Less than three months after signing the first major tax reform bill in 31 years, President Trump has announced that the administration will impose a 25 percent tariff, or tax, on imported steel and a 10 percent tariff on imported aluminum. While the new taxes are intended to reduce the demand for imported goods, thus opening the market to domestic producers, the cost of these taxes will be borne initially by firms that buy the imported steel and aluminum, and eventually passed on to consumers through higher prices.

While the administration has not released estimates on the magnitude of these new taxes, we estimate that they could cost U.S. firms nearly $9 billion if 2018 imports equal 2017 levels. For example, the value of imported steel totaled just over $29 billion in 2017. If the 25 percent tariff were levied on the same level of imported steel, the tax would total roughly $7.3 billion. Similarly, if a 10 percent tariff were applied to the $16.8 billion worth of aluminum imported in 2017, the tax would total nearly $1.7 billion.

U.S. Census import data indicates that the taxes will disproportionately hit the imports from a small number of countries because of the volume of steel and aluminum they import to the U.S., and the new taxes will disproportionately impact a small number of U.S. states that directly import these commodities. Indeed, two-thirds of the new taxes will be initially borne by 10 states, with Texas, New York, California, Florida, and Utah being the top five most affected states.

Tariff Cost on Steel Imports, Nearly $7.3 Billion

The table below lists the top 15 steel-exporting countries based on the value of the product they send to the U.S. The value of the steel imported from these 15 countries comprised over 80 percent of all the imported steel U.S. manufacturers purchased in 2017. Canada topped the list with more than $5 billion worth of steel bought by U.S. firms. Thus, a 25 percent tariff would raise the cost of Canadian steel by more than $1.2 billion. Korea, Mexico, Brazil, and Germany round out the top five sources of imported steel by value, while China ranked 10th. The total tax on just these 15 countries would top $6 billion if the 25 percent tariff were levied on 2017 import values.

15 Largest Importers of Steel to the U.S. by Value Source: U.S. Department of Commerce, Enforcement & Compliance, https://enforcement.trade.gov/steel/license/SMP/Census/Annual/gdesc52/MMTSum_ALL_ALL_9Y.htm Total Value of Imports 2017 (Thousands of Dollars) Impact of a 25% Tariff (Thousands of Dollars) World $29,138,335 $7,284,584 Canada $5,119,944 $1,279,986 Korea $2,785,764 $696,441 Mexico $2,501,226 $625,307 Brazil $2,442,468 $610,617 Germany $1,833,793 $458,448 Japan $1,657,908 $414,477 Russia $1,431,273 $357,818 Taiwan $1,261,033 $315,258 Turkey $1,182,998 $295,750 China $976,330 $244,083 India $732,425 $183,106 Italy $725,800 $181,450 Vietnam $519,732 $129,933 Netherlands $511,829 $127,957 Sweden $493,260 $123,315 Rest of the World $4,962,552 $1,240,638

Tariff Cost on Aluminum Imports, Nearly $1.7 Billion

In 2017, U.S. firms purchased more than $16.8 billion worth of aluminum from foreign suppliers, nearly 90 percent of which was imported from the top 15 countries. A 10 percent tariff would raise the cost of imported aluminum by nearly $1.7 billion if imports remained at 2017 levels. Again, Canada ranks first, exporting more than $6.8 billion worth of aluminum to the U.S. Thus, a 10 percent tariff would raise the price of Canadian aluminum by more than $686 million. China is the second-largest supplier of aluminum by value with more than $1.7 billion worth purchased by U.S. firms. The 10 percent tariff would raise the price of Chinese aluminum by more than $175 million. Russia and the United Arab Emirates are the only other countries that export more than $1 billion worth of aluminum to the U.S.

15 Largest Importers of Aluminum to the U.S. by Value Source: United States International Trade Commission, https://dataweb.usitc.gov/ Total Value of Imports 2017 (Thousands of Dollars) Impact of a 10% Tariff (Thousands of Dollars) World $16,821,429 $1,682,143 Canada $6,863,292 $686,329 China $1,758,921 $175,892 Russia $1,569,202 $156,920 United Arab Emirates $1,343,987 $134,399 Bahrain $585,332 $58,533 Argentina $546,673 $54,667 India $379,247 $37,925 South Africa $376,944 $37,694 Qatar $307,046 $30,705 Germany $259,988 $25,999 France $225,868 $22,587 Mexico $208,132 $20,813 Indonesia $199,047 $19,905 Venezuela $180,485 $18,049 Austria $154,316 $15,432 Rest of the World 1,428,580 $142,858

Initial Impact of the Tariffs Concentrated on 10 U.S. States

The initial impact of the tariffs on U.S. states will depend on the concentration of firms that import steel and aluminum. Ultimately, of course, these costs will be borne by consumers throughout the country depending on the final products they purchase. Consumers could run the gamut from households who purchase automobiles and appliances to construction firms that purchase steel for office buildings and factories.

We can estimate the initial impact of the tariffs on states using the International Trade Administration’s state import data web tool, which lists the amount of primary metals imported into each state in 2017. This broad category (NAICS code 331) includes both steel and aluminum imports. As the table below illustrates, Texas led in 2017 by importing nearly 11 percent of the nation’s primary metals. New York imported the second-most primary metals at 8.5 percent, followed by California and Florida, each importing 5.9 percent, and Utah and Ohio at 5.6 percent each. The top 10 states import 63 percent of the nation’s primary metals.

If we assume that the initial incidence of the tariffs falls in proportion to the imports in each state, we can see that Texas firms would pay nearly $1 billion of the nearly $9 billion in total import taxes if import levels remained at 2017 levels. This includes over $786 million in steel tariffs and more than $181 million in aluminum tariffs. New York firms would pay more than $758 million in higher prices, while firms in California, Florida, and Utah would pay more than $500 million. Collectively, the top 10 states importing primary metals would pay more than $5.6 billion in higher prices on their imports.

Again, these estimates of the taxes paid by importing firms represents the initial incidence of burden imposed on U.S. states. It is far more difficult to trace the final burden on consumers, but it is likely that most Americans will be touched in some way by these higher costs. And, to the extent that the tariffs work as intended to divert market share to domestic steel and aluminum producers, the $9 billion in higher costs effectively represents the amount of income redistributed from American consumers to those domestic companies.

Conclusion

While it may be easy to dismiss the impact of a roughly $9 billion tax increase in a $20 trillion economy, to put it in perspective, the new tariffs proposed by the Trump administration far exceed the tax benefits from the recent expansion of the section 179 expensing provisions for small businesses in the Tax Cuts and Jobs Act. Thus, some small manufacturing firms could see the benefits they hoped to gain from the expensing provision erased by the increased cost of the new tariffs.

The impact of these tax hikes may ultimately be shared by most American consumers, but the initial costs will be concentrated among a narrow segment of U.S. states. The administration would do well to weigh the cost-benefit of this action before moving forward with the policy.