Tariffs: Analyzing Pros And Cons

by: Blue Pacific
Summary

The concept of Free Trade has been incredibly popular in the United States in the past 35 years.

Free trade is usually very positive in the short term.

Long-term economic planning, however, requires a more careful analysis.

Tariffs can be useful (although painful, short term) to correct imbalances created from policies that were good in the short term but led to excess imbalance in the long term.

As a general rule of thumb, for the long-term economic planning of a country, two important risks arise when considering free trade:

A) Exporting your nation's technology to another country to use its low cost labor (over time, an ever-growing amount of it is made by your suppliers and you lose the manufacturing labor skills, leading to supplier dependence).

B) Overly depend upon natural resources from another country (if your economy becomes dependent on that natural resource, the supplier has significant leverage).

In the United States, we are fortunate to have a significant abundance of natural resources (importantly, both food and energy - including oil now) and a relatively healthy, though weaker than past periods, manufacturing sector.

Yesterday, Donald Trump announced tariffs on steel and aluminum. Is this a wise policy that promotes the United States' long-term strategic interest to maintain a healthy domestic steel industry, or is this likely a policy implemented with short-term political gain in mind?

To analyze the question, we must ask the following questions:

1) How much of our steel do we produce internally vs. import?

2) How concentrated is our exposure to our suppliers? Will we be beholden to just one country, or is the source diversified enough that if one supplier became hostile we would have alternatives?

3) Do our suppliers exploit a significant labor cost difference to produce product at an unfairly low price?

United States Steel Production Vs. Imports

It turns out that the United States produces a significant amount of our own steel internally. In recent years, around 70%.

United States Steel - Sources Of Import

It also turns out that the United States sources steel from a broad, diversified base of suppliers.

United States Steel Production Competitiveness

This question is significantly more detailed in the analysis and beyond the scope of this article, as it requires analyzing the source of raw materials (which includes a significant amount of scrap), domestic energy prices and energy subsidies, and, to a much lesser degree, wages. For the purpose of determining whether or not we are 'losing' to other nations on steel because of wage discrepancies, however, we can see that wages are a very inconsequential component of the total cost of production:

Further, while the cost of production varies, and the below does not show Mexico or China, we can compare the United States' cost to Brazil, and also to the rest of the world:

Conclusion

While tariffs probably need to be considered in a range of areas given the United States' current trade imbalances, steel does not appear to be an area of:

i) Gross imbalance from domestic production vs. domestic demand (need).

ii) Exploitation of another country's low labor cost or poor labor policies.

iii) Over-reliance on any one supplier or trade partner.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.