USA Tariff-Lined Self-Made Box Canyon

CNN says many US Senators are upset about yesterday’s White House announcement of new import tariffs of 25% on steel and 10% on aluminum. For the most part, the Senators worry about other countries raising retaliatory tariffs.

Although GOP Senators claim tariffs are a Democratic Party tool, the younger President Bush (a Republican) tried tariffs on steel imports too. That turned out to destroy jobs in other industries, and here we are with the USA’s steel industry still hurting.

Let’s take a closer look and see why the tariff announcement is a strategic blunder.

How could the USA really save its steel industry? By learning from its ‘special relationship’ with the UK instead of swinging a blunt instrument (the tariffs) that hurts the relationship more than it hurts the purported cheap import targets.

The UK’s steel industry teetered on the verge of collapse after the last economic downturn. The cost of materials and energy kept going up. The price commanded by finished steel was going down. Cheap imported steel from China wasn’t coming yet, but strategists in the industry (correctly) anticipated it.

I was on contract to Tata Steel for a while at that point. Steel plants were closing or sliding toward closure.

Tata Steel (now British Steel) had foresight. We built something unprecedented, an idea dreamed up by their PhD metallurgists and researchers that stretched the capabilities of modern technology.

Shareholder reports show the results. With the same materials, they became able to make more sophisticated, higher grade steel with more consistency. It commands higher prices, resulting in better profit margins.

Most importantly, when cheap steel from China began to come in, the imports were only suitable for the low end of the market that Tata/British Steel was stepping away from anyway.

Keeping steel mills open has been a hard-fought battle, and too many had to close. It almost took too long to get the new system fully embedded and up to speed. But the plant that first rolled it out is thriving now. The UK still has a steelmaking industry.

Tariffs won’t correct the underlying problems and will spin out new problems. America can’t ask the British (or any other knowledgeable ally) how to cope with the situation while simultaneously slapping them in the face. Within a day, the EU and several other countries responded with plans to impose retaliatory tariffs on other goods as early as next week, so it is already too late to back down from the announcement.

It’s a brilliantly constructed box canyon.