No doubt you’ve heard about the looming US tariffs on imported steel and aluminum. President Trump’s recent announcement pleased American steel producers, but the market didn’t share that feeling. Tariff talk sent a shockwave through the market, with the Dow down 3% and the S&P 500 dipping 2% as of the end of last week.
Instead of talking about the interplay between policy and the economy, or about the virtues and shortcomings of the tariffs, I want to focus on something different. I want to plumb the emotional depths of the steel industry, talk about what this tariff may mean and why the issue is so important to Americans.
About 80% of the steel used in the US is produced domestically. The other 20% comes from a handful of countries, including Canada, Brazil, South Korea and Russia. As you can see, some of the countries are friends of ours. Others are more like frenemies, or outright rivals. Interesting note: despite all the attention China has been getting in the tariff buzz, it provides just 2% of our steel.
But with this issue, I’m more interested in exploring the human element. I grew up in Coatesville PA, about an hour or so outside of Philadelphia. My most vivid memories of life as a boy are the rolling hills, farms, and my father’s veterinary practice.
Coatesville was home to Lukens Steel, the oldest steel company in America. The company got its start as The Federal Slitting Mill way back in 1793, situated on a little stream called Buck Run just a few miles south of town. Later, it became the Brandywine Iron Works and Nail Factory, and then Lukens Steel. It operated for decades before becoming Bethlehem Steel, and ultimately getting rolled up into ArcelorMittal – the massive, Luxembourg-based global steel company.
As a boy, I saw Lukens as this massive plant; it looked like its own city, yellow and rust colored. Even then I realized that it was a huge part of the local economy. Lukens made steel for nuclear submarines, battleships, aircraft carriers, tanks, locomotives, bridges and the World Trade Center.
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Lukens often struggled. When it did, the residents of Coatesville struggled, too. In one massive downsize, Lukens fired 22% of its manufacturing workers and eliminated half of the white-collar jobs.
You don’t have to have grown up in small-town America to understand the impact of a cornerstone employer laying off hundreds of workers. It shocks the community, sends ripples through local economies and creates fear and uncertainty.
Steel has been the backbone of our nation since at least the early 19th century. Many scholars credit it with propelling the US to world economic power. It catapulted us into the Industrial Revolution. And, it built our railways, bridges, ships, and buildings.
Steel also has deep roots in Americans’ emotions. That’s why the Trump steel tariffs, and even the 2002 Bush steel tariffs, elicit a strong emotional response from proponents and critics alike.
Tariffs are simply an extra tax on specific imported goods or categories of imported goods. In essence, tariffs are designed to make domestic producers more competitive than their overseas counterparts by making imported goods more expensive.
Still, looking back at the Bush-era tariffs, there is no real evidence that they helped American companies. To the contrary, it is widely believed that they instead cost the US between 20,000 and 200,000 jobs before ending in 2003.
With the Trump tariffs, the first question is whether it’s too late to help Big Steel. According to the Bureau of Labor Statistics, there are about 140,000 direct steelworkers in the US. Half a century ago, there were as many as 650,000. So, we’ve already experienced a 78% drop. What’s interesting is that at the same time, the output per worker increased five-fold. This means that we’re producing five times the amount of steel with only about 20% of the workers.
There’s more. Despite the decline in the number of workers, the steel sector has been one of the fastest growing manufacturing industries over the last three decades, second only to the computer software and equipment industries. With the increased capabilities of technology in steel manufacturing, there are very real questions about whether domestic protection will really bring back a substantial number of jobs.
Our second question is who (or what) is really at the root of the steel labor decline? Can we blame China, when we import less than 2% of our steel from them? My answer is probably not. Still, there’s the argument that, because China now produces about one half of the steel used around the world, they do have an impact on prices and jobs.
It’s technology that’s really up-ending the steel industry by allowing producers to create more with less. I do understand, however, that it’s much easier to get emotional against an adversarial nation than a robot or a line of source code.
The impact of the tariff could be far-reaching. Estimates indicate that two million jobs in industries that use steel “intensively” (meaning where steel inputs represent five percent or more of the industry’s total input requirements) could be affected.
The numbers from the latter half of last week indicate that shares of steelmakers are up, while shares of steel users are down. Take a look at the chart below, and you’ll see that US Steel is up 6%, while Ford, Boeing, Caterpillar and Campbell Soup are all down.
The bottom line is that there’s fear surrounding the steel industry and the tariffs. We don’t want steel jobs to diminish even more, and we don’t want a global trade war. If you ask me, we’re dealing with a predominantly emotional and political issue.
Sure, the economic and market piece is there, too; we want to keep our jobs, and we want to avoid an international dogfight. But when all is said and done, I can see the long-term impact on both the economy and the markets ending up as more bark than bite.