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Regional Matters

August 10, 2018

Fifth District Firms Weigh In on Steel and Aluminum Tariffs

In June 2018, the Richmond Fed asked its survey participants if and how their businesses would be impacted by the tariffs imposed on imported steel and aluminum. Out of 148 responses, slightly more than half (54 percent) said the impact would be negative and about a third (37 percent) said they would not be impacted. The remaining 9 percent, which represents 13 respondents, indicated that their business would be positively impacted by the tariffs.

The chart below shows how the number of responses spread across a broader spectrum of negative to positive, ranging from "very" to "slightly" for each direction, and by their firm's industry classification of manufacturing, retail, or nonretail service.

When asked to elaborate on their responses, the firms that said the impact of the steel and aluminum tariffs would be negative also commented that they had seen, or expected to see, the impact through rising costs. In fact, there were a few comments that indicated higher prices coming from both foreign and domestic suppliers. One such commenter noted that steel prices were rising, regardless of the source, and that lead times were getting even longer than they already were (at around 12 weeks).

Some firms indicated that the domestic supply of steel and aluminum was not interchangeable with imported metals or that there was not enough domestic supply available to meet demand. For example, one manufacturer that sourced steel from Germany said some of the product was proprietary and would require significant investment in tooling by domestic firms to compete. Meanwhile, another firm indicated that there was not enough domestic supply of aluminum foil to pick up the demand from Chinese or European suppliers.

In addition to these direct impacts on prices and availability of steel and aluminum, several firms reported or expected indirect effects. For example, an architecture firm expected less demand for their services because the cost to build the buildings that they design would go up. Another example was a manufacturer that did not use metal in their products but expected a reduction in demand because their customers, who purchase metals, would be faced with higher costs that would reduce their spending on other goods. Lastly, one firm noted an increase in the prices for substitute goods such as wood. 

Among the handful of firms that expected a positive effect, comments generally fell into three categories: they were a steel mill or sold substitutable products, they would be able to pass along the costs, or the tariffs would be good in the long term for the economy and therefore their business. On the latter point, a few firms that expected a negative impact also commented that, in the long term, it could be a good thing for the U.S. economy. In fact, this notion is somewhat evident in the responses when we asked how firms believed the tariffs would impact the overall economy.

The chart below shows that the number of firms that believed the impacts would be negative for the U.S. economy were roughly the same as those that were negative on their own business. However, there were fewer neutral responses and more firms that were positive with respect to the overall impact on the U.S. economy.

Yet again, some common concerns among negative commenters were rising input costs, which could lead to rising prices for other goods/services (inflation), and the potential for retaliation or a trade war. Meanwhile, the positive commenters noted some common potential benefits that included increased domestic production, increased hiring, and the potential for the tariffs to lead to the U.S. getting better trade deals.

Our survey also included questions on whether firms that faced higher input prices would be able to pass along those costs to customers and, if not, how they would adjust to lower margins. The majority of firms responding to these questions indicated that they were either unable to pass along the costs at all or that they would only be able to pass along a small portion (1 to 20 percent). Only 12 respondents said that they expected to pass along all or almost all of the increase in inputs to customers. (See chart below.)

Among firms that said they would not be able to pass along all of the increase, comments generally fell into three categories: they would absorb the costs and face lower margins, they would look to cut costs elsewhere (i.e., labor costs, dividends, and/or capital expenditures), or they would increase productivity or shift production to nonmetal products. These businesses generally felt that they were unable to pass along these costs because of market competition and the inability to set prices or because their prices were already determined by existing contracts.

To summarize, while about half of the firms we surveyed expected negative impacts to their own businesses and to the U.S. economy because of the steel and aluminum tariffs, there was a good portion of firms that believed the tariffs would be good for the overall U.S. economy, even if their firms would not directly benefit.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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