Protections on Steel Hurt Downstream Exporters

It has been widely reported that President Trump may impose high tariffs on steel imports on national security grounds. Scott Sumner has a good summary on why this rationale is not particularly convincing. But even if President Trump is not persuaded by Sumner on national security, perhaps he will be interested to hear how protectionism will affect the other manufacturing industries he purports to want to flourish.

Last year, a paper by economist Bruce Blonigen explored the impact of industrial policies in steel on downstream industries, i.e. those where steel is an input to the production process. Unsurprisingly, less openness to foreign competition through direct protection or state support or privileges raises the price of steel within a country. This in turn raises costs for downstream industries such as fabricated metals and machinery manufacturers.

More pertinently given Trump’s obsession with trade deficits, Blonigen’s work suggests the effect of this cost increase is to significantly reduce exports from these industries. The headline result is that a one standard deviation increase in industrial policies associated with steel leads to a 1.2 percent decline in the export competitiveness of the average manufacturing sector in the years immediately after implementation. For those that use steel intensively, the decline is as large as 6 percent.

If President Trump really wants an export-led manufacturing jobs boom then, his steel policies are utterly self-defeating.