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Manufacturers prepare for impact of tariffs

Tariffs could signal rising prices, trade war

RFP
Automotive industry grindingIn support of his protectionist agenda, President Donald Trump recently proposed implementing sweeping tariffs on steel and aluminum that could lower profits for manufacturers of everything from pickup trucks to canned soup, or result in higher prices for consumers.

If implemented, the proposed 25% tariff on steel imports and 10% tariff on aluminum imports would hit manufacturing especially hard and impact a wide variety of industries. U.S. automakers, who are already struggling with higher commodity costs and declining sales, would likely be significantly impacted. The sector accounted for 26 percent of U.S. steel demand in 2017.

Ford — the number 2 U.S. automaker — reported in January that higher steel and aluminum costs would hurt 2018 profits, and blamed a poor fourth-quarter performance, in part, on higher commodity costs. Implementation of new tariffs could mean the choice between lower margins and lower sales.

Jeff French, Grant Thornton national managing partner, Consumer and Industrial Products, acknowledged that "the Trump Administration's announcement of 25% tariffs on steel imports into the U.S. and 10% tariffs on aluminum imports is disappointing to many manufacturers. The tariffs will raise domestic prices for both commodities."

While the proposed tariffs would benefit U.S.-based raw steel and aluminum producers, French suggested "the manufacturers who consume these inputs, and who far outnumber the small group of companies that will benefit, will see their costs rise."

The American Automotive Policy Council also voiced concerns about the "unintended consequences" of these tariffs, saying they will lead to higher prices in the U.S. compared to competitors in other countries.

Jeff French“Companies should look at supply chain options to mitigate the margin impact from these tariffs.”

Jeff French, National Managing Partner, CIP
About one-third of the 100 million tons of steel used each year by American business is imported, while imports account for more than 90% of the 5.5 million tons of aluminum used by U.S. companies.

Moreover, according to the Bureau of Economic Analysis, about 17 million Americans work in industries that use domestic steel - 6.9 million in manufacturing and 10.1 million in construction. Yet the increased cost of materials that will impact the manufacturing of everything from appliances to beer cans will likely result in fewer goods made in the U.S. and fewer workers to produce them.

Following the president's announcement, both Canada, a primary customer of U.S. steel, and the European Union issued strongly-worded statements and warned that countermeasures could be on the horizon. Canadian Minister of Foreign Affairs Chrystia Freeland noted that the steel and aluminum industries are highly integrated and support North American manufacturing supply chains. However, since the president's original announcement, the Administration has revealed that the U.S. has formally offered to exclude Canada and Mexico from the planned tariffs provided they can work out a deal on the new North American Free Trade Agreement.

Trump's decision to propose the new tariffs on imported steel and aluminum follows a review by the Commerce Department to determine whether certain imports pose a threat to national security. Under Section 232 of the Trade Expansion Act of 1962, the Commerce Secretary examines whether imports of any product represents a national security threat, an action that has only taken place 14 times, with only two investigations having been conducted since the U.S. entered the World Trade Organization in 1995 (neither resulted in tariffs).

While significantly increasing prices of domestic steel and aluminum will benefit steel producers, one major concern is that the move could trigger a trade war that could negatively impact NAFTA negotiations. However, the primary driver of the tariff measure is to raise steel and aluminum production capacity from 74% and 71% respectively, to 80%. The Trump administration is hoping raising domestic materials prices will allow producers to gain a bigger share of the domestic demand pie.

"These tariffs would take place in a market where steel and aluminum prices are already rising," Grant Thornton's French said. "It's too early to tell the impact these tariffs will have on domestic production and on potential trade retaliation, but recent history does not show a favorable trend from such tariffs. Companies should look at supply chain options to mitigate the margin impact from these tariffs."

Contacts Jeff FrenchJeff French
National Managing Partner, CIP
T +1 920 968 6710