Issue No. 5

Tariffs on North American Steel Set for March 12, But the Real Problem Is China

It’s not easy to keep up, but this much we know: President Trump issued a proclamation on Feb. 11 placing 25% duties on steel and aluminum imports from the entire world on March 12. That includes Canada and Mexico, parties to the U.S.-Mexico-Canada Agreement, or USMCA, which prescribes free trade among the nations of North America. He has shown no inclination to change his mind – as he has done in the past with other tariff threats.

The steel tariffs will be applied under Section 232 Section 232 of the Trade Expansion Act of 1962, which justifies duties based on U.S. national security.  

Not only is it absurd to say the U.S. is threatened in its security by Canada and Mexico, but the entire steel-tariff strategy – if we can call it that – is based on an enormous misunderstanding. The problem is not Canada and Mexico. The problem is China, which has been flooding the world with exports in recent years either directly or through surrogate nations like Vietnam.

Steel from China and Vietnam is subject to tariffs already, but because China is such low-cost producers, the tariffs have little effect. The answer is not for the U.S. to place 25% tariffs on steel from Mexico and Canada entering the U.S.; the right approach is for Mexico and Canada – and as much of the world as the Trump Administration can persuade – to place far higher tariffs, in the range of 50% to 100%, on steel from Chinese and its trans-shipment friends.

Let’s examine some numbers. China is the number-one global steel producer by far. China makes more han half the world’s steel, 1 billion metric tons in 2024. India is a distant second at 150 million; Japan third, 84 million; the U.S. fourth, 79 million.

Where does all that steel go? China uses a lot of its steel at home, but it is also by far the largest exporter. China exports as much steel to other countries as the U.S. produces at home in a year. The top inporters of Chinese steel aren’t the U.S., Canada, Mexico or Europe, but other Asia countries: Vietnam, South Korea, Indonesia, Thailand, and Taiwan. Much of that Chinese steel then makes it way to the United States.

Take a look at the leading sources of U.S. steel imports. According to data from the American Iron and Steel Institute, compiled from U.S. Census reports, Canada is number-one, with Mexico third. But the big increases in 2024 came from Asia, especially Vietnam, whose exports to the U.S. rose 143% compared to 2023. South Korea was also up. Taiwan rose 75%.

By contrast, steel exports coming from Canada fell 5% last year; from Mexico, exports dropped 16%.

An examination of trade data finds that “51% of U.S. steel imports come from China or satellite countries that import steel from China.” Just 12% comes from Mexico. Steel derivatives are also making their way to the U.S. from China. The same proprietary study found that “69% of U.S. nail imports come from China or satellite countries that import steel from China.”

China is such a low-cost producer, with its steel mills heavily subsidized by the government, that current tariffs aren’t preventing the flood of steel and derivatives from that country and its satellites. Clearly, if U.S. steel producers have a problem, then the solution isn’t wrecking the USMCA; it is raising tariffs on China and countries like Vietnam.

U.S. pressure on Mexico and Canada is misdirected. Donald Trump should not be trying to reduce steel imports from North America. In fact, North America, with its shorter, more reliable supply chains, should be nurtured as a source of steel for U.S. automakers and other manufacturers. That was the intention of the USMCA.

Instead, the U.S. should be pressuring Mexico, Canada and other countries to raise their tariffs on Chinese steel. That’s the only way to keep it out of the U.S. – and, more broadly, to keep it from flooding the world and causing steel factories to shutter.

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Retaliation Is a Certainty

The alternatives to such a strategy are not pretty. Almost certainly, if the Trump Administration applies steel tariffs against North American, strong retaliation will follow. That’s what happened when Section 232 was first applied in 2018. Some $28 billion in aid was necessary to help U.S. farmers who were devastated by retaliatory tariffs. “The Trump administration gave more taxpayer dollars to farmers harmed by the administration’s trade policies than the federal government spends each year building ships for the Navy or maintaining America’s nuclear arsenal,” said a 2020 report.

This time will be worse. Canada is already engaged in a small and escalating trade war with the U.S. over more general tariffs. That war will explode, and we can expect Mexico and many other countries to join in.

The U.S. stock market is anticipating such a trade war, which is a major reason it has dropped sharply in the last month, and recession risks have risen.

