Trump's Steel Tariffs: Should the UK Care?
The global steel glut, impact on the UK and whether retaliation is the right move
Trump’s decision to reimpose 25% tariffs on steel and aluminium imports from all countries already seems like old news. But when I started writing this article last week, it was before he’d sold-out Ukraine, and before JD Vance had taken a self-righteous hatchet to 80 years of US and European alliance. Steel tariffs were still in the news – and having worked on UK steel policy in the Treasury it seemed an apt time to write about it. It turns out I had more to write than I thought, so this is part one.
Steel tariffs and the UK: a recap
The story last week was that Trump was reimposing a 25% tariff on steel and aluminium imports from all countries, without exception. The tariffs were first imposed in 2018, under Trump 1.0, and were met then with a robust response from the EU (including Britain as it was still in the EU at the time, although distracted by trying to leave). The EU levied retaliatory tariffs, as permitted under WTO rules, on an assortment of US products, including motorcycles and bourbon. A deal was reached under Biden that exempted imports from more “friendly” nations, and the EU and UK (which had then left the EU) dropped the retaliatory tariffs.
Trump doesn’t like these exemptions, is planning to remove them, and the EU and Canada are readying for a fight. The UK initially seemed to be ducking that fight, but by Sunday had changed tune, with Jonathan Reynolds, business and trade secretary, warning that it could impose tariffs on US products if the UK was not exempted from the US steel ones. Douglas Alexander, the trade secretary, had previously warned that the tariffs on UK steel exports would be a “significant blow”.
Which is a bit surprising, because if you look at the numbers, steel and aluminium don’t matter that much. The UK steel industry accounted for £2.3 billion of GVA in 2021 or 0.1% of total UK output. Exports to the US amount to about 5% of total UK steel exports, and were worth £388m in 2023, compared to total UK exports of £844 billion. So that’s 0.1% of output and 0.05% of exports directly affected. It doesn’t feel like a major problem worthy of an urgent question in the House of Commons.
Aluminium matters even less. The one remaining operational aluminium smelter in the UK is in Lochaber, which employs around 200 people and exists only due to an extremely dodgy deal negotiated by the SNP at a cost of £586m to taxpayers. I’ve never been to Lochaber, but I recall discussing the plant with a Scot who grew up there, knew the inner workings of the deal, and was appalled by it. That’s a story for another day. The point here is that with 200 workers, aluminium production is not critical to the Scottish economy, let alone the UK one.
Of course, this doesn’t mean that steel and aluminium aren’t important inputs into the UK economy. We need both – to build new houses, to build (some) infrastructure, to make (some) cars and produce (some) other manufactured goods. And if we don’t produce steel domestically, we either need to import the ingots, rods and bars to bash into other products or import the end-products that contain the steel (and aluminium, but I’m ignoring that from now on).
Importing vs domestic production
The extent to which a country like the UK should produce steel rather than import it is hotly contested, and somewhere over the course of 2021 and 2022, I lost months of my life in an endless argument between the Treasury and the UK’s business department over it.
At that time, the debate centred around whether the UK needed to maintain primary, also known as virgin, steelmaking capability, by which is meant the steel produced in blast furnaces by heating iron ore and coking coals to extreme temperatures.
The UK had only two remaining blast furnace sites left then – one in Port Talbot in South Wales, owned by Indian conglomerate Tata; and one in Scunthorpe close to the Humber Estuary in North Lincolnshire, owned by Chinese steelmaker Jingye. The last blast furnace at Port Talbot was shut down in September following a deal between Tata and the UK government to build a new electric arc furnace on the site. This leaves the UK with only one primary steelmaking facility in operation today.
Ed Conway did a good breakdown of the issues in a post last year, but the key arguments for supporting primary steel production in the UK came down to maintaining jobs, national security and security of supply.
The key arguments against were the ongoing costs required to subsidise an uncompetitive industry (because steel plants in the UK were old, aging, underinvested and built in the wrong places); different views of national security (because from the military perspective, in any type of war that required production of steel at scale, the UK would need to rely on its allies for a whole lot more than steel); and a different view of what security of supply meant (because even if you kept the blast furnaces, you still need to import the raw materials to make virgin steel).
