Trade War Risks Still Loom

The Trump administration’s ongoing focus on steel and aluminum tariffs largely has been attributed to issues like American security, jobs and an unsustainably high trade deficit. In March 2018, the U.S. trade deficit stood at $49 billion, which was actually down 15 percent from the previous month due to surging exports, and was the lowest level since September 2017. March’s monthly decline in the trade deficit ended a a six-month streak during which the trade deficit expanded.

However, the mere fact that there is a large trade deficit is not necessarily a call to action. While sometimes unsettling, the availability of foreign-produced goods in abundance positions consumers to enjoy more product choices at lower prices. In turn, those lower prices expand consumer spending power, including on domestic goods and services such as housing, health care and vacations. The availability of foreign output also translates into less economy-wide inflation, which in turn translates into lower interest rates, diminished borrowing costs, and greater support for affordable financing, including for construction projects.

Globally available output also may render certain manufacturers more competitive. A recent analysis conducted by the Trade Partnership estimates that while tariffs on steel and aluminum could increase the number of American workers in the metals industry by an estimated 33,500 jobs, decreased employment in other industries due to higher input prices would approach 180,000 positions. Construction, which is already wrestling with higher materials prices, would be among the most negatively impacted industries (losing 28,000 jobs). 

There’s more. The insistence on tariffs, whether on metals or on a variety of Chinese-produced goods, invites retaliation and potential future trade wars. There are also discussions regarding the future of NAFTA, special exemptions regarding political allies, and the impact on companies that depend heavily on global commerce, such as Boeing, Apple, Intel and Texas Instruments.

ongoing negotiations

The tariffs were proposed during the ninth year of U.S. economic expansion. The economy gained momentum for much of 2017 and enters 2018 with considerable strength. The broadening of the U.S. economic expansion from merely being consumer led to also being associated with surging manufacturing output, construction activity, rising exports and business investment is attributable to many factors, including elevated business confidence and recently enacted tax reform.

At the heart of America’s newfound vibrancy has been the ability of the economy to continue to support low interest rates even in the context of accelerating growth and an ongoing move toward full employment. According to the most recent employment report, America added 164,000 jobs in April and the official unemployment rate dipped below 4 percent for the first time since 2000. Construction added 17,000 net new positions in April, with the majority being in the nonresidential construction segment.

Even as the economy has flourished and construction backlog has mounted, there has been a growing sense of unease regarding the longer-term outlook for the economy. In addition to the routine concerns regarding the national debt, Medicare/Social Security insolvency, mid-term elections, etc., there are growing concerns regarding inflation. That’s where the tariffs come into play.

On March 8, the White House issued two Presidential Proclamations announcing impending tariffs on steel and aluminum products imported into the United States for all nations with the exceptions of Canada and Mexico. The exemption then was extended to the European Union (EU). Both proclamations stated that “[t]he Secretary (of Commerce) found and advised me of his opinion that steel articles are being imported into the United States in such quantities and under such circumstances as to threaten and impair the national security of the United States.”  

In late April, the White House announced it would delay imposing most of its tariffs on imported steel and aluminum until at least June 1. Tariffs had been scheduled to take effect on imports from Canada, the largest U.S. supplier of steel and aluminum, as well as Mexico, Argentina, Brazil and the EU. Published information indicates that the administration has reached an agreement in principle with Australia, Argentina and Brazil, which may prevent the need for tariffs against those nations altogether. As of this writing, discussions with Canada, Mexico and the EU are ongoing.

Higher Input Costs

Even during its initial year, the Trump administration was actively seeking to influence global trade and production patterns. Last year, the Trump administration stepped up actions against Canadian softwood lumber producers. Available data indicate that during a recent 12-month period, softwood lumber prices rose 16.3 percent. While some of this increase was very likely attributable to stronger construction activity in North America and a general rise in commodity prices, it is equally likely that trade sanctions played a role in shaping that increase.

Additionally, the construction industry has been dealing with rising compensation costs, including in the form of rising health care expenses. Fuel also has become more expensive, as has copper. Steel and aluminum prices were rising even before the tariffs were announced. According to the construction materials Producer Price Index, between March 2017 and March 2018, iron and steel prices rose 6.5 percent and steel mill product prices were up nearly 5 percent.

While some of the cost increases associated with steel and aluminum tariffs can be passed along to customers, contractors will likely suffer shrunken margins in certain instances. One way to offset that impact is to reduce other costs, including worker compensation.  

Potentially Shorter Expansion

The bigger impact may be related to the durability of the current economic expansion cycle. Inflationary pressures are building throughout the economy, whether in the form of health care costs, workers, tuition, apartment rents, home prices or gasoline. The imposition of tariffs on steel and aluminum is likely to inflate the price of many items, including vehicles. These additional inflationary pressures could result in faster increases in interest rates, which could rise far and fast enough to eventually bring the current economic expansion to a grinding halt. These forces will become even more impactful if a full-blown trade war is triggered.