Macroeconomics and Trade
American steel and aluminium tariffs
Make America tariff-free again?
Introduction:
This paper will examine how US tariffs on aluminium and steel have influenced the
domestic, international markets as well as trade flows. It will highlight the US-China and USUE relationship after tariff expansion. What is more, this work will elaborate on further tariffs,
as well as trade wars between the countries mentioned above and will apply relative theory and
models when appropriate. This paper is based on the article written for the New York Times
by Ana Swanson and Peter Eavis titled: “Trump Expands Steel Tariffs, Saying They Are Short
of Aim” published on 27th of January 2020, it focuses on challenges and future potential
outcome of the tariffs introduced by Donald Trump in 2018 as well as briefly explains the
current industry market structure in the United States of America.
Brief history and facts:
At the beginning of March 2018, the US president together with his administration
announced 10% tariff on imports of aluminium products, as well as 25% tariff on imports of
steel products.1 At the beginning of February 2020, an expansion plan to already existing
tariffs was introduced by Donald Trump in order to fill the gaps previously missed by the
government two years prior. The United States of America is the world’s largest steel and
aluminium importer2. Despite the 2018 tariffs and a decrease in imported metals, the country
still remains on the leading position in metal import, indicating that U.S. industry is strongly
dependent on these two resources.
Domestic effect of tariffs:
1
https://www.npr.org/2018/03/08/591744195/trump-expected-to-formally-order-tariffs-on-steel-aluminumimports?t=1606352491972
2
https://www.statista.com/statistics/1113645/global-aluminum-imports-by-country/
According to Trump’s administration, the increase in the price of imports would make
American market more competitive globally, secure domestic production and encourage
companies to move back to the USA. However, historical evidence indicates that tariffs raise
prices and reduce quantities of goods and services for investors and customers3. This results in
higher unemployment, decreasing income and lower economic output within the country.
Increase in tax on steel and aluminium leads to an increase in price of any good using those
inputs. Higher consumer prices reduce labour as well as capital income, as it becomes more
expensive to produce3. Due to rise in the import price of raw materials, many companies
located in the U.S. could not compete with world prices of steal and aluminium derivatives
such as nails, tacks, cables etc. This led to an increase in the import of this products into the
USA, what clearly contributed to lower output in the home country and further reductions in
employment and wages (Figure 1.2 with annotation).
In order to increase the output US government has introduced new expansion to the
already existing tariffs this time including earlier mentioned derivatives.
What is more, from a macro perspective after introduction of additional tax in 2018
American government is constantly lowering the interest rates4 together with increase in
government spending5. (Figure 1-1) This monetary expansion shifts IS curve to the right,
furthermore monetary expansion pushes LM curve down. Mix of both policies in theory
should increase the output in the country. It is estimated that all the tariffs imposed by the US
would lead to a decrease in GDP by 0,51% (127,21 billion), as well as fall in wages by 0,35%
and increase in unemployment by 394,300 in a long run3.
As a leading importer of aluminium and steel commodities US tariffs imposed by
Donald Trump not only affected domestic market but also it struck largest exporters of these
goods to the United States. (Figure 1.3) illustrates domestic as well as world market impact of
the tariffs. Looking at US’s import of raw material from abroad, the effect of the tariffs on
prices can be easily spot. First, we see how tariffs shifts up the export supply curve from X* to
X* + t, as the export of steel or aluminium from any given country, covered by the tariff, faces
significantly higher cost to enter the US market. The US prices increase from 𝑃 𝑊 to P* + t.
This may force exporters, in any given country covered by the tariff, to lower their world
prices from 𝑃 𝑊 to P* and absorb part of the tariff. What is more, due to foreign supplier’s
3
https://taxfoundation.org/tariffs-trump-trade-war/
https://countryeconomy.com/key-rates/usa
5
https://www.statista.com/statistics/215503/expenditures-of-the-us-government-by-quarter/
4
partial coverage of the tariff, there is a chance to increase overall welfare from producer
surplus and tariff revenue that the government is experiencing. On the other hand, consumers
in the home country are also being affected by the tariffs. Due to price increase faced by the
customers the domestic demand decrease resulting in deadweight loss. However, local
producers might benefit from higher customer prices and their products being competitive
again.
