President Donald Trump is implementing tariffs on steel imports, particularly from Canada, to support the U.S. steel industry. However, a recent report from the CATO Institute highlights that protectionist measures in this sector have not led to improved competitiveness or job growth over the past 60 years. The report, authored by Clark Packard and Alfredo Carrillo Obregon, examines the long history of government interventions aimed at protecting the steel industry.

Packard noted that despite extensive government support, the U.S. steel industry has not become more competitive. "The United States has essentially showered the domestic steel industry with everything it’s asked for over the last 60 years. But, unfortunately, it’s not in a better competitive position," he said. After World War II, the U.S. dominated global steel production, but as other countries rebuilt their industries, they adopted more efficient technologies. This shift led to declining sales for U.S. steel companies, prompting them to seek more government protection.

The report argues that while tariffs and quotas may temporarily boost domestic production, they ultimately raise costs for U.S. manufacturers. "Without those competitive pressures from abroad, it allows domestic producers to increase their prices," Packard explained. This situation can hinder innovation and growth in manufacturing sectors that rely on steel.

Carrillo Obregon emphasized that protectionism limits competition, which is essential for innovation. "The reality is that tariffs are not going to change the fact that some companies have struggled to innovate and to catch up in terms of modernizing and investing to the extent that other producers are doing so elsewhere," he said. He added that the U.S. steel consumption has not returned to levels seen in the 1970s, and tariffs may exacerbate the industry's challenges.

Trump has justified the tariffs on Canadian steel by citing national security concerns. However, Packard dismissed this rationale, stating, "There’s no justification. Canadian rebar does not jeopardize the national security of the United States." He referenced a memo from former Secretary of Defense James Mattis, which indicated that the military's needs could be met with only a small percentage of domestic steel production. Packard argued that the U.S. risks losing credibility as a trading partner by using national security as a pretext for protectionism.

The implications of using national security to justify trade restrictions could be significant. Packard warned that this approach could undermine the global trading system, stating, "If every country starts doing this, it really does break the modus operandi of the global trading system. Over time, I think this has a real potential to lead to lower growth in the global economy."

The report also highlights the impact of tariffs on downstream manufacturing industries in the U.S. Packard noted that a 25 percent tariff on steel typically results in a 23 percent increase in the price of imported steel. This price increase is likely to be passed on to consumers, contributing to inflation. The Federal Reserve is facing challenges as it navigates the economic implications of these tariffs, with rising inflation complicating its monetary policy decisions.

Manufacturers relying on Canadian steel are adjusting their sourcing and investment strategies in response to the tariffs. Carrillo Obregon mentioned that while U.S. steel producers are expanding capacity in anticipation of higher demand, they are concerned that increased prices will suppress manufacturing activity. "If that happens, all this capacity that they’re trying to add is not going to be used," he said.

As of June, U.S. steel capacity utilization was slightly above 79 percent, close to the 80 percent target. However, this figure has fluctuated, and there are doubts about the industry's ability to maintain high utilization rates in the long term.

Looking ahead, the renegotiation of the Canada-U.S.-Mexico Agreement (CUSMA) may be affected by these trade policies. Packard suggested that negotiating binding trade agreements may be less appealing if the U.S. continues to impose tariffs. He noted that both major political parties face challenges in addressing trade policy, with protectionism becoming a significant aspect of the Republican platform and the Democratic Party's base being influenced by domestic union support. The complexities of unwinding protectionist measures could hinder future trade liberalization efforts.