By Robert Romano
One of the conventional wisdoms to do with the tariffs and duties levied by the Trump administration on steel, aluminum and lumber is that they will lead to higher prices and inflation, hurting producers and consumers, thus stunting economic growth.
For example, billionaire Charles Koch warned on July 30 that the tariffs would lead to a recession.
So far, however, that does not appear to be the case. In the second quarter of 2018, the U.S. economy boomed at an inflation-adjusted 4.1 percent annualized. And the latest consumer and producer prices, taking into account the period when many of the tariffs were levied, do not show the predicted price hikes.
Consumer inflation is up 0.8 percent the past six months, below the Fed’s 2 percent 12-month target.
As for producer prices, if you look at finished goods for final demand by commodity less energy and food, you see a 1.44 percent increase the last six months, averaging 0.24 percent a month. That is slightly below the historical average of 0.27 percent a month dating back to 1974.
Americans for Limited Government President Rick Manning commented on the numbers, saying, “the six-month tracking demonstrates that the economic growth spurt generated through President Trump’s economic policies have not spurred higher costs to consumers. Just one more piece of welcome news that defies so-called expert predictions.”
To be fair, since the steel and aluminum tariffs were recommended in February by the Commerce Department, announced in March and taken effect in May, steel and aluminum prices have increased on commodities markets.
For example, Aug. 2018 contracts on hot rolled coil steel on NYMEX increased from about $690 to $901 as of this writing, a 30.5 percent increase. And Sept. 2018 contracts on aluminum MW U.S. premium platts on NYMEX have increased from $0.13 to $0.195, a 50 percent increase.
But what has not happened is it impacting overall consumer and producer prices and hindering growth overall, as seen by the latest numbers. That is because steel and aluminum only make up a small part of overall consumer and producer prices, such that an increase in demand for U.S.-produced steel and aluminum could lead a price increase, but not at all slow economic growth or trigger inflation.
As for lumber, it is true that after the President Donald Trump announced the tariff on Canadian lumber in April 2017, Sept. 2018 contracts on lumber futures on NYMEX did increase from about $350 to $624 on May 27, but guess what? The prices since then have crashed dramatically by 33.7 percent back down to $414.
It was a speculative bubble. Perhaps driven by the announcement of the tariffs, but a bubble nonetheless that turned out to not be sustainable when real market factors were taken into consideration by investors. The futures prices after all on commodities markets do not take into account taxes. They are a pre-tax price, and in any event, the U.S.-produced commodities in question are not being taxed at all.
All of which serves as a cautionary tale for those investors that drove the futures prices up on steel and aluminum, as that increase may not be long-lived. Market factors explain it too. As U.S.-based steel and aluminum producers take advantage of the current trade advantages and increase market share, they will also ramp up production. This will in turn of eventually bringing prices down to what the market can bear.
Meaning, although there are obvious market impacts brought on by the tariffs, at the end of the day, they are taxes on foreign-produced goods and commodities. The incentive is to purchase the U.S.-made products instead, which is what is happening. It’s the whole point of the policy.
What it won’t lead to, however, is 1970s-style overall inflation or impede economic growth, no matter how many times the alarmists make such predictions.
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Robert Romano is the Vice President of Public Policy at Americans for Limited Government.
