Steel Tariffs Are Driving US Economic Growth

By Jeff Ferry, CPA Chief Economist

On October 25^th, America’s largest steelmaker Nucor opened a new steel mill in Hickman, Arkansas.

The mill will employ about 100 workers at an average salary of $80,000 a year. A jubilant Arkansas Governor Asa Hutchinson attended the opening and told the crowd: “I am thrilled that Nucor chose Hickman as the site for its new specialty cold mill complex…Nucor’s investment in Mississippi County over the past 30 years or so has made a substantial economic impact to the region.”

Hutchinson was especially pleased that day because in the month of October he presided over four plant openings involving the creation of 1,500 new jobs. In addition to Nucor’s steel, the new plants will manufacture machinery, plastic housewares, and life sciences products.

Meanwhile, not far away, in Osceola, Arkansas, Big River Steel is investing $1.2 billion to expand its steel complex with an additional 500 jobs when it’s complete. Osceola Mayor Dickie Kennemore is equally thrilled. “It’s like we’d won the economic development lottery,” he told an Arkansas newspaper. “I went through the downturns of our textile mills closing and back then, you’d have given anything to get 50 or 100 jobs.” Kennemore went on to detail the broader effects the steel investments were having on the city’s economy. City tax revenue was up 29% thanks to the construction activity and spending of the construction workers and newly arriving steelworkers. Housing is under construction in Osceola. “We used to have a housing surplus here,” said Kennemore. “We don’t any more.”

Travel 350 miles northwest of Osceola and it’s a similar story. In Sedalia, Missouri Nucor is building a greenfield steel production facility. We spoke to Economic Development Director for Sedalia-Pettis County Jessica Craig, who told us of the wave of economic development going on in the area. “There’s a $10 million rail service going to the Nucor property,” said Craig. “There are more businesses popping up around that location. Nucor has about 500 construction personnel staying in local motels, and suppliers are coming for meetings and they’re all staying here and eating here.”

Local Sedalia real estate developer David Furnell is also seeing the benefits. Furnell is building a new apartment complex with 100 units, a significant addition for a town with a population of 21,000. “We have a small hotel and our occupancy numbers are up,” said Furnell. “Rents are up between 12% and 15%. Home sale prices are up about 15%. That’s good for everyone.” Furnell went on to describe a recent local vote, which approved a sales tax levy to fund the building of a new community center which will include swimming pools, a basketball court and a senior center. “None of this was happening two years ago. Attitudes have changed.”

The steel tariffs are working. They are delivering prosperity to the steel industry, which is in turn benefiting the local communities where steelworks are located. According to industry sources, some $13 billion worth of major steel investment projects are now underway. Most of them are in small towns or semi-rural communities in Middle America, exactly the sort of places that became depressed after years of deindustrialization.

The steel tariff, enacted by the Trump administration in March 2018, put a 25 percent tariff on imported steel, with exceptions for some countries. The world steel industry is in chronic oversupply due to two decades of intensive, government-subsidized investment in steel production in China. China now produces 55 percent of the world’s steel (ten times as much steel as the US produces). It’s estimated that on top of that over-production, China has additional excess capacity worth 400 million tons a year. The market overhang has led to high levels of steel imports into the US and chronic weakness in US steel prices. The price weakness has made it difficult for the steel industry to invest and maintain production.

With steel named as part of America’s Critical Manufacturing Sector in the Department of Homeland Security’s 16 critical US infrastructure sectors, the administration invoked Section 232 of the 1962 Trade Expansion Act to levy the tariff. By reducing imports and providing the industry some confidence that there won’t be another surge of imports reducing steel prices, the tariffs have been successful. According to the US Commerce Department, steel import penetration is today around 21 percent, compared to 23 percent in 2018, and higher import levels, reaching even 30 percent, in the 2014-2017 period.

