My article in the summer edition of Mining Quarterly discussed the importance of critical minerals in our economy. My parting comment was that we need to keep our eyes on minerals where we have a high net import reliance and where our global supply chain could be subject to disruption through unilateral imposition of tariffs leading to retaliatory tariffs resulting in a trade war. So, here we are trying to make sense of the impact of unilaterally raised tariffs on steel and aluminum. In this column, I will try to shed a little light on what we in the mining industry might expect.
Let’s start with a few definitions and a bit of history to show how we got here and then look at where “here” is and where we might be heading. First: What is a tariff? Simply, a tariff is a tax on an import, collected by the government and often levied as a percentage of the value of the commodity. The direct impact of a tariff is an increase in price to the consumer of the product.
So, why do we have tariffs? Two reasons: revenue and protection of domestic industries. In the U.S., both factors have been important at one time or another. The 2nd Act passed by the 1st U.S. Congress on July 4, 1789, was “An Act for laying a Duty on Goods, Wares, and Merchandises imported into the United States.” The explicit reasons stated in the act were “the support of government, the discharge of the debts of the United States, and the encouragement and protection of manufactures.” The act was supported by Alexander Hamilton, President George Washington and the northern states. There was some resistance from the South where the agrarian economy relied on imported equipment and was concerned with retaliatory tariffs on their exported agricultural products.
Tariffs continued to be a major part of U.S. policy throughout the 19th and early 20th centuries, and protectionism was the driving force. This protectionist policy helped the U.S. become a dominant industrial power during this period and provided substantial government revenue without directly taxing individuals or businesses. In 1913, the 16th Amendment providing for a federal income tax changed the revenue picture substantially, and the trade disruptions caused by World War I further eroded our reliance on tariffs as a major source of tax revenue. However, the protectionist policy would continue to be a dominant factor. Post-World War II presented an environment in which protectionism for U.S. manufacturing was considered not as important. The industrial capacity of the Axis powers and our European Allies had been devastated by the war, and the rebuilding of this capacity was deemed a high priority. This rebuilding succeeded in creating the stable world economic system we enjoy today.
There was some protectionist resurgence in the ’60s and ’70s, primarily in response to low-cost Japanese and German steel and Volkswagen’s entry into the U.S. automobile market. After the fall of the Berlin Wall, the Republican Party under President Ronald Regan completely abandoned protectionism in favor of minimal barriers to world trade. The World Trade Organization oversaw the administration of “fair” tariffs and settled disputes when they arose when one nation would accuse another of “unfair trade practices” such as: dumping below-cost products onto the market, manipulating currency to make exports more favorable, or imposing tariffs without justification.
That was generally the status quo until this year. In March, President Donald Trump announced that he was imposing a tariff of 25 percent on steel imports and 10 percent on aluminum, citing National Security concerns as the basis for this unilateral increase from essentially zero. National Security is considered by the WTO as a legitimate reason for imposing tariffs under Section 232 of the Trade Expansion Act of 1962.
Let’s look at some numbers. In terms of percent net import reliance in 2017, the U.S. imported 18 percent of our steel and 61 percent of our aluminum. While these are potentially worrisome numbers, we also need to consider the vulnerability of supply chains for these products. Remember that a secure supply chain can mitigate a high percent net import reliance in terms of national security concerns. Where do our imports for aluminum and steel come from? Forty percent of the $23.4 billion worth of aluminum came from Canada (36 percent) and Mexico (4 percent); 15 percent from China. For steel, a $28.8 billion market, 25 percent came from Canada (18 percent) and Mexico (7 percent), while about 2 percent came from China.
The response from our trading partners? Canada, Mexico, the European Union and China have all imposed retaliatory tariffs on U.S. goods, notably on agricultural products such as soy beans, meat and poultry, whiskey, and cheese, as well as imports of American produced aluminum and steel. In addition, both China and the EU have filed complaints with the WTO challenging these tariffs. Looks like a full-blown Trade War is brewing unless somebody blinks. As an aside, one might wonder how Canada, which provides the largest proportion of our imported aluminum and steel, qualifies as a threat to our national security.
What does all this mean to the mining industry? First, note that these tariffs are on metals and not ores. Aluminum is produced from bauxite, and neither the U.S. nor Canada has any significant reserves or production. So the impact on mined product is nil. Both Canada and the U.S. are net exporters of iron ore with annual ore production of about 47 million tonnes each. Following the “Law of Unintended Consequences,” the steel tariffs will cause an increase in the domestic price. Iron ore producers should then see a bump in their domestic revenue although retaliatory tariffs could erase any domestic gain. So, we might see a small positive direct impact on that sector of the industry.
However, the major impact I see for mining is that we are major consumers of finished steel and aluminum products and, in general, consumers bear the brunt of cost increases in manufactured goods driven by a price increase of input materials. Consider that a large haul truck, or a mid-sized SAG mill, might contain a million pounds of steel. Almost all our mobile power is based on diesel engines: The CEO of Cummins, in an article in the New York Times, lamented the dilemma his company faces of either absorbing the cost increase (thereby facing layoffs and plant closings) or passing them on to their customers (decreasing Cummins’ sales and revenue). Remember also that miners are price takers; we can’t pass the costs on to the buyers of our products.
To me it looks like a cost increase for us. Hard to say how big or for how long, but these tariffs will not help the mining industry and could put a significant dampener on expansion. On the other hand, who knows what the trade situation will look like by year end, or by the time this is published for that matter? So, keep alert, and keep on muckin’.