Where I personally ended up is that the UK needed to shut down the blast furnaces, but that the government should help invest in modern electric arc furnaces. That seems to be roughly where policy is today, although we still need a new consultation to work out exactly what that policy is.
Excess capacity, excessive subsidies
Wherever you end up on the imports versus domestic production debate, as it stands today, the UK doesn’t produce much steel and isn’t likely to anytime soon. Wikipedia tells me the UK was the 35th largest producer of steel in the world in 2024.
And from a global perspective, and assuming trade flows don’t completely break down, that’s fine, because there is plenty of steelmaking capacity elsewhere. In fact, the defining feature of the global steel industry is excess capacity. There is vastly more capacity to produce steel then there is demand for it.
This isn’t a recent problem. In 2016, the Global Forum on Steel Excess Capacity (GFSEC) was established by G20 leaders to facilitate global cooperation to address steel overcapacity after it reached peak levels in 2015. The problem hasn’t got much better today.
Why is there so much excess capacity? The answer you get from European and US steel producers is that it’s all because of China. The reality is slightly more nuanced.
China’s role in the global steel glut
The China story goes something like this. Starting in the early 2000s, China began to rapidly expand its domestic steel production. This was no surprise since it had been long observed that the intensity of steel use in an economy follows an inverted U shape as a country becomes richer. As China built its infrastructure and factories, demand for steel boomed, and it made sense that a domestic steelmaking industry grew to meet those needs.
But the development of this domestic industry was supported by state subsidies, which enabled Chinese steel companies to operate at a lower cost than they otherwise would, distorted demand and supply, and encouraged over investment in steelmaking. The result was China’s steel production rapidly outgrew domestic demand, and to get rid of excess capacity, Chinese companies exported the steel, driving down the price globally. This became a more acute problem from 2015 on as China’s domestic economy slowed; and it’s become more acute in the past few years for the same reason.
Everyone else’s role in the global steel glut
The slightly more nuanced version of the story is that excess capacity in steel production isn’t just a China problem, even if it’s the largest culprit.
According to the GFSEC, India, Indonesia, Malaysia and Vietnam have all experienced significant growth in steelmaking capacity in recent years. With the exception of India,
trends observed in these economies include significant over-investment in the steel industry, growing gaps between capacity and steel demand, and strong growth in steel exports due to insufficient local demand.
There is a similar story in the Middle East which has seen a large ramp-up in production, particularly in Iran.
As with China, this is aided by extensive subsidisation of steel industries, likely driven by variants of the same arguments over jobs and security we had in the UK.
Mature economies are guilty too. The EU has its own excess capacity problem, a function of older plants that were built for a level of domestic demand that has steadily declined, a higher cost base relative to new plants built elsewhere in the world, and a political desire to retain existing plants for the sake of employment and sovereign capability. The steel industries in Germany, Italy, Spain, France and Austria have capacity utilisation rates between 56% and 76%, well below the 85% level considered sustainable.
The global ripple effect
As much as all regions are guilty to some degree, there’s clearly an interaction between excess capacity in China and excess capacity elsewhere. China accounts for 47% of global steel production, and if it produces lower cost steel due to state subsidies, it’s going to cause excess capacity in markets like the EU and US, as it will mean producers in these countries are less competitive.
Where the exact truth lies in how much is a China problem, and how much is a true competitiveness problem isn’t entirely clear to me. But as China accounts for 47% of global steel production and its subsidies are estimated by the OECD to be more than five times higher than other non-OECD economies and more than 10 times higher than OECD countries there does seem to be some major distortion going on.
Tariffs, anti-dumping and safeguards
Dealing with this distortion is where Trump’s tariff policy comes in, and although there are clear downsides – it increases the costs for US consumers of steel – if the primary goal is to protect US steel production, it’s not a crazy solution. Nor is it without precedent.
Canada imposed a 25% tariff on steel imports from China in October last year; Turkey imposed anti-dumping duties (tariffs) on steel from China, Russia, India and Japan; Indonesia imposed them on steel from China, India, Russia and others. The EU has a safeguarding system that puts tariffs on import levels over set quota amounts, to try and prevent “dumping” of excessive quantities, although it should be noted that this was partly triggered by Trump’s original steel tariffs in 2018. The UK carried over these safeguards when it left the EU (not without drama, which I’ll turn to in the next post).
