Intermediate Goods: The Hidden Cost of Blanket Tariffs
President Trump has promised to unleash a surge of blanket tariffs, many of which will be placed on intermediate goods, not the finished products themselves, upending the foundation of American manufacturing. A key example is his proposed new 25 percent tariff on steel and aluminum, metals considered essential in the production of everything from cars to appliances. When tariffs inflate the cost of these essential inputs, domestic manufacturers face mounting expenses and reduced competitiveness, hurting the very producers they intend to help. That said, when it comes to China—a nation that has long skewed global markets with its mercantilist practices—tariffs emerge not as an economic misstep, but as a measured response to protect American industry.
To understand how these steel and aluminum tariffs would negatively affect U.S. businesses, one only has to look to March 2018: even as U.S. steel production surged, tariffs of 25 percent on steel and 10 percent on aluminum were slapped on imports—supposedly to boost domestic production. Instead, these tariffs became an excuse for U.S. producers to use higher import prices as a pretext to raise their own, pocketing extra profits while downstream users in hardware, machinery, and auto sectors saw sales and revenue nosedive.
Between 2017 and 2021, domestic steel and wrought aluminum producers benefitted, seeing production climb 5 and 15 percent, respectively, while imports fell. But because the number of jobs in U.S. industries that use steel or inputs made of steel outnumber the number of jobs involved in the production of steel by roughly 80 to 1, the higher costs of steel due to the tariffs ended up harming rather than helping far more U.S. jobs, companies, and industries. Indeed, the shockwaves were massive—Ford and GM lost $750 million and $1 billion, respectively, and the U.S. International Trade Commission estimated downstream industries faced $3.4 billion in production losses. These losses forced layoffs and production shifts thanks in part to uncertainties over tariff permanence. Unlike what Trump suggests, it’s unlikely these tariffs will swiftly return steel and aluminum production to America without significant vicarious costs.
With a deluge of tariffs likely coming from the Trump administration over the next four years, downstream users of steel and aluminum are not the only ones at risk. Fifty-one percent of goods imported into the United States are intermediate goods, including most chemicals, electrical equipment, plastics, and information communications technologies (ICT), including semiconductors. ITIF has advocated against placing tariffs on ICTs due to their importance as intermediate goods in advanced industries, including aerospace products, appliances, cars, and scientific instruments. Increasing the price of these essential goods leads to higher costs for businesses, decreased investment in productive capital, and reduced productivity growth. U.S. firms in advanced industries require heightened productivity growth to compete for and win global market share.
Trump would argue that tariffs won’t negatively impact American firms; instead, tariffs will strengthen the dollar, limiting their impact on the price of imported foreign goods. At the same time, domestic producers will simply produce more, ushering in a golden age of American business both here and abroad.
Unfortunately, it's not that simple. Domestic producers, particularly in America’s advanced technology industries, need access to global markets to increase their competitiveness and revenues. A stronger dollar means American goods become more expensive internationally, making it harder for U.S. manufacturers to compete with European and Asian competitors. With higher prices than for other foreign products, American firms would experience decreased revenue, meaning they would invest less in capital stock and research and development (R&D), ultimately harming their competitiveness in a fierce global market. Foreign retaliatory tariffs would only worsen this effect and lead to a counterproductive global tit-for-tat.
Rather than placing blanket tariffs on goods imported from anywhere, the Trump administration needs to take a more targeted approach, using tariffs only on economic rivals, such as China, or on countries that implement blatantly unfair trade practices, which, unsurprisingly, also includes China. China’s innovation mercantilist practices have made it possible for Chinese firms to be at the frontier of technological innovation, increasing its production capacity and winning global market share from the United States. These policies, including forced technology transfer, massive industrial subsidization, and intellectual property theft, have brazenly disregarded the rules of the World Trade Organization (WTO) and commitments China made to the United States and other trading partners.
China has utilized non-market practices, such as over-subsidization, to become the world's largest producer of steel and aluminum, responsible for over half of all global production. Subsidies on steel in China are 10 times greater than those of other Organization for Economic Cooperation and Development (OECD) nations, such as the United States, allowing firms to operate at a loss, overproducing goods to drive down the global market price. Steel and aluminum-producing firms in other nations can’t match Chinese production and have seen their market share plummet in recent years in response. In this case, tariffs on steel and aluminum are more than warranted.
China has cheated its way to near-parity with the United States in key industries and has even exceeded America in others, including steel. Imposing blanket tariffs on steel and aluminum from our allies would only weaken American industries. If Trump wants to bring back U.S. manufacturing, as he says, placing targeted tariffs on specific Chinese goods is the way to do it.