International trade and relations:
In 2019 alone, The US has imported 22,3 billion dollars’ worth of aluminium from over
140 countries all around the world6, almost all of them are covered by the tariff except Canada
(the biggest aluminium exporter to the U.S.), South Korea and Australia6. The international
responses to US tariffs spiked disputes between America and its biggest trade partners: China
and European Union7.
The United States and China trade relations:
Despite the 25% and 10% tariff on steel and aluminium, China still is one of the largest
exporters of these commodities to the US8. However, the relation between the two countries
seems to get worse and worse each year. Since 2018 Donald Trump imposed additional tariffs
on more than 360 billion USD of Chinese goods, aiming to encourage consumers to buy
American products making imported goods to the U.S. more expensive8. The response of
Beijing was immediate, implementing tariffs on more than 110 billion USD of American
goods. This led to so called Trade-war between those two countries8.
Tariffs translate into protectionism, by limiting the trade opportunities. In theory
protectionism plays a key role in improving economic activity within the home country9. On a
macroeconomic level such excessive number of tariffs imposed by each country indicates that
there is huge pressure to determine who is the winner and who is the looser in this face-off. At
the same time secure the position of a world trade leader. What is worth mentioning is the fact
that China is able to produce most of the goods at significantly lower cost level, as labour and
wages are much cheaper there, giving China an advantage over the USA. To secure position as
6
http://www.worldstopexports.com/us-aluminum-imports-by-supplying-country/
https://web.archive.org/web/20180713173752/https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/doc
uments/webcontent/tg_ian_003364.pdf
8
https://www.bbc.com/news/business-45899310
9
https://www.investopedia.com/terms/p/protectionism.asp
7
a world leader, the US had to find new import and export markets. In 2019, “the US imports
from China shrank more than 13% - but imports from Vietnam are popping10” (Grace Shao,
CNBD). In firs three quoters of 2019 imports from Vietnamize manufacturing market has
increased by approximately 35% year to year10. Reduction in the gap due to tariffs
implemented by both countries led to change in American trade flow focus to South-East Asia
boosting the foreign investment in Vietnam and increasing its trade surplus11.
The United States – European Union trade relations:
Implemented tariffs, by U.S. president Donald Trump, on steel and aluminium hit the
European market affecting 6,4 billion EUR worth of EU goods12 ,triggering possible
employment decrease within the Union and lower output in countries such as Germany, Italy
and Sweden13which are strongly contributing to the metal trade between two continents.
Although the transatlantic dispute is not as brutal as US-China trade war, tariffs were
introduced by UE to strike back the USA.14. The list has covered a wide range of U.S. goods
and commodities that will be submitted to additional tax when arriving at the European ports
and airports. 25% tariff on a range of seafood, agricultural and industrial goods, as well as
15% tariff on import of Boeing aircraft15.
That is a direct hit to the American food and manufacturing export. What is more,
implemented tariff on aircraft is a response of EU on American subsidies for Boeing to protect
European aircraft manufacturer Airbus15. This is another example of protectionism.
From a macroeconomic perspective a retaliatory duty in form of tariffs implemented on
the United States of America may affect its trade balance. As some of its exports may no
longer be profitable to import by local producers and consumers in Europe and China it will
inevitably lead to a decrease in export demand, net export would also shift downwards what
would affect U.S. export trade deficit (Figure. 1.4). What is more, decease in export will
directly affect American food producers and industrial manufacturers. As the demand for
American goods decrease abroad, the country faces another risk of unemployment, lower
output, income as well as consumption. In order to keep the output on the same level Donald
10
https://www.cnbc.com/2019/11/22/vietnam-exporting-more-to-us-but-still-isnt-a-full-china-substitute.html
https://e.vnexpress.net/news/business/data-speaks/trade-surplus-rises-to-new-high-4154743.html
12
https://www.bruegel.org/wp-content/uploads/2018/10/EU-Response-US-Trade-Tariffs.pdf
13
https://publications.jrc.ec.europa.eu/repository/bitstream/JRC112036/jrc112036_jrc112036_scienceforpolicyrepo
rt_final.pdf
14
https://www.ft.com/content/39f0700b-4534-40b2-a747-19cade45558e
15
https://www.seafoodsource.com/news/supply-trade/eu-regretably-introduces-new-tariffs-on-us-goods-but-mostseafood-is-exempt
11
Trump has to find new potential export markets which are willing to import American goods
in the same quantities, what may in the future lead to another shift in trade flow towards
different part of the world.
