Movers and SHAKERS
Why are basic material industries suffering despite government help?
(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)
In the 2016 election, President Trump ran on a platform of bringing back basic material industries such as coal, energy, and steel. He followed up on his pledges by loosening environmental restrictions and placing tariffs on imports. Specifically, the Trump administration reversed Obama’s Clean Power Plan that would have shifted power generation from coal to natural gas. The administration opened additional federal land for drilling, approved new oil and gas pipelines and rolled back automotive fuel economy (CAFÉ) standards in order to help the energy industry. The administration enacted a 25% tariff on steel imports from all countries except for Canada and Mexico to bring back jobs to steelworkers. Now, after some initial success, these core industries are reporting lower profits, stock prices are down, and employment levels are falling. Do the president’s actions represent an investment in this country’s future that will eventually pay off (Bull Case)? Or, have the president’s actions backfired (Bear Case)?
Tariffs and subsidiaries take time to
work. The coal, energy and steel industries are capital intensive industries whose results are often very circular. Coal, energy and steel prices are low relative to historical levels due to issues outside of the industry’s control, such as a slowdown in the global economy. President’s Trumps efforts may not be having an immediate positive impact, but they are helping many companies survive the down cycle. When pricing comes back, these companies will be well positioned to expand market share and profitability.
It’s an issue of national security. Basic material industries provide valuable products to other industries such as defense, transportation and manufacturing. Maintaining domestic production of materials is an important part of supporting the country’s role as a world leader. Success should not be measured in terms of profitability, stock price or employment levels. Success must be viewed within the larger scope of overall country performance.
Tariffs are needed to level the playing field. Wilbur Ross, acting US Commerce Secretary, argued that steel tariffs were needed to offset steel subsidies being given in other countries. John Ferriola, Chairman, CEO and President of Nucor Corporation, claims US Steel companies can compete with anyone in the world, provided that every country is playing by the same rules. He argues that the tariffs are not a step away from free trade, but a step towards achieving “truly free trade.”
The costs are real. Despite President Trumps claims that tariffs represent additional revenues for the country, most economists believe that tariffs are passed on and paid by consumers. The Labor Department estimates that steel tariffs cost consumers and businesses $900,000 for every job saved, roughly 13 times the typical salary of a steelworker. The long-term costs of easing environmental restrictions is harder to measure but could be significant.
We are fighting against technology improvements. The reason why basic material pricing has fallen is due to technological improvements (horizontal drilling, increased use of larger coal mining equipment, improved robotics in steel manufacturing). These technological advances will not go away meaning basic material pricing is likely to remain at low levels. Government protection encourages capital to be invested into lower growth industries and hurts the overall growth of the country.
Tariffs invite retaliation and raise input prices to products that are exported. Mark Perry of AEIdeas argues that tariffs hurt the steel industry more than it helps them. He cites studies stating that 95% of the imports affected by the tariffs were intermediate goods purchased by American firms, and that higher costs hurt these companies’ sales and exports. This, in turn, lowered the overall domestic demand for basic material such as steel and aluminum.
Time will tell whether the government’s bailout of the basic material industries will result in healthier, stronger companies somewhere down the line. For now, the answer seems to be no. The free market is an incredibly efficient way to allocate resources to the optimal location. The idea that one person, or even one government could make decisions better than the collective wisdom of the masses seems far fetched. Those decisions are best left to the people actually putting capital at risk.
https://www.foxnews.com/us/trump-tariffs-steel-industry-pennsylvania-ohio-wisconsin, Frank Miles, Fox News, November 4, 2019
https://www.washingtonpost.com/business/2019/05/07/trumps-steel-tariffs-cost-us-consumers-every-job-created-experts-say/, Heather Long, The Washington Post, May 7, 2019
https://www.theguardian.com/environment/2019/jun/19/trump-climate-crisis-coal-pollution-clean-power-plan, Emily Holden, The Guardian, June 19, 2019
https://www.nbcnews.com/business/economy/trump-touts-thriving-steel-industry-manufacturing-insiders-disagree-n954866, Martha C. White, NBC News, January 4, 2019
https://www.latimes.com/politics/story/2019-10-29/steel-industry-faces-a-bleaker-future-than-when-trump-moved-to-rescue-it, Don Lee, Los Angeles Times, October 29, 2019
https://www.bls.gov/iag/tgs/iag331.htm#workforce, Bureau of Labor Statistics, October 2019
https://www.wsj.com/articles/trumps-tariffs-help-the-u-s-steel-industry-11549476964, Wall Street Journal, February 6, 2019
https://www.aei.org/carpe-diem/backfire-economics-trump-tariffs-are-killing-american-steel/, Mark Perry, AEIdeas, January 18, 2019