How Trump's Modified Tariffs Could Affect Consumers

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President Donald Trump narrowed the scope of his planned tariffs on steel and aluminum imports, but consumers could still see higher prices on some cars and appliances next year.

The president signed proclamations this week imposing a 25 percent tariff on steel and 10 percent on aluminum, effective March 23. But in a significant concession, he left out two big U.S. trading partners--Canada and Mexico--and left room for other countries to negotiate ways to avoid the tariffs.

Excluding Canada and Mexico means prices on big-ticket consumer items could rise 2.5 to 5 percent next year rather than up to 10 percent as originally feared, says Bill Selesky, an analyst who covers Ford Motors at Argus Research, an investment research firm in New York City.

"There will still be an impact, but not to the same degree," Selesky said.

Even with the potentially smaller price increase, Dan Ikenson, director of trade policy studies at the Cato Institute, a libertarian think tank, says that consumers might want to consider buying a car or appliance this year rather than waiting. A 2.5 percent increase for a $30,000 car is $750. 

"Even if the tariffs are applied more narrowly, there will still be a higher cost to steel and aluminum," Ikenson said. "Combine that with rising demand for autos in a growing economy, and prices will likely be higher next year than this year."

Trump has made the Canada and Mexico exclusion dependent on a successful renegotiation of the North American Free Trade Agreement. If those talks fail, and the president decides to impose tariffs on those countries after all, prices could increase by up to 10 percent next year, says Selesky. 

Canada is the number one source of imported steel to the United States, while Mexico is among the nation's top foreign suppliers. 

Tariffs Timeline

Whatever happens, consumers won't feel the impact until next year because it takes time for the higher cost of raw materials to work its way through the supply chain.

Many U.S. manufacturers may already have products that are waiting to be sold in lots and warehouses or have raw materials such as steel and aluminum stockpiled.

“There are cars produced, cars in inventory,” says Ikenson. “There is steel in inventory, and a lot of the bigger carmakers are insulated by yearlong contracts, which have already been priced out.” 

But once those costs kick in, prices for big-ticket consumer items like autos and appliances  could start rising.

 

Uncertainty Abounds

The true impact, however, may not be known for some time because the tariffs announced this week could be modified further.

The tariffs are being imposed under the auspices of national security, giving the administration flexibility to make changes whenever it wants, Ikenson says.

"Trump said 25 percent for steel and 10 percent for aluminum, but if you start excluding countries, that might bump the tariffs number up to 40 percent for imports from places like China," he says.

Mexico and Canada account for about 50 percent of U.S. steel imports, he says, while China accounts for just over 2 percent. 

Further complicating the calculation is the fact that steel is not really a commodity in the same way as, for example, oil.

"There are many, many different grades and they're used in different products. The anti-corrosive steel that goes into a car is 50 percent more expensive than raw steel," Ikenson says.

Then there is the question of how much steel (or aluminum) goes into a product.

"A car is usually 25 percent steel, while an oil pipe is 100 percent steel," he says.

Whatever the impact, it could still affect a broad swath of the economy.  

“Since steel and aluminum are used in autos, appliances, airliners, pipes, building infrastructure, beer cans, and soup cans, there could be price increases across the economy,” Ikenson says.

“Fleets of trucks could be impacted, the cost of travel, the cost of food, even the cost of your restaurant experience could go up,” he adds. “In an economy where you tax [steel and aluminum], you have a much larger ripple effect.” 

In a statement to Consumer Reports, Ford Motors said, “Despite the fact that Ford buys the vast majority of its steel and aluminum for U.S. production in the U.S., this action could result in an increase in domestic commodity prices—harming the competitiveness of American manufacturers.”

In the end, Ikenson says, consumers will feel the impact in 2019, but the severity of the impact will be depend on the products consumers purchase, what countries are impacted by the tariffs, and the final tariff numbers. 

Tariff Action, Tariff Retaliation

“I think the countries involved would want to see how they will be impacted financially by these tariffs,” Selesky says. “If the tariffs stay the same after 12 months, I think countries will retaliate.”

But retaliation threats are already flowing from across the Atlantic with European Union President Jean-Claude Juncker announcing that the confederation of European nations could slap tariffs on everything from American-made Harley-Davidson motorcycles to Kentucky bourbon. Even Florida and California oranges would be in the crosshairs for European tariffs.

Tariffs also can have ripple effects on the rest of the economy, often with unforeseen consequences.

Although the tariffs are meant to protect U.S. steelmakers, Ikenson says they can have harmful effects on the wider economy.

“For every one job in the steel industry there are 60 jobs in the steel-using industry,” Ikenson says.

Selesky agrees that the consequences can outweigh the benefits.

“Be careful what you wish for,” he says. “A potential trade war could create more problems than it initially solves.”

The MillerCoors brewing company warned of rising prices and the impact to American workers.

“Like most brewers, we are selling an increasing amount of our beers in aluminum cans and this action will cause aluminum prices to rise and is likely to lead to job losses across the beer industry,” the brewery says. “We buy as much domestic can sheet aluminum as is available. However, there simply isn’t enough supply to satisfy the demands of American beverage makers like us. American workers and American consumers will suffer as a result of this misguided tariff.”

The National Retail Federation, a retail trade association, on Thursday said it was concerned about the planned tariffs.

“The retail industry is extremely concerned by the administration’s apparent desire to ignite a trade war, where the net losers will be the very people the president wants to help," the federation's CEO, Matthew Shay, said in a statement released during the President's announcement.

"A tariff is a tax, an unnecessary tax on every American family and a self-inflicted wound on the nation’s economy," he said.

"Consumers are just beginning to see more money in their paychecks following tax reform, but those gains will soon be offset."



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