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The news is full of talk about tariffs, trade, trade deficits, Chinese conspiracies and trade wars, and it’s reasonable to ask what impact will all of this have on the mining industry. After all, the industry uses heavy equipment made from steel (one of the subjects of the much-discussed tariffs) and lots of steel in other uses. In addition, we remember that 10 years ago when the Chinese economy was booming, demand for steel, heavy equipment and accessories, like tires, sent prices soaring and created worldwide shortages that severely affected Nevada miners.

To put these issues in perspective, nothing has happened yet except for the publication of numerous articles about how horrible or wonderful — depending on who’s paying — it will be. So far, it’s just noise – a “nothing burger.”

President Donald Trump proposed a 25 percent tariff (tax) on steel and a 10 percent tariff on aluminum imported into the U.S. This would presumably increase the profits of U.S. producers and the costs of U.S. consumers. A major stated rationale for the tariffs is the U.S. trade deficit, that is, the value of goods and services imported into the U.S. in excess of the value of U.S. exports, which was $566 billion last year. I say the trade deficit is the stated rationale because, for a number of reasons, the trade deficit has very little to do with what is going on.

First of all, the current trade deficit is not even large by historical standards; in fact, it’s slightly below the recent average as a percent of gross domestic profit. Moreover, despite the fact that “deficit” sounds “bad,” it really isn’t. The trade deficit is, by definition, equal to our capital “surplus.” When foreigners accept dollars for goods or services, they can either hold the money, i.e., invest in our paper, or buy something from us. Whichever they choose, we’re better off. Of course, there are situations when extreme deficits could be a problem, but this isn’t one of them.

A second stated reason for the steel tariff is China’s $375 billion trade deficit (out of the $566 billion total) with the U.S. Now we are getting closer to what’s going on, but it really doesn’t have much to do with steel. Yes, China is the world’s largest steel producer, producing about half of the world’s supply. It has also invested heavily in production capacity to the point where it has over-capacity and is accused of “dumping” its excess steel, i.e., selling below cost, on the world market and depressing world prices but employing Chinese steel workers. This has steel producers around the world crying “foul!”

U.S. steel producers would like higher domestic prices that supposedly would result from the tariff, but there is still a problem with this story. Only about 2 percent of steel used in the U.S. comes from China. If a tariff were imposed, that percentage would fall to zero.

The biggest exporter to the U.S. is Canada (14 percent) and besides the fact that there is no good reason to aggravate our friends the Canadians, imposing a tariff would violate the North American Free Trade Agreement, set off legal disputes, etc., and just doesn’t make sense. We’ve already said we will exempt Canadian steel.

So, you ask, what’s the point? It’s kind of like Muhammed Ali waving around his right hand before he punches you with his left – it’s a diversion.

The real point is to get China’s attention and get them to the table to discuss trade practices, which range from unfair to illegal. Tariffs on U.S. cars exported to China are 25 percent, while tariffs on Chinese cars imported to the U.S. are 2.5 percent, for example. China prohibits U.S. companies operating in China without a majority Chinese partner. In many cases, the result is that the Chinese partner co-opts the U.S. partner’s trade practices and secrets then competes against them. The biggest insult of them all, the Chinese are accused of stealing $600 billion in U.S. intellectual property, such as patents and technology, annually, by various means including cyberwarfare, which dwarfs the trade deficit.

For their part, the Chinese have threatened retaliation with a tariff on U.S. soybeans. OK, if the Chinese don’t buy soybeans from the U.S., where will they get them? They are not going without soy sauce. Brazil and Argentina are the next largest-producers, so the Chinese will probably go there, driving up prices to Brazil and Argentina’s current customers. Where will these customers go? Probably to U.S. suppliers. The net effect is market disruption and possibly higher transportation costs for foreign soybean buyers.

For these and other reasons, economists generally oppose tariffs and want to avoid trade wars. However, there is fairly wide and growing agreement that we are already in a trade war and have been for a long time. The U.S. is not alone in opposition to Chinese trade practices, so look forward to more trade talks, threats and posturing. Yet steel tariffs probably aren’t happening, and even if they do, they won’t make much difference. It’s been said that trade talks are a bit like breeding elephants – there is a lot of grunting and roaring, it all takes place at a high level, and it takes years to find out what happened.

Yet steel tariffs probably aren’t happening, and even if they do, they won’t make much difference.

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John L. Dobra is an associate professor of economics at the University of Nevada, Reno’s College of Business and has almost 30 years experience consulting for mining companies. Dobra is a senior fellow at the Fraser Institute, has been published in academic journals and has testified in Congress on mining issues.


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