Manufacturing | Distribution | Retail Practice
06.13.2018 | Berdon Industry Insights
On March 1st, President Donald Trump announced that his administration would be imposing a 25% tariff on steel and a 10% tariff on aluminum imports into the United States. The decision, which was greeted with consternation by manufacturing executives and the U.S. securities market (the S&P’s 500 industrial sector fell 1.9% after the announcement), came two months after the release of a report by the U.S. Department of Commerce, Bureau of Industry and Security Office of Technology Evaluation, which investigated the effects of steel imports on U.S. national security.
The Commerce Department report found, in part, that: “Excessive steel imports have adversely impacted the steel industry. Numerous U.S. steel mill closures, a substantial decline in employment, lost domestic sales and market share, and marginal annual net income for U.S.-based steel companies illustrate the decline of the U.S. steel industry.”
The report went on to conclude that steel imports are “weakening our internal economy” and “threaten to impair U.S. national security” as defined in Section 232 of the Trade Expansion Act of 1962.
Armed with that finding, the President announced that the administration would impose steel and aluminum tariffs, pursuant to Section 232. However, exceptions were quickly carved out for imports from the European Union (EU), Canada, and Mexico.
Those exemptions have now come to an end.
New Tariffs on the EU, Canada, and Mexico
On May 31st, the White House announced that “as of June 1, 2018, tariffs will no longer be suspended for steel or aluminum imports” from the EU, Canada, and Mexico. The statement went on to note that “Section 232 steel and aluminum tariffs have already had major, positive effects on steel and aluminum workers and jobs, and will continue to do so long into the future.”
As expected, American trading partners in Europe, Canada, and Mexico reacted negatively to the administration’s decision. German Chancellor Merkel called the measures “illegal” while Canadian Prime Minister Trudeau found it “inconceivable” that Canada “could be considered a national security threat.”
U.S. manufacturers were no less alarmed—as was the Dow Jones Industrial Average, which plummeted 200 points after the announcement. The expectation is that steel and aluminum tariffs will, over the medium-to-long term, hurt job growth, and will end up costing consumers more.
The Alliance of Automobile Manufacturers announced that: “The decision to forge ahead with these steel and aluminum tariffs will adversely impact the price of consumer goods, including the millions of new vehicles Americans buy each year.”
The food and beverage industry is also bracing for the deleterious knock-on effects of the tariff on aluminum. Campbell Soup, Kraft-Heinz, General Mills and Hershey are expected to be among the most affected. A spokesperson for Campbell noted: “Any new broad based tariffs on imported tin plate steel – an insufficient amount of which is produced in the U.S. – will result in higher prices on one of the safest and more affordable parts of the food supply.”
Tariffs on Canadian aluminum are also expected to hit consumers in the pocketbook. The U.S. market imports an estimated 5.5 million tons of aluminum per year, but produces only around 700,000 tons. The shortfall is largely made up by Canadian imports, which account for nearly 50% of the aluminum consumed by U.S. manufacturers. The rise in the cost of importing Canadian aluminum will be passed on to the American consumer.
Moreover, the tariffs are widely expected to have negative effects on key parts of the U.S. supply chain. In recent months, American firms have seen the newly introduced tariffs lead to higher prices on imports, which, in turn, are forcing them to charge more for their products. The chief executive of Insteel Industries Inc., a North Carolina maker of concrete reinforcements, told the Wall Street Journal, “This is a nightmare for steel consumers.”
Some steel consumers, such as toolmaker Stanley, Black & Decker, are now considering replacing American suppliers of component parts with foreign ones, which could spell trouble for the U.S. labor market.
What about the effects on the labor market?
A study by the Competitive Enterprise Institute found that while the short-term result of the new tariffs could save as many as 33,000 jobs, the downstream effects of the new policy will raise the cost of doing business in the automobile, construction, and food and beverage industries, with potential cost of loss of an estimated 179,000 jobs.
Another study on the effects of the tariffs on the U.S. beverage industry noted that the 10% aluminum tariff could create a $347.7 million tax on America’s beverage industry, and may result in the loss of 20,291 American jobs.
United Steel Workers, which represents 1.2 million currently employed and retired steelworkers in North America, objected to the Administration’s application of Section 232 to Canada. In a statement, the union said it “has become increasingly difficult to understand the reasoning behind certain decisions and policies.”
In the months since the imposition of the new tariffs, the effects on the labor market are apparent. The nonfarm payroll numbers in leading steel industry cities, such as Reading, PA, Decatur and Mobile AL, and Monroe, MI, have turned negative since the imposition of the first round of tariffs in March.
Perhaps more alarming, a new report by Trade Partnership Worldwide, LLC indicates that the service industry sector may lose up to 375,000 jobs as a result of the new tariffs. The report predicts that about 7,000 jobs will be lost in agriculture and 20,000 jobs in manufacturing, a total loss of over 400,000 jobs during the next three years.
All told, a shrinking labor market, combined with higher consumer prices, would seem to be a recipe for a downturn in the overall economy.
To speak with a Berdon professional about how the new tariffs may impact your business and discuss accounting solutions to help identify potential savings opportunities: Contactus@berdonllp.com.