During his presidential campaign, President Trump pledged to put American workers first. Over the years, imports of steel have decimated the steel industry. Thousands of steel and aluminum manufacturing workers lost their jobs. President Trump called for a bold new trade strategy to revitalize manufacturing plants and employ many workers. Following through on that campaign promise, President Trump moved forward to raise tariffs on steel by 25% and on aluminum by 10%. Many steel manufacturing plants would be able to recall many of workers. However, it begins a trade war that could have devastating effects on the construction industry.
What is the Rationale for Steel and Aluminum Tariffs?
The United States was once a powerhouse for steel and aluminum production. With low wages and government subsidies, China floods the worldwide steel market with cheaply priced materials. China is responsible for 90% of the world’s steel production. This has resulted in thousands of jobs lost the United States: 14,000 steel jobs in the last two years and 13,000 aluminum jobs since 2000.
With the United States dependent on China and other foreign countries for steel and aluminum, production poses a risk to national security. These materials are critical to US defense including the manufacturing of ships, jets, and other military supplies and vehicles. In the event of war, the United States would not be able to produce its own materials and be entirely dependent on foreign sources.
Increase of Construction Material Costs
Steel and aluminum are vital raw materials in the construction of buildings and infrastructure. Steel is used in highways, bridges, and pipelines. Buildings use steel for structure reinforcements and rebar for concrete. Behind steel, aluminum is the second most widely used metal in construction. Aluminum is used in window frames, exteriors, roofing systems. These just are the tip of the iceberg in ways that steel and aluminum permeates the construction industry
Labor and material are the most significant costs in construction, and those costs rise year over year. Associated Builders and Contractors (ABC) reports a 4.9% increase in material prices from the previous year. Naturally, material prices are going to increase slightly each year. However, the tariff will increase the price beyond the natural year over year increase. While the domestic production of steel and aluminum will increase, it will not be sufficient to fulfill all the supply needs of the construction industry and other industries in the United States. The construction industry will still need to rely on imported materials.
Rising material costs can negatively impact a project’s cost as well as the contractor’s profitability. Contractors that have previously locked in fixed pricing or negotiated future contracts with their suppliers are at an advantage—for now. Eventually, the terms of the pre-negotiated pricing will expire, and they will be subject to pay the higher market prices.
Contractors should review all their current contracts to see if it allows for any price adjustments for material increases or changes in taxes. While the contractor covers the cost of the price increase, the profit margin, which is already tight, becomes tighter.
A Trade War Hurts the Construction Industry
When contractors are paying more for materials, this decreases the amount they can invest in their own company—employees, equipment, or technology. At a time when skilled labor is at a premium, if a contractor cannot increase employee wages, they risk losing their employees and unable to recruit new employees at wages that are not competitive. The ripple effects of a trade war will make many items more expensive as other countries retaliate with their own tariffs.
The construction industry has rebounded since the recession. Demand for new buildings has increased so much that the industry is experiencing a labor shortage. However, the rising costs could make the construction costs too high that it becomes not feasible or profitable for many developers. Infrastructure projects, which Trump himself is advocating, will scale back as well. The costs will be just too large for many owners, developers, and governments. With less demand, the construction industry will suffer with over 30,000 workers at risk of losing their jobs.
According to the Association of General Contractors, “The bottom line is that any short-term gains for the domestic steel and aluminum industries will likely be offset by the lower demand that will come for their products as our economy suffers the impacts of these new tariffs and the trade war they encourage.”