A trade war would be especially harmful to U.S. steelmakers. Mexico and Canada are where nearly all U.S. exports (93%) go. Below is a graph from the U.S. International Trade Administration.

In addition, U.S. manufacturers like Nucor and Cleveland-Cliffs have operations in both Mexico and Canada, so they will be hurt not just by retaliation but by the tariffs Trump is scheduled to impose on March 12.

Even worse, U.S. steelmakers will suffer as the trade war triggers a global slowdown or recession. When the U.S. stock market fell on March 10 in anticipation of tariffs, shares of all three U.S. steelmakers dropped as well. They are badly mistaken if they think tariffs will help them. The stock of Cleveland-Cliffs dropped 10% to its lowest level since 2020.

The irony is that steel companies will suffer because their steel will cause prices of automobiles and other U.S. goods to rise, causing a general economic slowdown, which hurts steel and practically everything else. A Bloomberg article on March 3 carried the headline, “Car prices poised for $12,000 surge on Trump’s new tariffs.”



Retaliation will mean that prices at the grocery store will jump. Already, the province of Ontario, Canada, has placed a 25% surcharge on the electricity it ships to Minnesota, New York and Michigan. The list of U.S. products to which Canadian tariff retaliation has been applied includes orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and certain pulp and paper products.

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The Possibility of Mexico Leaving the USMCA

Retaliation, however, isn’t the only response that affected nations will take to tariffs. Already in Mexico, there is discussion of dropping out of the USMCA altogether. President Trump was the creator of the USMCA as a modernization of NAFTA. He was proud of his accomplishment and, just five years ago, called it “the fairest, most balanced, and beneficial trade agreement we have ever signed into law.”

Now, by imposing tariffs on Canadian and Mexican steel and aluminum – and perhaps on April 2, as he promised, on all other goods as well -- he threatens to destroy his own creation. It’s possible that Mexico, at least, will beat him to the punch.

Powerful political forces in Mexico have always opposed NAFTA and USMCA as deals favoring U.S. industry. A sore point has been that Mexican exports of cars, trucks, parts, and electronics are produced not by Mexican companies but by foreign businesses, mainly based in the United States.

There is growing left-wing pressure on President Claudia Shainbaum to walk away from USMCA entirely. Yes, tariffs on goods shipped from Mexico to the U.S. might rise, but Trump is hiking them anyway. What U.S. companies would lose are the legal certainties that USMCA provides. Their massive capital investments in Mexico would suddenly be at greater risk, and they could not pick up and move.

Meanwhile, Mexico would inevitably move closer to other trading partners, including Europe and China. For the U.S., Mexico dropping out of USMCA would be a disaster.

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Economists Raise the Specter of Smoot-Hawley and Global Depression

One of the great mysteries of Trump’s decisions on tariffs is that he has some smart people in the White House advising him. How can they believe that tariffs will cause anything but chaos, inflation, and recession? We are not talking about outlier economists like Peter Navarro but about mainstream conservatives like Kevin Hassett, formerly of the American Enterprise Institute.

Among economists, the detrimental effects of tariffs are not even a matter of serious debate. They harm consumers and businesses, as we noted in our Newsletter No. 3.

We cited an extensive December 2019 academic paper by two Federal Reserve Board economists, Aaron Flaaen and Justin Pierce. They looked at the effects of the “unprecedented tariffs increases” undertaken by the U.S. since the beginning of 2018, as well as the effects of retaliatory tariffs by trading partners “on manufacturing employment, output, and producer prices.” They wrote:

We find that U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment as a positive effect from import protection is offset by larger negative effects from rising input costs and retaliatory tariffs. Higher tariffs are also associated with relative increases in producer prices via rising input costs.

The researchers pointed to “the importance of increased costs from tariffs on inputs as a mechanism through which tariffs affect the manufacturing sector, with this channel yielding highly statistically significant effects for both employment and producer prices.”

For example, tariffs raise the price of steel, so the vast number of manufacturers that use steel as an input have to raise their prices as well, which in turn reduces demand from purchasers (think car-buyers) and as factories cut back, employment drops.

Perhaps the best explanation of the damage caused by tariffs came in a letter by former Senate Banking Committee Chairman Phil Gramm, now with the American Enterprise Institute (Hassett’s old home) and former Treasury Secretary Larry Summers, published in the Wall Street Journal.