Effects on new-build and bulk shipping
Tariffs imposed on aluminium and steel will affect American ship-building industry16.
As the prices of imported steel rise the cost production of a new-build vessel might increase
for a private investor. However, effect on shipyards involved in the government-funded
projects could be minimal as manufacturers may negotiate higher contracts16. What is more,
Peter Sand BIMCO’s chief of shipping analysis claims that these tariffs impose uncertainty for
the shipping industry as it disturbs flow of goods, shifts the trade lines and make it difficult to
position ships efficiently on the market17. “The dry bulk shipping industry has already been
affected by the steel and aluminium tariffs and will be hit again when further tariffs come into
force17”(Perter Sands, BIMCO).
Conclusions:
Protectionism and tariff impose on key inputs driving the manufacturing industry
within the country, as well as escalating trade war with China and cooling partnership with the
European Union due to continuous tariffs expansion make Trump’s protection plan less
favourable. Most likely aluminium and steel together with trade wars have already created
irreversible damages to the U.S. economy. Trade is based on opportunities when we throw
obstacles instead of passing them, we deteriorate global trade growth and ourselves, at the
same time allowing others to gain the advantages from us. Does it mean that America should
be tariff free again? Definitely not, although more careful planning of tariffs, and primarily,
knowledge of the country’s economic needs, might in the future save billions of dollars and let
the country thrive.
16
17
https://www.professionalmariner.com/american-shipbuilders-brace-for-impact-of-tariffs-on-steel-aluminum/
https://www.bimco.org/news/market_analysis/2018/20180703_trade_war_overview
Sources:
1. 2018 Tariffs: https://www.npr.org/2018/03/08/591744195/trump-expected-to-formally-ordertariffs-on-steel-aluminum-imports?t=1606352491972
2. Import of Steel and Aluminium by country: https://www.statista.com/statistics/1113645/globalaluminum-imports-by-country/
3. https://taxfoundation.org/tariffs-trump-trade-war/
4. https://countryeconomy.com/key-rates/usa
5. https://www.statista.com/statistics/215503/expenditures-of-the-us-government-by-quarter/
6. http://www.worldstopexports.com/us-aluminum-imports-by-supplying-country/
7.https://web.archive.org/web/20180713173752/https:/www.trade.gov/mas/ian/build/groups/public
/@tg_ian/documents/webcontent/tg_ian_003364.pdf
8.Trade war https://www.bbc.com/news/business-45899310
9. https://www.investopedia.com/terms/p/protectionism.asp
10. https://www.cnbc.com/2019/11/22/vietnam-exporting-more-to-us-but-still-isnt-a-full-chinasubstitute.html
11.https://e.vnexpress.net/news/business/data-speaks/trade-surplus-rises-to-new-high4154743.html
12. https://www.bruegel.org/wp-content/uploads/2018/10/EU-Response-US-Trade-Tariffs.pdf
13.https://publications.jrc.ec.europa.eu/repository/bitstream/JRC112036/jrc112036_jrc112036_sci
enceforpolicyreport_final.pdf
14. https://www.ft.com/content/39f0700b-4534-40b2-a747-19cade45558e
15. https://www.seafoodsource.com/news/supply-trade/eu-regretably-introduces-new-tariffs-onus-goods-but-most-seafood-is-exempt
16. https://www.professionalmariner.com/american-shipbuilders-brace-for-impact-of-tariffs-onsteel-aluminum/
17.https://www.bimco.org/news/market_analysis/2018/20180703_trade_war_overview
18. Robert C.Feenstra, Alan M.Taylor, International Trade 4th Edition Global, Worth Publisher
2017, New York
19. Macroeconomics, 7th Edition, Global Edition, Olivier Blanchard, 2017, Pearson.
Work based on the article written for the New York Times by Ana Swanson and Peter Eavis titled:
“Trump Expands Steel Tariffs, Saying They Are Short of Aim” published on 27th of January 2020
Appendix: (models from International Trade 4th Edition Global, by Feenstra, Tylor.
Macroeconomics 7th Edition Global, by Blanchard)
Figure (1.1) IS-LM curve
Figure (1.2) wage setting relation (annotation: The higher the
unemployment-rate the lower the real wage)
Figure (1.3)
Figure (1.4)