What is odd, both in 2018 and now, is that Trump is putting tariffs on imports from all countries, not just China. One argument for this is that Chinese excess capacity depresses prices globally, impacting US producers wherever the steel comes from, and there’s probably some truth to this. But this is the same for the EU, Canada, Japan, South Korea, and any steel producing nation that isn’t China. US producers aren’t at a competitive disadvantage relative to steel producers in those countries – all face the same challenge.
The lack of rationale and the failure to target the root cause of global excess capacity must be part of the reason why the EU responded so forcefully to the US tariffs in 2018 and is threatening to do the same today. That, and the fact that steel is politically sensitive, and the largest EU economies still have large steelmaking industries.
After the US put tariffs on €6.4 billion worth of EU steel and aluminium exports in 2018, the EU applied retaliatory tariffs on €2.8 billion worth of US goods. A similar response is likely again, meaning that what is an issue about excess steel production globally could again turn into a more general trade war between the US and the EU.
Where should the UK stand?
Back in 2018 the UK didn’t have a choice in following the EU reaction, because it was still part of the EU. But we’ve been told since then that one of the great benefits of Brexit is being able to chart our own course on trade.
The UK doesn’t produce much steel, and little of what it does produce goes to the US. Keeping heads low and deferring action on any retaliation seems sensible. Desperate as I am to stand up to Trump, if the UK starts down the path of retaliatory tariffs, it simply doesn’t have many sticks to throw. Target US bourbon or Levis jeans, and the US can whack a new tariff on Scotch whisky. Cue a political shitstorm overnight.
And so, I interpret the comments from the UK business secretary on Sunday with some caution. Perhaps a week of meetings with steel industry leaders has worn him down; perhaps the business department is using the potential for escalation as a tool to extract more money (or defend current commitments) for the steel industry in a tight spending environment; perhaps there is real panic that this will be the end of what’s left of the UK steel industry. Whatever the reason I’d be surprised if the UK decided to escalate.
But while this course of action may make sense for the UK in a vacuum today, if Trump keeps going, at some point some industry that is of more economic value, and exports more to the US, will be in the crosshairs. At that stage the UK may want the EU on its side, and the price for that may be taking a stand on things that it cares little about.
More widely this is yet another example of US actions that undermine European unity, with little regard for consequence. Trade wars create winners and losers - and when they cut across nation states, as is the case with the EU, maintaining a unified front can require setting aside national interests. At a time when the US is siding with Russia on all things Ukraine, the last thing Europe needs is to expend energy on a trade war that could pit its industries in one country against the industries in another. The US bears responsibility for starting that trade war, and the UK will be affected by it, even if it decides to avoid the fight today.
I called the Fort WIlliam aluminium plant 'legacy' - just in the sense that it was already there for a good while. Have not followedprocess developments closely but it appears that - provided GFG Alliance as the owner survive current trials and tribulations intact - it's well on track as a test site for more sustainable smeltering technologies. It's of course also colocated to, owns and meets its energy needs through Scotland's fourth-largest hydro scheme, .which is systemically relevant to safeguard stability of the national grid.
If I was Gupta then I would diversify into sth like Lochaber AI plc, the energy is already there :)
The Lochaber plant might also benefit from a nuanced view. Nevermind any Grensill Gupta shenanigans the adjacent alloy wheel factory seems to be on course still? For Fort William that's a big construction project, for the local college it has important training and skills ramifications, and the wheels do seem to be pitched competitively into the marlet (allthough we will only really know th8s once production is in full swing).
So the regional spill-over effects are much more significant than the legacy plant, in a region that is depopulating. Could similar objectives be achieved with a different industrial strategy? Perhaps. But it remains a real challenge to grow any kind of economy in the highlands and islands. Worth bearing in mind that Lochaber as a whole only has a population of about 20k, half of whom in Fort William itself, which is a 4h drive from Glasgow and the largest settlement along the whole of the west cost from there.
I am sure locals will have a diverse view on it all, in particular the many retirees who have moved up for a quiet life. But where are the alternatives?