What the steel tariff means to manufacturers. - Romeo RIM

• Manufacturing, Materials, Process Technology
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On March 1, 2018, the United States announced that it will impose a tariff on all imported steel and aluminum.  But, what exactly does that mean and how will it affect manufacturers who rely on relatively inexpensive foreign steel and aluminum?

Well, first, let’s go back to Economics 101 and understand what a tariff actually is.

A tariff is essentially a tax on imported goods.

Any foreign country who wants to sell products or raw materials in another country (export) can be subject to a “tax” at the discretion of the importing country.  Tariffs, by nature, are designed to “level the playing field” by increasing the cost of imported product or raw material, in an effort to make domestic product or raw material more attractive.  The idea is to boost the production and the sale of domestic steel and aluminum and to create more jobs.

It sounds great on the surface.

The problem, though, is that, compared to domestic steel, foreign steel is less expensive.  So, in essence, the tariff will raise the cost of a less expensive foreign material so that it is higher than the material you can purchase domestically.

As a manufacturer who relies on steel as a raw material to produce products, this increases your cost to produce that product.

As an example, say the price for imported steel is $1.50/lb and the price for domestic steel is $1.75/lb.  You are enjoying a 20% savings by buying imported steel!

But with a 25% tariff (tax), the price for imported steel goes up to $1.88.  So now your options are to buy at either $1.75 or $1.88.  The tariff effectively increased your raw material cost by 20%.  And when you are using hundreds of thousands of pounds of steel to manufacture your product, the cost increase is significant.

Typically, price increases like these leave manufacturers with only three options.

1. Absorb the costs. Manufacturers can choose to not do anything and take on that extra cost.  However, this will adversely affect the manufacturer’s ability to maintain profitability.
2. Increase the price of your product. As a way to offset your cost, manufacturers can choose to pass along these increased costs to the customer and keep profit margins intact.  This can have a negative effect on overall sales as customers are inherently cost conscious and may look to purchase elsewhere.
3. Cut costs elsewhere.  So as not to effect profitability or invoking the ire of customers opposed to increased pricing, manufacturers can choose to lay off workers or close poor performing facilities.

Luckily for manufacturers who rely heavily on steel, there is another option.

Turn to composites!

If there ever was a time to start thinking about replacing heavy, expensive steel parts with another material, that time is now.

Plastic composites have routinely shown to be as strong as steel, yet lighter, less expensive and more resistant to wear and corrosion/rust.