President Trump's 25% tariff on imported steel and 10% tariff on imported aluminum has raised the prospect of a global trade war. The moves, which led to Gary Cohn resigning as Trump's economic advisor, were not supported by many in the administration.
On this episode of Industry Focus: Energy, analyst Sarah Priestley is joined by Motley Fool contributor Daniel Kline to talk about the tariffs and how Trump negotiates. They break down what the president is trying to accomplish and what that means to American jobs, as well as how consumers may end up paying.
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A full transcript follows the video.
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This video was recorded on March 22, 2018.
Sarah Priestley: President Trump announced that there will be a tariff of 25% on imported steel, 10% on imported aluminum. It's caused a bit of a frenzy. There's a lot of politicians unhappy about it, a lot of industry experts unhappy about it. His own economic advisor quit rather than give the decision his support. The fuel industry is kind of the only fairly happy party about all of this.
Dan Kline: It's a typical Donald Trump negotiating tactic. Basically, diplomacy is, we both talk, we discuss what we could do to each other, but you work on a compromise and it all happens behind the scenes. The Trump tactic is more to say, "Here's the penalty. Come to me and negotiate a deal to get rid of the penalty."
Kline: It's effective in real estate, I'm not so sure it's going to be effective on the global stage.
Priestley: We shall see. Yeah, imported steel makes up about a third of the 100 million tons of steel used in the U.S. each year and 90% of the aluminum used. It was all started -- in case anybody is interested in the background -- the Department of Commerce conducted an investigation, they sent several recommendations to President Trump which included, and its most extreme, the suggestion of a 7.7% tariff on aluminum, 24% tariff on steel, and levies the accusation of dumping on China specifically, which we've heard before. This has all come about from the 2014 and 2015 surge that we saw in steel from China. The presentation of this from the Department of Commerce was that this is an issue of national security, and that is how they've been able to pass this. There's a loophole. They could enact this using a provision from 1962 trade law. Which opens us up to questions on precedent.
Kline: This isn't atypical. In the past 9-10 years, between the previous administration and this one, finding back doors to past policy has been an easier path than trying to get things through oppositional Congress. It's weird to think that a Republican Congress would be oppositional to a Republican president, but obviously, if you're in Pennsylvania, a steel tariff is very different compared to if you're in California, which is where a lot of it is being dropped off, a lot of it is being used. So, this was really the only way this could get done, is to find what is essentially a loophole.
Priestley: Yes. The consensus on this has been very negative. A lot of people are not happy. But, it's important to note, tariffs can work, and they have provided protection in the past for a few vulnerable companies or a vulnerable industry. They do come with a lot of costs and risks, and we're going to be talking about those. Dan, outline for us simply, what do you think that President Trump is trying to achieve with this?
Kline: Not to be too disparaging of the president, but he likes to make bold proclamations and he likes to be the guy in charge. He's not the kind of person who's going to go into a back room with a bunch of Chinese diplomats and work out a quiet, "I'll give you this if you give us that." He wants to be the winner here. This is a very pro wrestling tactic of making your threats and then seeing if you can back them up. And arguably, he's trying to protect American jobs. But realistically, he's just trying to win.
Priestley: When he signed the tariff, he said, "Steel is steel. You don't have steel and you don't have a country." And he's right, to a certain extent. Steel is very, very important for so much stuff.
Kline: It is, and you don't want to drive the U.S. steel business out of business. On the other hand, when you raise the price of something, we all saw the Commerce Secretary holding a Budweiser can and saying, it's only two-tenths of a cent, so it won't change the price of a can of beer. It might change the price of a steel anything. There's not a lot little steel things. Steel tends to be very big. So, you take a 25% tariff over anything -- a steel building, a steel plane, whatever it is. Well, of course, a plane would not be mostly steel, that would be very heavy plane. But, that's going to translate into protection for these companies at the expense of American taxpayers.
Priestley: And the Commerce Secretary was accused of this, he was accused of a tax on the average American, and he said the impact would be trivial. He said there's about a ton of steel in a car. The price of a ton of steel is about $700 or so. That's unprocessed, I think. [laughs] So, 25% on that would be a 0.5% increase on a typical $35,000 car. But, that's still 0.5%.
Kline: Yeah. And it's 0.5% across all of the steel things you buy. Even things like a building, when they build a new 30-story housing development, that's a significant amount of money that adds to that cost. So, this isn't trivial. And, the people who support this tend to be the same ones who are against agricultural subsidies to keep American farms afloat, but this is really just doing the same thing in reverse.
Daniel B. Kline has no position in any of the stocks mentioned. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.