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How The 2018 Steel Tariffs Will Disrupt Construction Industries

The Trump administration recently announced a new steel tariff policy that could have negative short and long-term effects on construction-related industries.

Beginning in March, these new tariff and trade policies place a 25% and 10% tariff on steel and aluminum imports, respectively. The Trump administration has also unveiled plans to impose up to $60 billion in tariffs on imports from China.

If enacted, the steel and aluminum tariffs will have a significant impact on construction industries across the country, as they continue to work to return to pre-recession performance. What is this tariff in the first place, why is it being instituted, and how is it going to affect your business?

What is a steel tariff?

A tariff is a tax levied on a particular class of imported goods. Any company importing that item then pays the tax to the US government, raising the price of the good similar to a sales tax. Governments use tariffs to as a way to protect industries and raise revenues.

Steel and aluminum are common materials used in both commercial and residential buildings. Steel accounts for approximately 16% of total building cost for a typical commercial project. Residential builders use steel in basement lolly columns and support beams. From beams to reinforced concrete to duct work to kitchen appliances, steel and aluminum are everywhere in commercial and residential structures. Hospitals, manufacturing facilities, commercial kitchens and science labs are examples of commercial applications for steel and aluminum.

Beyond buildings, steel is also a major component of heavy equipment, vehicles, machinery, tools and infrastructure such as bridges and waterlines.

Why impose a steel tariff?

The idea behind a tariff beyond raising revenues is to stimulate domestic production of a product. According to the US Geological Survey, the US relied on imports to account for 18% of total steel needed in 2017. The United States imported 53% of the total aluminum needed for consumption in 2017. These new tariffs are the results of three recommendations from the US Department of Commerce. It also isn’t a secret that steel and aluminum industries have been lobbying for this kind of government action for years.

Who will be impacted by the tariff?

The short answer: everyone.

Manufacturers have already reported an increase in cost to the raw material in advance of the tariff. This means that projects currently in the bid stages will see an immediate increase in cost. The commercial or residential developer of a home, apartment building or commercial property will need to verify their projects still pencil. This may stall or stop new projects from even starting.

Edward Zarenski, a construction economics professor at Worcester Polytechnic Institute, believes that the 2018 Steel tariffs will result in a 1% increase or 7.5B increase in construction prices this year.

If a project proceeds, either the consumer or manufacturer will need to pay the added costs.

The short and long-term effects of a steel tariff

In the short term, manufacturers purchasing materials for building components will attempt to pass along the increased raw costs to the builder.

Those increased building costs then translate to increased cost to the consumer. New commercial buildings will become more expensive to build, and existing commercial buildings will need to increase leases or delay their original expected returns. Residential homes will also see a price increase, pricing some new home buyers out of the market.

Over the longer term, everything from HVAC units to kitchen appliances will see a price increase - adding more cost to a finished building or home. Businesses themselves also will see impacts to the bottom line in the form of overhead costs such as new vehicles or heavy equipment.

The price difference wouldn't be obvious to the consumer right away but industries that rely on steel such as the aerospace, manufacturing, and building sectors are bracing for increased expenses. It is worth noting that these industries account for a large part of the US economy.

Jobs as a result of a steel tariff?

Lydia Cox of Harvard and Kadee Russ of the University of California, Davis, estimated that steel-using industries employ 80 times as many people as steel-producing industries. That means the industries that consume steel as part of their business employ 80 individuals to every 1 person employed by the steel and aluminum manufacturers. If the goal of the tariff is to increase domestic production of steel and aluminum, a tariff would incentivize the sale of American products - but can the US steel close an 18% import gap?

If the US has the capacity to manufacturer 18% more steel to meet demand, the end result would mean more US jobs in theory. Between 1962 and 2005 the steel industry lost approximately 75% of its jobs while output per worker quintupled due to advances in technology.

Further, employment in steel production fell more than 10 percent from 2006 to 2016 to 140,000 workers. Output per worker increased more than 20 percent during that same period, according to data from the U.S. Bureau of Labor Statistics. In fact, the steel industry is one of the fastest growing industries in the US over the last three decades.

Will we see more US jobs if it could meet production needs? Yes, but because of technology, an 18% increase in production does not equate to an 18% jump in employment.

What about jobs affected by increased costs?

Industries that use steel intensively account for approximately 2 million jobs. All things being static, a price increase in steel would pass on to the consumer. History tells us that this will not be 100% the case in all instances. Some costs will cause value engineering, white the company and consumer split the others. In the worst case, a company may not be able to pass on the cost. If a tariff is in place for an extended period of time it is probable that the industries that use steel as a vital component of their manufacturing process will see a decline. Many of these industries competing internationally rely on exporting their goods.

This larger population of jobs created by steel users accounts for 1.3% of citizens employed in the United States. The steel and aluminum industry accounts for 0.0008% of the employed population.

Exceptions, Trade Wars, and Mortgages

U.S. Trade Representative Robert Lighthizer has reported that there may be delays and exemptions to imposing the steel and aluminum tariffs for some countries including Mexico and Canada. The EU, Australia, and Argentina are actively discussing tariff terms with the Trump administration. The EU has been aggressive in its stand against US tariffs, threatening to boycott imports of American goods such as jeans, motorcycles, and bourbon.

Do these threats foretell a trade war between the US and the world economy? According to President Trump, “trade wars are good, and easy to win”. Only 6% of US imported steel from emerging countries like China. Tariffs will likely impact countries like the EU who struggle with excess global production.

What does a trade war have to do with mortgage rates and the building industry? Let's follow the money. The value of the dollar today is less than it was in the past. Simply put, inflation occurs when the dollar decreases in value. Prices of imported goods rise when you can buy less today with the same dollar you had to spend yesterday.

The federal reserve manages inflation in the US economy. The Fed has forecasted four rate increases to interest rates in 2018. This means home loans, business loans, and credit cards will follow the Fed's actions with interest increases. This interest rate change is just part of what may cause interest rates to rise.

The US current holds 21 trillion dollars of debt on its balance sheet. To fund this debt, the US Treasury sells the debt on the world market. The US is being treated as a credit card racking up variable-interest expense. Due to a robust economy, the US has had no trouble selling debt on the world stage. If these new tariffs on steel and aluminum take effect as planned on March 25th, countries could retaliate in many ways including demanding the US pay more to finance its debt. If this scenario takes place, businesses and consumers can expect more interest increases which would drive up the cost of building and drive some buyers out of the market completely.

With no end to debt in sight and rising interest rates, these new steel and aluminum tariffs appear to create few jobs while also increasing the threat, the threat of trade retaliation and rising costs for businesses and consumers of the building industry. Only time will tell if the US economy is resilient enough to absorb the impact.

Do you know if your construction or manufacturing company is keeping track of the right metrics? We've put together our KPI By Industry Cheat Sheet to get your reporting on track. Check it out here:

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