The Man of Steel
The curious conservative enthusiasm for Trump’s tariffs thrives on microdoses of good news, or at least not so bad news.
It seems news that tariffs have not yet resulted in big price increases get three cheers and a round of “jolly good fellows.”
But the lack of dramatic price increases only means that tariffs have not yet gotten down to their main and most destructive job. Tariffs reallocate capital, human and material, from more productive to less productive use. Raising prices and revenues for domestically produced goods reroutes money and minds to investment in domestic production of products we would be better off importing from overseas and away from enterprises that would flourish here.
A recent headline in the Wall Street Journal told the story well. “A Boom in New Steel Mills is Outpacing Demand.” The story by Journal reporter Bob Tita explains that for steel the tariff story goes back to at least to Trump’s first term, when he imposed tariffs on imported steel as far back as 2018. In his second term, he doubled those rates.
The results are twofold.
Predictably, U.S. steel producers have gained share against foreign providers.
Just as predictably, the United States now pays the world’s highest prices for steel. U.S. steel prices can be as much as $400 a ton higher than steel in some foreign markets where supply gluts have depressed prices.
The resulting misallocation of precious capital is equally unsurprising. Seduced by protectionism, steelmakers are building new plants that will add millions of tons of capacity. U.S. plants shipped 87 million tons of the hard stuff in 2024. The planned expansion would add more than 20 million tons of capacity for an industry that has underperformed foreign competition for years.
As the Journal notes, the only reason for these planned expansions is that the companies doing so “expect domestic prices to rise even further and vastly exceed current rates.”
The Journal, however, points out a little problem with that assumption. U.S. demand for steel does not begin to equal the proposed supply. And to the extent that new production is based on anticipated increase in prices, there is little reason to expect that outcome. Even with tariffs in place, prices will rise only if demand does, and that looks unlikely.
There is a substitute for every product, including steel. The most popular substitute for almost anything is nothing: not using the stuff at all because the products it would go into are priced out of the market.
In addition to nothing, in various applications steel can and is replaced by aluminum, titanium, wood, concrete, and advanced composites such as carbon fiber. Even graphene is playing a role because it can strengthen concrete by some 30% while reducing the weight needed.
Substitution has been depressing steel prices for years. The Journal notes that although domestic steelmakers have “embraced a protectionist fervor,” even with tariffs “they haven’t been able to keep prices from slipping because of soft demand from major steel consumers such as the auto and construction industries.” In 2024, steel shipments were no higher than in 2015.
The Journal quoted Geoff Gilmore, chief executive of Columbus, Ohio-based Worthington Steel (NYSE: WS), a specialized processor of steel, who said “We’re in a tough situation,” made tougher by the planned expansion in capacity. “For steel demand to meet the capacity, we’re going to need much more robust GDP growth.” With the government in charge of capital allocation, that becomes unlikely.
Overproduction of steel will self-correct. Lacking a market, plants new or old will shut down or never be finished. Tariff-inspired castles in the air will crash to earth. Investors will lose their shirts.
Not self-correcting will be the human and financial capital lost via the tens or hundreds of billions invested in unneeded steel plants rather than innovative industries in which the United States can and should remain competitive.
We have often documented in these pages how, even for high tech, the real money is in innovative use and design of products rather than their manufacture. The chip designers—Nvidia (NASDAS: NVDA)—make more money than even the best chip manufacturers such as Taiwan Semiconductor Manufacturing Corp. (NYSE: TSM). The software companies who come up with ever more clever and productive ways to use the chips make still more money than the design companies. And all these ventures are dwarfed by the more than $100 trillion global economy utterly dependent on modern electronics.
Plumbers make more money than steel makers.
Although tempting as props in a drama of “The Art of the Deal,” as Trump is chiefly using them, tariffs in the end become tools of a command economy. They thwart the flow of information, the source of all economic growth. They empower the state to choose how a nation’s capital, and above all its human capital, is deployed with no evidence that any state has ever been competent to do so.