Steel Buyers Beware
November 15, 2018
Recent tariffs on steel and aluminum imports raises questions U.S. buyers must ask suppliers to avoid price gouging.
In early 2018, President Trump announced that he would enact additional duties on steel and aluminum imported into the U.S. Since then, the list of trading partners most affected by the president's decision has become clearer. These are the essential points for steel and aluminum buyers to know:
- A 25 percent tariff applies to steel imports; a 10 percent tariff applies to aluminum imports.
- Major trading partners impacted include Canada, Mexico, the European Union and China.
- Exempted nations include Argentina, Brazil, Australia and South Korea.
Although the tariffs affect only unfinished and semi-finished steel and aluminum, suppliers of steel and aluminum components, especially those from China, are beginning to announce price increases, claiming the tariffs are significantly influencing their costs. That has left wholesale buyers — who are often squeezed between price increases from their suppliers and a reluctance to pass higher costs along to their customers — to wonder if the rise in prices really is a result of the recent tariffs and, if so, if it is proportional.
FTI Consulting’s economic segment1 conducted an analysis (see sidebar "Analytical Approach") of the impact of steel and aluminum tariffs on commodity prices to understand the potential ramifications. The analysis produced answers to three key questions to inform buyers’ decision-making:
FTI Consulting’s white paper analyzing steel and aluminum tariffs2 used the Global Trade Analysis Project (“GTAP”) model of international trade and finance.3 GTAP represents global trade across 140 regions and 57 economic sectors and is used by various U.S. government agencies, including the Departments of Agriculture and Energy, the Environmental Protection Agency and the International Trade Commission. It is maintained by academics at Purdue University using peer-reviewed methodologies.
To simulate the impacts on global steel and aluminum trade and prices, FTI implemented the steel and aluminum tariff shocks in two GTAP sectors: “Ferrous Metals” for steel and “Non-Ferrous Metals” for aluminum. Both sectors represent broader categories than steel and aluminum alone. Accordingly, FTI reviewed the specific Harmonized Tariff Schedule4 codes to implement the tariffs correctly. The tariffs were prorated for sectors using the value of imported goods subject to the tariffs as a percentage of the value of overall sector imports without the tariffs.
Key Question 1: Where are the steel price impacts to manufacturers being felt, and what is the impact under the new tariffs?
Answer: If the steel were supplied by Chinese firms to Chinese manufacturers, then the steel price impact would be essentially zero, as would be expected.
However, if the supplier imported steel from China to manufacture parts in the U.S., then according to the analysis model, the impact of the tariff on steel prices would be approximately 17 percent, which, due to supply and demand rebalancing, is lower than the 25 percent tariff.
Finally, if the supplier used U.S. steel, then the price impact would be minimal (~0.8 percent).
Key Question 2: What is the price impact if the steel were purchased from different countries?
Answer: If only a portion of a supplier’s annual steel purchases came from China, then the buyer should not pay the 17 percent price increase, and instead pay the weighted average of price impacts consistent with the percentage mix associated with each exporting country.
Key Question 3: What portion of a part or component being purchased is made from steel?
Answer: For parts that are made in the U.S. that use imported steel, if a part being purchased is 50 percent steel by cost, then the appropriate steel price impact should be discounted by 50 percent. It should not apply to parts made elsewhere and imported as finished goods since finished goods are not covered by the tariffs.
The legal complexities and a lack of transparency can make it difficult for companies to understand true costs when it comes to tariffs. By extrapolating on, and extending the conclusions above, an importer of steel, aluminum or any other products on the tariff list can have a fact-based conversation with its suppliers about the appropriateness of passing through price increases attributed to tariffs. With knowledge of the true nature of the tariffs’ impact, companies can then find ways to reverse these increases when the tariffs are lifted.
1&2: Ken Ditzel, Scott Nystrom, and Mitch DeRubis, “The Economic Impact of Steel and Aluminum Tariffs,” FTI Economic and Financial Consulting, 30 August 2018.
3: Global Trade Analysis Project (GTAP)”, Purdue University.
4: Official Harmonized Tariff Schedule 2018,” U.S. International Trade Commission.
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