Today, the Trump administration announced steep tariffs on steel and aluminum to go into effect in 15 days. According to the administration, these two industries have been targeted for many years and subjected to unfair trade practices resulting in plant closings and decimation of whole communities — a trend that is creating not only economic consequences but also a national security concern. As President Trump announced today, strong steel and aluminum industries are vital to the national security of the United States. Specifically, the president indicates that he intends to build up the country’s military using American-made steel and aluminum.
The tariffs will consist of a 25 percent tax on foreign steel and a 10 percent tax on foreign aluminum. No tax will be levied on any product made in the United States. According to the administration, it is open to modifying or removing tariffs on individual countries. Canada and Mexico will be excluded from the tariffs for the time being. The president indicated that if these countries and the United States can come to agreement on the North American Free Trade Agreement (NAFTA) renegotiation, the exclusions will become permanent; the implied message is that if the renegotiation is unsuccessful, tariffs will be applied to all imports, regardless of source.
No one should be surprised at today’s actions. The president campaigned on this issue and can be expected to play to his base that this is a “promise kept.” That said, there are signs of flexibility for countries willing to make adjustments in the interest of more fair and reciprocal trade. However, any country granted an exclusion would result in higher tariffs for other countries in view of the administration’s apparent commitment to maintain a level of protection in defense of domestic steel and aluminum industries.
Critics of the administration’s move today have raised concerns regarding the possibilities of strong reprisals and escalating protectionist practices that could lead to full-scale trade warfare, create strong headwinds of slower global growth and higher inflation for exporters and multinationals, as well as consumers and businesses having strong reliance on imports. Given this week’s fluctuations in the markets in which there was an abrupt decline followed by a recovery, fears of an extreme response appear to have subsided – at least for now.
These tariffs have understandably raised questions among many organizations in different industries. While this obviously is an evolving situation and much more will develop and become clearer in the coming weeks, I asked some of Protiviti’s Global Industry Leaders to share with me their initial thoughts on some of the potential impacts in their industry and the questions their clients are asking. Here’s what they had to say:
Manufacturing and Distribution: The proposed tariffs are applied broadly rather than to specific countries, which opens up the risk of retaliation, even from U.S. allies. Clearly there will be winners and losers in the manufacturing industry, based on the particular sector. Obviously, domestic steel and aluminum producers stand to gain the most from these tariffs as they counter cheaper imports “dumped” from heavily subsidized countries like China. However, due to tariffs raising the cost of steel and aluminum in global supply chains, many U.S. industries that use those metals could see decreasing margins, increasing prices for customers and/or a reduction in manufacturing jobs. This could include automakers, machinery and equipment manufacturers, beer and soda companies and the construction industry, to name a few. From a trade partner standpoint, certain European and Asia-Pacific allies who are larger trading partners than China on certain goods could be harmed. If a trade war ensues, no one wins.
Consumer Products and Services: Steel and aluminum tariffs will likely drive up costs on manufacturing equipment and raw materials used in packaged consumer goods manufacturing as well as the finished goods themselves, although no one knows for sure just where the point of levy will be in the value chain. For a long time, companies have taken full advantage of cheap labor costs abroad through outsourcing, offshoring and emphasizing low cost producers in building global supply chains. As a result, U.S. businesses and, in particular, retailers have benefited from less expensive imported goods. Accordingly, the National Retail Federation and the Food Marketing Institute have expressed concern that these tariffs will impact the finances of all Americans with higher costs on basic consumer items, including food and food packaging. Additionally, for many years, Americans appetite for imported goods has increased and a trade war could lead to higher prices for imported goods Americans enjoy. If the administration’s trade policies and retaliation by other countries were to increase the cost of imported goods, it is reasonable to expect – at least initially – upward pressure on the prices of consumer goods.
Technology: Although the technology industry is not typically called out as one of the significantly impacted industries, steel and aluminum are major components for many manufactured technology products. A key unknown as of this writing is whether the tariffs will be assessed on raw materials or finished goods. Companies (e.g., Apple) that manufacture components and products outside the United States will fare better if the tariff is on raw materials than those that import steel and aluminum to produce components in the United States. If assessed on finished goods, manufacturing outside the United States will not protect products from cost increases. Companies that have implemented and utilized technological advances to streamline their manufacturing processes, and therefore their use of affected metals, may insulate their import costs as compared with companies that continue to manufacture via less efficient processes. Another significant unknown involves retaliatory tariffs. The EU has proposed very targeted product tariffs so the potential impact on technology industry players remains a risk should their products be targeted by affected countries.
Energy: Margins are already tight in the industry, so this could create a bump in the road to what has been recently on a steady (albeit small) uphill climb. U.S. companies with assets and operations internationally are likely not affected. However, oil field services companies that make rig and production equipment will likely see higher costs to machine their products. These higher costs could be passed on to upstream companies purchasing oil field services materials and services. Pipeline companies would likely incur increased costs. Given that most of their revenues are domestic, utilities are less likely to be impacted by anti-trade policies. They may incur increased costs – probably construction-related costs – that could be passed on to general public in the rate making process.
To sum it up, one thing we can say is this: No matter what happens, protectionist rhetoric is now out in the open. Once that cat is out of the bag, it’s hard to stuff it back in.