Post Scriptum on Steel Tariffs
A Wall Street Journal story of today (“Foreign Steel Keeps Flowing Into U.S. Despite Tariffs,” December 5, 2018) expresses surprise at the most standard results of elementary trade theory: a tariff raises all prices equally, those of domestic producers as much as those of foreign ones; domestic quantity supplied increases; and imports decrease. The Journal writes:
Instead of isolating imported steel as the most expensive in the market, domestic steel producers have raised their prices … Domestic steel producers have raised their prices … The tariffs have made steel more expensive in the U.S. than almost anywhere in the world. The benchmark price for hot-rolled coiled sheet steel is up 22% in the past year at $760 a ton, 70% higher than the price of sheet steel in some other countries. … Between April and September steel production averaged nearly 8 million tons a month, the most since 2014, the steel institute said.
The title of the article, of course, is misleading. Except if the tariff is “prohibitive,” imports will continue to come in, but in smaller quantity, as indeed seems to be the case:
Imports are down 13% in the year through October from a year earlier.
The reader who has read my discussion of steel in a post of last week will not be surprised.
Also not surprisingly, as economic theory again forecasts, short-term profits of domestic producers (Nucor Corp., U.S. Steel, and others), who benefit from a rent, have increased—or have replaced losses. Indeed, this is precisely why domestic producers wanted the tariff in the first place.
And note how, given continuing advances in technology and productivity, increased production hasn’t translated into equivalent employment gains:
Just over half of the 18,400 jobs shed during the last steel market slump have returned.
Although the article sometimes appears confused, reading it is, for the wheat and for the chaff, a good exercise in applied economics.
Dec 5 2018 at 10:23pm
Do you see any irony in the idea that to punish Iran, we deny Iranians the benefits of international trade, but that to make America great again (like in 1930), we deny Americans the benefits of international trade?
Dec 6 2018 at 10:43am
Very good point, Maniel!
Dec 5 2018 at 10:46pm
Seems to me the application of a tariff, and who bears the costs and how the price shakes out, depends upon the elasticity of supply and demand.
We are now operating in a average-to-good economy in the US, so there is demand for steel. Other nations are exempt from the steel tariffs, such as Thailand and Japan.
Curiously, steel prices today in the US are lower than 10 years ago!
China operates a dirigiste economy, and has been cutting taxes and increasing subsidies to exporters, to offset the US tariffs. So China may be “eating” part or all of the US tariffs.
BTW, the stole the word “dirigiste” from Pierre Lemieux. Even at this late date, there is something classy about using French words in economic discussions.
Trump’s tariffs, or rather the results thereof, are more nuanced than seen at first blush. Perhaps tariffs will even result in more-diversified, more-robust supply chains.
Dec 6 2018 at 10:50am
Benjamin: Three points.
(1) Except in the case of terms-of-trade effects, world supply is perfectly elastic, so the only effect of a domestic tariff is on domestic quantity demanded and domestic quantity supplied, not on price.
(2) Point #1 solves the issue of “China” eating the tariff–at least to the effect that Chinese producers respond to price and profit incentives. And we can observe that they have not eaten much (except for the fall in quantity demanded).
(3) The impact of a tariff has to be considered ceteris paribus–compared to what the price would be if there had not been a tariff. Without a tariff, steel prices in America would be even lower compared to 10 years ago.
Dec 5 2018 at 11:22pm
Indeed, but given the Transitional Gains Trap, is it likely these profits persist? I think not.
Dec 6 2018 at 10:52am
I agree, Jon. (This is why I wrote “short-term”.)
Daniel R. Grayson
Dec 6 2018 at 10:12am
Re: ” for the wheat and for the shaft ”
… for the chaff?
Dec 6 2018 at 10:40am
Thanks, Daniel, for noting the typo. I’ll shift to proper spelling now!
Dec 6 2018 at 12:48pm
Probably a Freudian slip based on thinking about domestic steel users “getting the shaft.” 🙂
Dec 11 2018 at 2:32pm
Yes, it was that!
Dec 23 2018 at 9:08am
I’m not an economist, just curious as to the effect of these tariffs given there hasn’t been any headlines about them since the predictions of doom we heard across the political spectrum when they were introduced.
So it seems like they’ve had the desired effect then? They’ve created jobs, boosted revenue for domestic steel producers and from what you’ve said hasn’t stopped productivity gains. The point wasn’t cheap steel, it was steel that was priced realistically without the unfair advantages importers have to artificially lower it, giving domestic producers a level playing field. The question is whether this will lower demand to the point that these gains are wiped out or that other parts of the economy start to suffer in a way that makes it a net loser for the country as a whole. Is there any evidence of that yet?
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