The following by Bernard Weinstein, associate director of SMU's Maguire Energy Institute and an adjunct professor of business economics, first appeared in the March 9, 2018, edition of The Fort Worth Star-Telegram.
March 14, 2018
By Bernard Weinstein
Last month, the U.S. economy added more than 300,000 net new jobs with increases recorded in every sector, including manufacturing. More people are working today than ever before, the unemployment rate remains at its lowest level since 2000, the number of job openings exceeds the number of people seeking work, and inflation is ticking up. What’s more, total exports have jumped nearly 70 percent since the end of the Great Recession.
Against such a backdrop, the last thing the economy needs is restrictions on imports. Yet President Donald Trump has just increased tariffs on imported steel by 25 percent, despite the industry earning more than $3 billion in profits last year, and those on imported aluminum by 10 percent.
The President justifies his actions on “national security” grounds, arguing that steel and aluminum are critical industries that must be protected in the event of a conflict that might disrupt imports. He also claims that these and other industries have been “ravaged” by unfair foreign trade practices, which is undoubtedly true in some cases. But the broad brush approach of imposing across-the-board tariff hikes (with possible exemptions for Canada and Mexico) enhances the possibility of a trade war that could do serious damage to both the domestic and global economies. And Texas, with nearly a half-million workers employed in industries that use steel and aluminum, could suffer the most.
According to U.S. Census data, Texas accounted for more than $8.3 billion in steel and aluminum imports last year, twice as much as any other state. Many of these imports are used by the state’s energy sector for pipelines, drilling rigs, refineries, gas liquefaction, and petrochemical plants. Because steel accounts for a huge share of new drilling project expenses, one industry group has estimated the new tariffs could hike the cost of well completions in shale plays by up to 10 percent, slowing the growth in production and exports of crude oil and natural gas from Texas.
The state’s burgeoning liquefied natural gas (LNG) industry is especially vulnerable. For example, Michael Smith, CEO of Freeport LNG, recently stated that the new tariffs, had they been in place, would have increased the costs of building the company’s first three LNG production lines by $200 million. He also worries that should the tariffs lead to a trade war with China, Freeport LNG could suffer because China is a long-term buyer of their gas.
ExxonMobil has expressed concern that increased costs from tariffs could affect their plans to build another crude oil distillation unit at their Baytown refinery while Greg Armstrong, CEO of Plains All American Pipeline, worries about escalating costs for $1.5 billion in steel-intensive projects in the planning stage. Toyota Motor Corporation, who recently relocated their North American headquarters from California to Texas, anticipates higher prices for cars and trucks as a result of the tariffs.
Though the White House has indicated a willingness to let other countries plea for tariff exemption, the European Union has already threatened to retaliate against $3.5 billion in U.S. exports while other trading partners are expected to challenge the tariffs before the World Trade Organization.
The President’s actions may bring back a few jobs in the steel and aluminum industries. But the potential for job losses across the economy, as other nation’s respond in kind, can be catastrophic. For example, steel tariffs imposed in 2002 generated a backlash that resulted in the loss of an estimated 200,000 American jobs, and they were rescinded after 21 months.
If the White House is unwilling to bend on the tariff issue, Congress must take up the mantle. Republican Senator Jeff Flake of Arizona and several others have indicated a willingness to introduce legislation to nullify the tariffs, though Senate Republicans would need at least 16 Democrats to join them to make such a bill veto-proof.
One way or another, a middle ground must be found to avert a global trade war. If the intent of President Trump’s actions are to discipline China for alleged unfair trade practices, “the sweeping tariffs … are like dropping a bomb on a flea,” according to Senate Minority Whip Dick Durbin of Illinois.
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