In a recent turn of events, the US administration has made significant changes to its trade policies, reinstating a 25% tariff on steel imports and increasing the tariff on aluminum imports to 25%, effective from March 12, 2025. The initial tariffs on steel and aluminum, set at 25% and 10% respectively during the first Trump Presidency, included exemptions for certain countries. However, the latest provisions aim to revoke all exemptions and expand the scope of tariffs to derivative products made from steel and aluminum. To understand the long-term impact of these measures on the US economy and its main trading partners, a study utilizing the Baqaee and Farhi (2024) model and a unique methodology to analyze specific goods in input-output tables (Conteduca et al., 2025) was conducted.
Exploring the Consequences:
- Trade Displacement Effects: Upon analyzing the data, it was found that there are substantial trade displacement effects at a sectoral level, with US imports of tariffed products projected to decrease by 33%, while Canadian and Mexican exports of these products could potentially drop by 30% and 28% respectively.
- Industry Impact: While the tariffs aim to shield US steel and aluminum production, the study suggests that this comes at a cost. The production in other US industries, especially those downstream in the value chain, such as the automotive sector, may experience lower production levels and increased input costs.
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Consumer Welfare: The simulations reveal that while the tariffs protect domestic industries, they also result in lower consumer welfare in the US, albeit to a limited extent.
Delving Deeper:
Analyzing the broader implications of the US tariffs, insights from the Baqaee and Farhi (2024) model were combined with a detailed methodology to enhance the granularity of input-output tables (Conteduca et al., 2025). By considering sectoral interlinkages and the propagation of tariffs in a global economy, the study sheds light on the effects of these trade policies on various countries and industries.
Key Findings:
- Shift in Trade Flows: The study predicts a reduction in total imports by around 1.6%, with significant impacts on the total exports of Canada and Mexico by 1.5% and 1.4% respectively. Sectors like the automotive industry, which heavily rely on steel and aluminum imports, are expected to be most affected.
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Production Reallocation: The increase in tariffs is projected to redirect demand towards domestic production, leading to a 12% rise in the real output of the US steel and aluminum industry. This, however, may result in reduced production levels in downstream sectors due to higher input costs.
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Consumer Prices: With a potential increase in producer prices for sectors downstream in the production chain, the study highlights a shift in relative sectoral producer prices that could impact various industries differently.
Conclusion:
The implementation of higher tariffs may benefit specific sectors but comes at a cost to the overall economy. While these policies may lead to reshoring production in targeted industries, they also have broader implications for other sectors and consumers. To preserve global growth and welfare achieved over the years, it is crucial to avoid a spiral of protectionism that could harm the multilateral trading system and all nations involved.
In conclusion, the study emphasizes the importance of carefully considering the impacts of trade policies and their implications for different industries and countries. By understanding the intricate interlinkages within the global economy, policymakers can make informed decisions that balance protecting domestic industries with promoting global economic growth and stability.
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