For reference,
the steel industry employs about 80,000 workers (BLS NAICS data), automotive manufacturing employs 950,000 while construction employs over 7 million. While not all of the latter are in sectors that use steel – those in “stick” construction that relies upon wood 2x4s –it’s the biggest user of steel. What, if anything, would we expect to happen to employment in autos and construction? Walmart?
Finally, we export $10 billion of autos to China, principally of upscale models (including the BMW X-series that is only made in Spartanburg SC, and the Tesla Model S that is only made in Freemont CA). We also ship automotive components, including auto-dimming electrochromatic mirrors (made by Gentex and Magna’s Donnelly division, both located in Zeeland MI). Tariffs aggressively applied generate a reaction, and China has retaliated with its own 25% tariffs, affecting all automotive trade. Telling, neither US automakers nor US autoworker unions called for tariffs on imported cars and car parts, but that looks what we’ll get, with an impact that extends far beyond that of tariffs on steel.note 3
- The tariffs haven’t stopped at steel, with the White House is pushing for 25% tariffs on auto imports and 25% on all imports from China, including automotive components.
- We can’t say “car” because sedans comprise under 30% of the market. Because it’s tedious to always use “motor vehicle” I also use “cars” and “LVs” for “light vehicles”.
- PIIE estimates that 2% of auto industry jobs would be lost if tariffs are extended to imported parts. So far NAFTA is not included. Extending tariffs to Canada and Mexico would have a far larger impact.
“The Trump administration’s latest round of tariffs is throwing into sharp relief the dominance of Chinese suppliers in automotive supply chains. Among the $200 million in imports subject to 10% tariffs beginning next week are a $10 billion in auto components from more than 1,000 Chinese companies, including crankshafts, spark plugs and windshield-wiper blades” [Wall Street Journal]. “There are few immediate and affordable alternatives for many of those parts for U.S. manufacturers, and the levies—which rise to 25% next year—will reverberate through the supply chain, affecting prices of new and used cars. Chinese suppliers are beginning to see the impact, with some receiving fewer orders from U.S. customers. U.S. suppliers, facing higher costs and customers that won’t take nicely to price increases, are caught in the middle.”
from Naked Capitalism “water cooler” of 20 Sept