Insights from our CEO: Five Points to Ponder When It Comes to Tariffs

  • by itradmin - Tue, 03/13/2018 - 15:49

The President imposed tariffs on steel and aluminum on March 8, and that action dominated the conversation for much of last week. We discussed this issue at some length in our ITR Trends Report Executive Summary (which was released on March 9). We direct our economic consulting efforts toward helping businesses maximize profits. In summary, it is our position that no government, including ours, should be in the business of picking winners. In the case of the US, the economy is too complex, and the likelihood of unintended negative consequences is too great for this to be a good idea from a macroeconomic perspective. However, since the macroeconomic situation will be disrupted, microeconomic responses/decisions are needed. Individual businesses hold the keys to successfully handling the disruption(s) created by tariffs.

Here are five management objectives to ponder with tariffs and profits in mind if you are a consumer of imported steel or manufacture or utilize products made in the US using imported steel.

  • 1. Strategically raise prices to your consumers to cover the increased cost.
  • 2. Identifying the increase as a “tariff surcharge” (or something similar) may help the price increase “stick.”
  • 3. Beware of finished or semi-finished products coming in from overseas as a means of getting around the tariffs.
  • 4. Don’t assume US producers will be able to step into the product mix; expect gaps.
  • 5. Look to Canada or Mexico for steel for as long as the White House deems that good faith NAFTA negotiations are continuing.

Steel Scrap Prices are up 7.6% on the LME through the first seven business days of March. The tariffs of 2002 suggest additional price rise is probable. Steel futures prices rose an annual average 27.3% in 2002, 27.1% in 2003, and 65.1% in 2004 before leveling off and edging downward 4.2% in 2005. Higher steel prices likely contributed on a delayed basis to a three-year trek of escalating inflation beginning in 2003 for the Producer Price Index (PPI inflation in 2005 was 5.2% after being negative in 2002) and the CPI (CPI inflation was 3.2% by 2005). These increases helped steel industry profitability at that time and no doubt hurt the profitability of other firms. To protect your profits, figure out how you will dodge absorbing the inevitable increase in costs.

Brian Beaulieu