Gramm and Summers began by raising the specter of the Smoot-Hawley Tariff of 1930, which, they wrote, “helped turn a stock market rout and a building financial crisis into a worldwide depression and triggered a global trade war that halved American exports and imports.” They criticized Trump’s proposed tariffs, explaining:

Protective tariffs distort domestic production by inducing domestic producers to commit labor and capital to produce goods and services that could have been acquired more cheaply on the international market. That labor and capital are in turn diverted from producing goods and services that couldn’t be acquired more cheaply internationally. In the process, productivity, wages and economic growth fall while prices rise. Tariffs and the retaliation they bring also poison our economic and security alliances.

They pointed out that the 2018 Trump tariffs “didn’t stop the secular decline in manufacturing employment as a percentage of the total labor force.” Instead, that decline “is being driven by the same secular forces that caused employment in agriculture during the 20th century to fall from 40% to 2% of the labor force: a vast increase in labor productivity. This is a worldwide phenomenon occurring in both developed and developing countries.”

In fact, they wrote:

Contrary to the repeated claim, there has been no hollowing out of American manufacturing. Industrial production in the U.S. is at an all-time high. The U.S. is producing 2.5 times as much real industrial output as it did when we last ran a trade surplus in 1975. We are producing that record output with the smallest percentage of the labor force involved in manufacturing since America became fully industrialized.

President Trump doesn’t understand that trade deficits aren’t necessarily bad: “In the long history of the country, there is little evidence to substantiate the claim that America prospers more when trade deficits fall than it does when they rise. During the Reagan recovery, as the level of economic growth surged, foreign investment rushed into the U.S. and the trade deficit soared.”



Gramm and Summers make the same point as Flaaen and Pierce, writing that “tariffs on steel and aluminum created only a small number of jobs, but since for every worker in the steel and aluminum industries there are 36 workers employed in American industries that use steel and aluminum in production processes, those modest gains were offset by the jobs losses in industries that use steel and aluminum as inputs."

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Fentanyl and Tariffs

President Trump has made it clear that he loves tariffs for their own sake. “Tariffs are a way of making America rich again,” he said in his recent address to Congress. He sees them as a way to boost U.S. manufacturing and raise revenues. He also believes they are a weapon to batter countries into adopting favorable policies -- specifically, in the case of Canada and Mexico, stopping the flow of fentanyl into the United States.

This is a ridiculous claim when it comes to Canada, the source of less than 1 percent of fentanyl border crossings. Canada has, nevertheless, “launched a $1.3 billion border plan with new choppers, boots on the ground, more coordination, and increased resources,” says a Government of Canada news release from March 4.

Canada appointed a Fentanyl Czar, entered into a Canada-United States Joint Strike Force, and launched a new intelligence partnership made up of key players from Canada’s big banks and law enforcement. As a result, “the U.S. Customs and Border Protection has reported a significant decrease in fentanyl seizures from Canada, with a 97 per cent drop in January 2025 compared to December 2024.”

Mexico has been battling fentanyl for years. According to National Public Radio:

Under current Mexican President Claudia Sheinbaum, enforcement actions against drug gangs have escalated, as has cooperation with U.S. law enforcement officials targeting the cartels and their finances. According to the U.S. Drug Enforcement Administration, the amount of fentanyl seized by the U.S. on the southern border plunged last year by roughly 20% and the potency of fentanyl pills also declined sharply.

Shainbaum last month “sent to the United States 29 top cartel operatives wanted by the American authorities, including one notorious drug lord whom U.S. officials had been seeking to bring to justice for 40 years,” reported the New York Times, which added that the event was “one of the most important efforts by Mexico in the modern history of the drug war.”

But Trump’s own pronouncements and the fact that he is prepared to slap tariffs on parts of the world, like Europe, that have little to do with the proliferation of drugs in the U.S., make us skeptical that fighting fentanyl plays much of a role in the administration’s economic strategy.

It is hard to see where drugs have been a Trump Administration priority. Overdose deaths soared by 50% during the last time Donald Trump was in office and have declined significantly during the final years of the Biden Administration.

Fentanyl is a terrible scourge, but linking it to tariffs is a mistake. Border issues, including illegal drugs, are separate questions that require negotiation – not policies that harm everyone in North America.