Tariffs (That Biden Won’t Remove) Threaten the U.S. Manufacturing Recovery (That Biden Wants)

Scott Lincicome

Bloomberg reports that American steelmakers are imperiling President Biden’s goal of boosting the U.S. manufacturing sector and might, in fact, cause more industrial offshoring:

Producers that shut furnaces in response to falling demand during the early stages of the coronavirus are still operating plants at well below pre‐​pandemic levels, even as recovering economies and tight supplies drive prices higher. The benchmark price for American steel is at an all‐​time high.

Companies including Cleveland‐​Cliffs Inc. and U.S. Steel Corp. have kept blast furnaces idled on expectations that prices are likely to recede at some point, which would squeeze margins and potentially force expensive shutdowns again at those furnaces. While that tack bodes well for steelmaker profits, customers in industries from automobiles to appliances to machinery say they can’t get enough metal, and may need turn to overseas suppliers.

“That’s just blowing a giant hole in the idea of reshoring, where if you want to support U.S. manufacturing you need to have competitively priced inputs,” Josh Spoores, the principal steel analyst at CRU Group, said in a telephone interview. “It’s primarily steel and energy, and if either of those is out of whack and it’s not competitive where it is elsewhere, you’ll see manufacturing move to lower‐​cost areas.”

As the article notes, U.S. manufacturers struggling to get enough steel would in normal times turn to foreign suppliers, but there’s one big, expensive impediment to doing so today: President Trump’s 25% “national security” tariffs on most imported steel, which remain in force and make imports artificially expensive for U.S. consumers (including some steelmakers that import semi‐​finished slabs). As a result of these tariffs, favored U.S. steel companies can extract extra profits from downstream manufacturers by continuing to restrict output and charging obscenely high prices (now almost as high as the tariff‐ and transportation‐​adjusted price for imported steel). And their executives are quite open about this profit‐​taking strategy:

Lourenco Goncalves, the chief executive officer of Cleveland‐​Cliffs, has told investors that he will focus on a quality over volume approach. The Ohio‐​based company bought AK Steel Holdings Corp. and ArcelorMittal USA assets in 2020.

“Under my watch, Cliffs had never been and will never be tempted by the stupidity of volume for volume’s sake,” Goncalves said on a call with analysts in October. “We will continue to manage our business in the most quality‐​focused and cost‐​efficient ways, always reaching for real value and return on invested capital.”…

“The demand is not pre‐​Covid levels, but it’s just more than what we have in production today,” said Dan DeMare, a regional sales manager for Heidtman Steel, a service‐​center customer of U.S. Steel. “The steelmakers are going to make a load of money, but the stress it puts on the market is insane.”

Restricted domestic steel production, of course, also means few (if any) additional steel jobs.

As I explained in a new paper, President Trump’s tariffs helped cause the U.S. manufacturing sector’s decade‐​long upswing to stall out in 2019, and repealing them — which President Biden could do with a stroke of a pen — would accelerate the sector’s post‐​pandemic recovery. Repeal would also help achieve Biden’s own economic and foreign policy goals, while correcting one of Trump’s most baseless invocations of “national security.” Unfortunately, the Biden administration seems in no rush to change course and may, in fact, be copying Trump’s economic nationalist playbook. It’s a frustrating case of politics and bad economics trumping (no pun intended) common sense — at least so far.

But, hey, at least some U.S. steelmakers are making a “load of money.”