Unalloyed Failure

On March 23, 2018, U.S. President Donald Trump imposed 25 percent tariffs on the import of virtually all foreign steel. These tariffs were actually taxes on U.S. companies that import steel, and they cost such firms nearly $3 billion annually. But Trump assured Americans that the tariffs would curtail “unfair” foreign competition, revive the foundering American steel industry, and bring back thousands of high-paying jobs. Five months later, he declared victory. “Tariffs,” he tweeted, “have had a tremendous positive impact on our Steel Industry.”

That was abject nonsense. In reality, the steel tariffs were a costly failure. Steel prices ended that year 14 percent lower than they were when Trump imposed the tariffs. During that period, steel-mill employment rose at just half the rate of overall private-sector job growth, and the stock prices of U.S. steel firms fell 20 percent—even as the S&P 500 index ticked down by just five percent.

Things soon got even worse. By Election Day last November, steel prices were 12 percent below where they had been prior to the tariffs. As the first bar chart below shows, steel-mill employment had fallen 4.2 percent, whereas overall private-sector employment had declined by just 1.9 percent (a fall driven by the COVID-19 pandemic). And, as the second bar chart shows, the stock prices of U.S. steel companies had lost 28 percent of their value, even as the S&P 500 index had gained 24 percent.

Meanwhile, the tariffs put U.S. companies that use steel at a distinct competitive disadvantage in global markets. And whereas 80,000 Americans work in steel production, some four million work for companies that use steel—including ones that manufacture automobiles, airplanes, machinery, and fabricated metals. For that reason, the tariffs have imposed a huge cost on the entire U.S. manufacturing sector.

But why didn’t steel tariffs at least help the industry they were designed to protect? There are three main reasons.

First, countries hit by Trump’s tariffs—such as Canada and Mexico—retaliated, causing their imports of U.S. metals to plunge. Second, Trump’s broader trade war with China and other countries slammed U.S. manufacturers with higher import costs and lower export demand. These effects in turn dampened domestic sales of U.S. steel. Third, U.S. steel manufacturing remained less efficient than that of other advanced economies, such as Austria, where steel manufacturing is more heavily automated. And given the rapidly changing economics of steel production, steel was never a sensible industry in which to try to spur job growth.

FORGING AHEAD

These facts do not mean that U.S. steel is a lost cause. In fact, the industry’s fortunes have improved considerably since Trump’s defeat last year. Between November 2, 2020, and April 30, 2021, steel stock prices surged 87 percent, surpassing their pre-tariff levels for the first time since 2018. This compares with a rise of only 28 percent in the S&P 500 index during the same period, as shown in the graph below.

Steel-mill employment had also ticked up by 1.4 percent by February, the latest month for which data is available, even as total employment fell by one percent. This rebound owes partly to factors that have nothing to do with the election of President Joe Biden. It reflects, for example, reduced steel supplies coming out of China’s Hebei Province, a steel-producing region that has been hit hard by the pandemic. But Biden’s victory has undoubtedly played a major role. Biden pledged to spend $2 trillion on modernizing U.S. infrastructure. Trump had, of course, made similar promises when campaigning in 2016, yet once in office he lost interest. With Democrats now controlling the White House and both houses of Congress, however, major infrastructure investments look virtually certain. Even the latest Republican counterproposal, at $568 billion, represents, by historical standards, a substantial commitment. And as one U.S. Steel executive remarked last December, “an infrastructure bill . . .  would be tremendous, tremendously helpful to the industry.”

What is more, Biden’s response to the pandemic—from vaccine production and distribution to fiscal support for households and small businesses—has been far more robust than Trump’s was. And although Trump claimed that a Biden victory would “crash” the markets, anticipation of a speedier end to the pandemic and its economic damage has been a driving force behind the post-election market surge.

Finally, with Biden in the White House, there now exists a genuine prospect that tensions over global trade will ease. During the campaign, Biden had been cautious in addressing the fate of Trump’s tariffs. But as president, he has already moved to roll back the tariffs imposed on the EU and the United Kingdom. And an end to trade conflicts with U.S. allies would mean improved business opportunities for American manufacturing—which would in turn mean higher U.S. steel sales.

To be sure, the U.S. steel industry and its workers still face significant challenges. Employment in the industry has fallen since Trump took office in 2017, and it is likely to continue falling with increased automation. That is why it would be foolish to rely on costly trade barriers or subsidies to protect jobs that are more vulnerable to rapidly evolving production methods than to overseas competition. Likewise, it would be misguided to insulate the industry for purposes of “national security,” as Trump did. Prior to his tariffs, three-fourths of all imported steel came from countries with which the United States has mutual-security agreements—notably, Canada, Germany, Japan, and South Korea. Beyond “do no harm,” then, the wisest course the Biden administration can pursue is to expand aid and retraining for laid-off workers under programs supported by the Trade Adjustment Assistance Act and the Workforce Innovation and Opportunity Act.

The broadest lesson to be drawn from the failures of trade policy during the Trump years, however, is one that credible economists on both the left and the right have urged on politicians since the disaster of the Smoot-Hawley tariffs in the 1930s: contrary to Trump’s boasts, trade wars are not “good, and easy to win.” Steel tariffs singularly failed to revive the U.S. steel industry; they in fact set it back through higher costs and reduced export opportunities for American manufacturers. Net exports, which Trump had pledged to boost through tariffs, actually fell during his presidency. And so even as economic conflict with China persists, the restoration of cooperative trade relations broadly, as well as improved growth prospects through much-needed infrastructure investment, should be considered welcome news for both U.S. industry and American workers.