A Tariff Windfall for Steel? Probably Not.

Are steel stocks poised to accumulate a windfall of profits from the announced tariffs on imports from Canada, Mexico, and the EU? The historical evidence doesn't seem very promising that domestic producers will see much of a short-term benefit from import taxes.

No Industry Is an Island

On the surface, it's easy to assume that taxing imports will raise the price of steel and improve the outlook for domestic producers who can now charge more for their production. The problems with that logic have several facets but three important issues are likely to negate any short-term positives. (See also: The Basics of Tariffs And Trade Barriers)

Rising steel prices will put pressure on the companies that buy steel. This includes firms as diverse as equipment manufacturers, Caterpillar Inc. (CAT), and Ford Motor Co. (F), or canned soup maker Campbell Soup Co. (CPB). All else being equal, rising input costs could just lower demand and make other U.S. exports less competitive.

While it is certainly true that the U.S. is a net importer of steel, that doesn't mean U.S. firms don't also export steel as well. According to the Department of Commerce, 12-14% of domestic steel production is destined for export. Almost all U.S. steel exports are sent to Canada and Mexico, both of whom have threatened to tariff U.S. steel and other exports on a dollar for dollar basis. 

Finally, the last time the U.S. imposed steel Tariffs on allied trading partners like this (2002-2003) there were so many loopholes and caveats created that it just created uncertainty in the industry and muted any potential effect. Perhaps that won't happen this time, but the government isn't known for efficiently managing commerce in the short-term. The share price of one of the largest firms in the sector, Nucor Corp. (NUE), declined 14% over the 2002-2003 tariff period as steel production across the industry only increased nominally.

The best evidence of somewhat negative expectations for the effect of tariffs on steel stocks are the share prices of steel stocks like Nucor, US Steel (X), AK Steel (AKS), and Steel Dynamics Inc. (STLD), which all fell from resistance and closed well off the highs on Thursday. The most important question isn't whether the world plays fair in trade but whether imposing tariffs like this is the solution. (See also: AK Steel Slashed to Sell Amid Trade Worries)

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