Trump's Tariffs Don't Explain the Drop in Steel Shares
The New York Times and the Council on Foreign Relations both attribute 2018 fourth quarter weakness in steel shares to Trump's "national security" tariffs. But the recent 11 percent drop in steel prices (figure 1) mainly reflects fears of a slowing global economy, forecast by the International Monetary Fund1 and the Organization for Economic Cooperation and Development and lamented at Davos. While escalating trade tensions are among key risks to the global economy, the US-China battle, doubts about Brexit and the US-Mexico-Canada Agreement (USMCA), and Trump's fascination with auto tariffs loom far larger than steel tariffs.
In fact, the steel tariffs are doing exactly what the president wanted: create a wedge between domestic and foreign prices. The 25 percent tariff on imports, coupled with quotas that limit imports from favored foreign suppliers (Argentina, Brazil, and Korea), ensure that domestic steel is more expensive than world steel. The gap between the US steel producer price and US import prices (which mirror world steel prices) rose to 10 percent by December 2018 (figure 2), imposing a hefty cost on all steel users. Partly in response to Trump's largesse, Nucor has announced plans to build a $1.35 billion steel plant.
The fact that steel shares, like other equities, hit a bad patch in the fourth quarter of 2018 may explain two of Trump's recent decisions: his refusal to lift tariffs on steel imports from Canada and Mexico,2 a step urged by influential legislators to promote ratification of the US-Mexico-Canada Agreement, and his newfound enthusiasm for a steel barrier rather than a concrete wall on the US-Mexican border. In any event, steel tariffs are serving their purpose of enriching US steel firms, no matter the cost to steel users and the rest of the US economy.
1. The January 2019 IMF World Economic Outlook reported that for 2019 global growth is estimated at 3.7 percent and US growth at 2.5 percent.
2. Canada and Mexico exported 5.78 million tons and 3.15 million tons of steel products to the United States in 2017, respectively, accounting for 25 percent of total US steel imports (34.58 million tons). US steel production in 2017 was 81.61 million tons.