The Irony of Trump Tariffs: How They Affect US Manufacturing and Stock Prices

It’s a world market. Aluminum is priced in London daily. This fundamental truth often clouds the immediate benefits tariffs can provide to industries like steel and aluminum. You’ve answered your own question indirectly—tariffs are not as beneficial for US manufacturing as one might initially believe. Let’s examine why:

The Immediate Benefits and Short-Term Profit Boost

Initially, tariffs benefit the management of the targeted industries. By increasing the price of imports, domestic companies become more competitive relative to foreign firms. This leads to greater profits in the short term, often exceeding the pre-tariff earnings. Higher profits can result in increased dividends to shareholders and bonuses to employees. However, the long-term effects are far more detrimental.

The Long-Term Impact on Manufacturing and Sales

As tariffs push up the price of imports, domestic producers are encouraged to raise their prices too. This sets a higher floor for pricing that consumers are exposed to. For a period, domestic producers may remain competitive, but at an elevated cost. As consumers become more price-sensitive over time, sales of the final goods decline. This reduction in sales volume decreases the demand for steel and aluminum, which are critical components in many manufacturing processes, particularly in the automotive and infrastructure sectors.

The decrease in demand for steel and aluminum means lower profits for producers. As a result, stock prices—representing the market's perception of discounted future earnings—start to reflect these reduced earnings. If the increased costs from tariffs lead to a contraction in manufacturing activity, the stock market will quickly judge the tariff policy harshly. The stock prices of US Steel and Alcoa Aluminum have fallen significantly in response to these adjusted market expectations.

The Impact on the Export Market

The impact of tariffs on US manufacturing extends beyond the domestic market; it also affects the export market. Many of the goods produced in the US incorporate components subject to tariffs on imports into the US. This makes US exports less competitive in global markets, which further erodes manufacturing activity and profitability.

The Inflation Factor

Tariffs also lead to higher inflation, as the increased cost of imported goods is eventually passed on to consumers. Inflationary pressures are not immediate but accumulate over time. Stock markets generally do not perform well in periods of rising inflation, which can be expected in the near future as tariffs take hold.

Conclusion

The tariffs implemented by the US, particularly on steel and aluminum, may provide short-term boosts to industry profitability but ultimately have a detrimental impact on manufacturing activity and stock prices. The long-term cost of such measures is far higher than the short-term benefits, as evidenced by the drop in stocks of US Steel and Alcoa Aluminum. As the market adjusts to the changing economic landscape, the drawbacks of these policies will become increasingly apparent.