“The tariffs have provided us a more stable environment for $13 billion worth of investment in clean, modern technology,” said Barry Zekelman, founder and CEO of Zekelman Industries. “We want efficient, plentiful steel production so we can keep costs down for US manufacturing industry and compete against foreign competition. Zekelman operates 17 plants across the US with $3 billion in sales and 2700 employees. He is currently investing $150 million to build the world’s largest steel tube mill in Arkansas. His company’s capital expenditure budget went from $80 million in 2017 to $110 million in 2018, and $140 million this year. He says he’s seeking to hire an additional 400 people. “And we pay our people well, from $60k to over $100k per job.”

Well-Paid Steel Jobs

High wages, as well as good benefit packages, are a trademark feature of the steel industry. Table 1 shows the pay levels of the median employee at America’s four largest steel companies. These figures are published in SEC filings and are required to be accurate under US securities laws.

Table 1.

For comparison, Table 1 also includes the average annual wage for all occupations in Arkansas, Missouri, and Texas, three states where new steel projects are under construction. It can be seen that the steel industry is paying employees roughly double the prevailing wage in all three states. We also include the highest-paid state in the nation, New York, and the US average. The steel industry is paying well above those figures too.

In fact, the benefits of steel jobs for workers and their families are even more dramatic because the steel industry often locates new investments in semi-rural regions where average employee pay is lower than the state average, and it hires many men and women without college degrees. Comments Jessica Craig, the Economic Development Director for Pettis County, Missouri: “In Pettis County the average wage as of June 2019 is $34,448. Nucor’s entry-level salary here is $65,000, almost double our average wage beforehand.”

And, Craig explains, the impact of those pay rates goes well beyond steelworkers and their families: “We are already seeing increased spending in the city and the county. And we are seeing other regional employers increase their wages.”

Free Trade: The Uses and Abuses of Economic Theory

The steel tariffs are criticized regularly by Wall Street professionals, mainstream economists, and their followers in the media. Many of these commentators invoke economic theory. Yet their understanding of economic theory is superficial and often wrong. The economic theory of free trade says that nations are most efficient if they focus on industries where they have a comparative advantage.  But that theory rests on the assumption of equilibrium, that a nation’s resources are deployed at their maximum productivity.  The fact that the steel industry pays double what other industries pay illustrates that by growing the steel industry, the US can increase worker productivity, total annual production (GDP), while at the same time increasing average income per worker, and returns to shareholders (since the steel industry, with stable prices, is a strongly profitable industry).

The radical differences in what employees earn in different industries illustrate where trade theory falls down: certain industries are simply more valuable to a nation than others. Since the 1950s, Japan, South Korea, and now China have rejected free trade theory and pursued growth in domestic steel industries because they benefit their own people and lay the foundation for other more advanced industries. The US is today the only major industrial power that imports 20 percent of its steel and it’s time for us to do the same: continue to invest in steel on the way to rebuilding other manufacturing industries.

A recent highly negative article in the Los Angeles Times collected all the common criticisms of the steel tariffs. Aside from the theoretical misunderstanding described above, its main criticism was that two steel companies, US Steel and AK Steel, have recently had to cut capacity, with some layoffs. But those capacity cuts are being made to older, less efficient plants. US Steel recently bought a large stake in Big River Steel, which uses the modern mini-mill technique of steelmaking. US Steel has a large debt load and the stability created by the tariffs plays an important role in enabling US Steel to make the transition from traditional blast furnace steelmaking to modern mini-mills. The tariffs are speeding along the transition of the US steelmaking industry into a world-class, state-of-the-art industry.  As Table 1 above shows, the mini-mill steelmakers (Nucor and Steel Dynamics) pay higher wages than the traditional steelmakers, so the technological improvements benefit the workers as well as management, shareholders, and customers.

Finally, the critics point out that America’s steel tariffs have not changed China’s behavior. This is true. According to the World Steel Association, China’s steel production in 2018 rose another 6.6 percent to 928 million tons, 51 percent of the world total, and has continued to rise further in the first half of this year, reaching 55 percent of world steel output in July. Keeping Chinese steel out of the US is one part of the solution. But until the entire international community can unite on imposing some restraint on a Chinese industry that is out of all control (many Chinese steelmakers are zombie companies, losing billions of dollars a year, but the Communist Party refuses to shut them down), there will be no long-term solution.