While everyone is concentrating on the recent interview of an overaged porn star trying to extend her 15 minutes of fame, while writing a cheap crime story, the president has again improved the US position in the world. With the announcement that President Trump was going to impose a tariff on steel and aluminum, the economic experts went nuts. Tariffs are counterproductive, tariffs will cost more jobs then they save, this will start an all-out trade war with the rest of the world, etcetera. The problem is that we have been taught over the years to only see the close in results on a narrow timeline. We have lost the ability to see a larger picture over an extended period. In other words, we have lost the ability to think and reason out situations.
Much of this has been the result of politicians learning to respond to news cycles in the past and to the present day 24/7 news coverage. Politicians on both sides of the aisle have learned to be circumspect in any statement and not take a firm position. The exceptions are those who demand ideological purity. Then along comes Donald J. Trump, a complete amateur in the field who speaks his mind and is willing to change position as needed to accomplish a needed end. Add to this the fact that he accomplished the impossible by defeating the anointed one for the presidency causing the news media to declare all out war. We need now return the American people to the point where they can think and reason.
Trump is a negotiator and as anyone who has negotiated knows, the first thing to do is set up the conditions of the negotiation. In the case of the tariffs it appears that the initial conditions were just that, setting the stage. Since the declaration of the tariffs the President has exempted counties such as Canada and Mexico and has begun trade negotiation with several others. One such negotiation was with South Korea which has now agreed to reduce the amount of steel exported and to double the number of US manufactured cars to be sold in the country. While South Korea is the third largest exporter of steel to the US we have also begun to negotiate with China which has now come to the table.
We must also look to the claims of the tariffs on US production and employment, which the talking heads scream will be negatively impacted. To begin most steel used in the US is domestically produced. Of what is imported 26% comes from Canada and Mexico which we have said is already exempted from the tariffs. South Korea accounts for an additional 10% of imports. To find the rest we see Brazil contributes 14%, which now brings us to 50% of all imports. The rest of the worlds top ten contributes another 27% and the balance of the world adds 23%. All this imported steel represents around 25% of all steel used in the US. Domestic with US mills are running at about 75% capacity. This means US mills can cover the loss of imported steel. The problem is not in the amount of steel however it’s the cost. All of this is not to confuse the issue but to point out that this issue, unlike what many are claiming, is complicated and needs thought, not emotion to reason out.
Because of several factors US manufactured steel is more expensive then imported steel, tariffs are designed to compensate for the difference. Which leaves two potentials, products that use steel will increase in price or the price of those products must come down. There is also the probability of US steel manufactures finding ways to reduce the cost of steel, which likely would cost jobs as efficiencies increase. The Trump administration has cut several cumbersome regulations and passed a tax bill that gives both corporations and most Americans additional income therefore we can look to market equilibrium containing pricing.
What have we learned, first that we should not react to actions without thinking about them in the long term. Second many negotiations begin without the intent that they will meet all the initial demands. Which brings us to the conclusion that nothing is black and white. That all things are negotiable if both side understand the rules and that obviously both sides don’t always understand the rules. There will be an impact on US markets, but it will not be the end of the world.