Update on U.S. Steel and Aluminum Tariffs

Tariffs on Steel and Aluminum Announced

• The White House has announced the restoration of Section 232 Tariffs on Steel and Aluminum that were originally imposed in 2018. The rate on steel will return to the 25% implemented in 2018, while the rate on aluminum will rise to 25%, from 10% previously. 
• The new tariffs are set to go into effect on March 12, 2025. This is separate from the March 4, 2025 deadline for the broad 25% tariffs on Canada and Mexico that were delayed last week. White House officials have since indicated that the new tariffs would apply in addition to the 25% blanket tariffs, taking the effective tariff rate to 50%.
• The White House has also announced the termination of exemptions to the tariffs on steel arranged with major trade partners since 2018. Moreover, the new orders remove the prior authority the Secretary of Commerce had to offer exemptions on steel and aluminum tariffs. 
• The import tariffs will cover all the products from the original orders in March 2018 and the tariffs on steel articles from January 2020. 
• The tariffs will cover derivative products, with exemptions for steel products made using “steel articles that were melted and poured in the United States”
• Canada and other countries have yet to announce any specific countermeasures.  How, and when, any countries respond will determine the economic ramifications of the current actions.  
  • Notably, the E.U. had agreed to suspend its countermeasures (tariffs on targeted products) when it reached an agreement with the Biden administration to lift the prior tariffs. These countermeasures could be implemented relatively quickly if they chose to do so.

Canada a Dominant Supplier to the U.S., Particularly of Aluminum

• Where does the US get its steel and aluminum from?
  • Canada is by far the biggest supplier of aluminum to the United States, providing nearly 50% of total US aluminum imports. The UAE, China, South Korea and Bahrain follow Canada in making up the top five aluminum suppliers to the US.
  • Canada, the E.U., Brazil and Mexico are the top suppliers of steel to the US providing about half of steel imports for domestic consumption. Canada accounts for the largest share at around 20%. 
• Drilling down a bit further on Canada, combined exports of steel and aluminum products comprise about 6% of total national merchandise exports, with shares across the two sectors roughly equal.  
  • Regionally, the aluminum export market is dominated by Quebec who account for nearly 70% of total Canadian aluminum shipments sent south of the border, with Ontario and British Columbia accounting for the remainder. 
  • On the steel side, Ontario tops the charts, sending 70% of total Canadian steel exports to the U.S., with Quebec (17%), Alberta (4%), and British Columbia (4%) rounding out the major providers.
• The market has reacted to the announcement by pushing up prices.  Most of the 20% jump in the aluminum Midwest premium—the proxy for U.S. prices—occurred when Trump announced his broader tariff plan on Feb. 1. The premium has continued nudging higher after the steel and aluminum tariff announcement. U.S. hot-rolled steel price premiums to benchmark steel rebar are up by a smaller 5%, with the majority of the price move taking place after the February 10th tariff announcement. 
  • Stockpiles of both metals are hovering slightly over 20% higher than 2018-2019 average levels which could provide some near-term insulation against a potential supply squeeze. That said, the broad nature of these tariffs put inventories at risk of a quick drawdown, putting further upward pressure on domestic prices. 

What Can We Learn from the 2018 Experience?

• The experience with tariffs on steel and aluminum in the 2018-19 period provides some guidance around what to expect going forward if these tariffs go ahead.   
  • Important to note that the current steel and aluminum tariff plan differs from Trump’s first term, notably, aluminum being levied at only 10% vs the proposed 25% now. Canada, without hesitation, imposed retaliatory tariffs of the same magnitude on both U.S. metal imports two month later. Canada would eventually reach a deal with the U.S. to remove the steel and aluminum tariffs in May 2019, almost a year after going into effect. As of now, the federal government hasn’t announced a specific response.
• For Canada, exports of steel and aluminum products to the United States decreased substantially during the prior episode.  Based on Statistics Canada data, tariffed Canadian steel exports to the U.S. dropped by 41% between February 2018 (the month before the Section 232 tariffs were announced) and May 2019 (when the tariffs ended). Aluminum exports were down roughly 19% in the year tariffs were in place. 
• Canadian steel output fell 10% over the lifespan of the tariffs and continued a sustained decline into the pandemic. The steel industry only retraced back to 2018 levels as of early-2022. Aluminum output on the other hand was virtually unaffected.
  • Although the industries suffered a major hit, the overall impacts on Canada’s economy were relatively small. The higher tariff on aluminum this time around would have a more deleterious effect than previously, suggesting this experience could be more consequential.
  • Data over the 2018-2019 period showed Canadian aluminum and steel producers were able to cushion some of the negative impact by re-routing exports to other major trading partners, namely Mexico, UK, and China. 
• In the U.S., a summary review by the Tax Foundation generally found that total economic effects of the tariffs were relatively small. 
  • During the prior experience, researchers Amiti, Redding and Weinstein found that tariffs on steel were initially fully passed through to consumers, but that the effect waned over time, with exporter prices gradually falling. 
  • The findings also highlighted that tariffs, in general, preceded a drop in imports, and that the response to tariffs gradually became larger with time. 
• However, as noted above, extrapolating the last time tariffs were applied to today requires a bit of caution. Beyond different tariff levels, the economy in 2018-19 was emerging out of a prolonged period of weak inflation, with relatively low inflation expectations. This status was upended during the pandemic, so to the extent inflation expectations respond differently in the current context, the resultant pass-through to end prices could also be different.

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