O- 9 | COMMENTARY ON U.S. STEEL TARIFFS AND THEIR INFLATIONARY IMPACT

O – 9 | COMMENTARY ON U.S. STEEL TARIFFS AND THEIR INFLATIONARY IMPACT

This short blog has been triggered by a meeting I had with a US-based construction company, I have engaged to make a quote for a client of mine to construct a large building using an innovative construction method. One of the risks the CEO of the company brought up is that the tariffs on steel imports (to the USA) will disrupt the market, and what they are seeing already is that local steel producers are preparing to raise (local) prices due to reduced competition from imports.

I don’t think that was the intended effect of the Administration with the introduction of the tariff measures. This is going to backfire big time, I thought. And the strange thing is, that there are several historical precedents in US tariff-policy, that have backfired equally. So, let’s write about it in a blog.

U.S. Steel Tariffs and Their Inflationary Impact

When the United States imposes tariffs on steel imports, it disrupts the natural market forces of supply and demand (see my earlier post on Ricardo and comparative advantages), triggering inflationary pressures both domestically and globally. Tariffs make imported steel more expensive, shielding U.S. steel producers from international competition. In response, domestic steel companies can and often raise prices and expand their profit margins, knowing that U.S. buyers have limited alternatives. This artificially inflated cost of steel has significant downstream consequences, driving up prices across multiple sectors of the economy. Welcome to Capitalism and Greed.

How Steel Tariffs Drive Inflation in the U.S.

Steel is a critical input in industries such as construction, automobile manufacturing, and heavy machinery. When domestic steel producers increase their prices, without facing competition from foreign suppliers, the higher costs ripple through the economy in several ways:

1. Higher Prices for Consumer Goods: With steel becoming more expensive, the cost of producing cars, appliances, and industrial equipment rises. These higher costs are passed on to consumers, contributing to inflation in consumer goods.
2. Increased Construction Costs: Steel is a major component in infrastructure and real estate development. Higher steel prices make buildings, bridges, and highways more expensive, which can lead to higher housing costs and reduced infrastructure spending.
3. Cost-Push Inflation: Because steel is a fundamental material in many supply chains, businesses that rely on steel must either absorb higher costs (reducing their profit margins) or pass these costs on to consumers. This type of inflation, known as cost-push inflation, reduces purchasing power and raises the overall price level in the economy.
4. Wage-Price Spiral Risk: As businesses face higher input costs, workers may demand higher wages to keep up with the rising cost of living. This, in turn, increases labor costs, which further fuels inflation, a dangerous cycle that can persist long after the initial tariff policy is implemented.

If the above happens, the American public will end up paying the big of failed economic policy through inflated prices.

Global Inflationary Effects

The impact of U.S. steel tariffs extends beyond domestic borders however, influencing the global economy in several ways:

1. Higher Global Commodity Prices: The U.S. is one of the largest consumers of steel. When American tariffs distort the global market, steel producers in other countries may divert supply elsewhere, driving up global steel prices. This affects developing economies that rely on affordable steel for infrastructure and industrial growth.
2. Retaliatory Tariffs and Trade Wars: Countries affected by U.S. tariffs often impose their own countermeasures, making essential goods and raw materials more expensive worldwide. This trade retaliation can contribute to a broader increase in prices across multiple sectors.
3. Currency Volatility and Inflation Transmission: When tariffs cause price spikes, they can influence exchange rates and monetary policy. If inflation accelerates, central banks (including the Federal Reserve) may respond with interest rate hikes, further tightening economic conditions both in the U.S. and globally.

So, Curacao (and our sister Islands), prepare for higher prices. You will also pay extra.

Who Suffers the Most?

While U.S. steel producers benefit from reduced competition and increased profit margins, the broader economy bears the brunt of inflationary pressures. Key losers include:

1. Manufacturers who rely on steel, such as auto companies and equipment producers, face higher costs and lower profit margins.
2. Consumers who pay more for goods due to rising prices caused by higher steel costs.
3. Workers in steel-consuming industries may face job losses as businesses scale back production due to increased costs.

The Long-Term Inflationary Consequences

Short-term protectionist policies like steel tariffs may shield a domestic industry temporarily, but they contribute to persistent inflationary pressures that hurt the broader economy. When prices rise due to artificially restricted supply, inflation can become embedded, requiring aggressive monetary policy (such as interest rate hikes) to control it.

The world economy will certainly be shaken.

Instead of tariffs, the U.S. should focus on policies that enhance competitiveness, such as investing in technological innovation, supply chain resilience, and workforce development, to reduce reliance on trade restrictions that contribute to inflationary cycles.

Dieudonne (Neetje) van der Veen is a financial and management business advisor. His work and experience are mainly in the field of financial management and structuring of companies in distress and Governance on Planning & Control cycles.

Mr. van der Veen has a master’s degree in business economics (Erasmus University Rotterdam), is a Registered Accountant (Royal Dutch Professional Organization of Accountants), CFE (Certified Fraud Examiner) and CICA (Certified Internal Control Auditor).