By John McDonald
As ongoing tariffs on imported steel and aluminum fly largely under the radar in the headlines over trade tensions, American manufacturers are quietly adjusting their supply chains. Certain states’ import volumes could serve as an important indicator of things to come in 2020.
Industrial production activity of aluminum and steel has risen over the past two years in the United States, but that does not necessarily mean everything is going swimmingly in the steel and aluminum sectors.
When President Trump initially enacted tariffs on these metals in March 2018, the goal was to revitalize American production outlets while handicapping foreign competitors.
However, because U.S. aluminum and steel production remained comparatively low in relation to the volume needed to sustain industry jobs and production levels, the administration ultimately lifted the tariffs on imports from Canada and Mexico.
This affected the supply chain for these two valuable metals and created a major shift in certain import-reliant state economies.
In turn, the changing supply chains emerged as a potential indicator for future economic movement on a national level.
This means that now gold investors should be watching aluminum and steel for signs of an economic shift.
Big Buyers and Big Losers
At present, the biggest buyers for imported steel and aluminum are Texas, California, and Illinois. Texas dominates the field with spending in 2019 alone of $4.77 billion, while California and Illinois spent just under $2 billion each.
Those states used to buy in high volumes from Louisiana, Missouri, and Connecticut.
Those three states have lost millions of dollars in tariffed metal imports since the advent of these tariffs. In fact, Louisiana is now importing nearly $683 million less than it was in 2017, while Missouri posted a $516 million loss and Connecticut posted a $381 million loss according to Census Bureau trade data.
Why Gold Investors Should be Watching the Tariffed Metals Sector
At first, this might not seem like it has a great deal to do with the price of gold.
However, according to both the presidential administration and economists like Bill Reinsch, the School Chair in International Business at Washington D.C.-based Center for Strategic and International Studies, the tariffs were intended to bolster American metals production.
If and when metals production levels out, the economy could be heading for a downturn or, at a minimum, a cooling period.
While production levels may not directly link to the heating or cooling of the American economy, their performance does tie into how the economy is functioning.
Reinsch explained, “The tariffs have created more supply, but demand is down and the economy is slowing down.
I don’t think there is anything [President Trump] can do for steel beyond what he’s already done unless he gooses the economy up to 3 percent growth.”
Although domestic production of steel and aluminum has spiked over the past year by more than 11 percent, that growth may be unsustainable as long as investors remain concerned about international trade tensions and national economic stability.
In the event that those three leading importers of tariffed metals – Texas, California, and Illinois – begin importing lower volumes and the losses in the already-declining states, Louisiana, Missouri, and Connecticut continue to fall, this could indicate more than a disruption in the supply chain.
Such a combination could indicate that many American businesses are unwilling to take a risk on the rising expenses associated with importing aluminum and steel.
That downturn in investor and consumer sentiment will likely indicate the inaugural season of the next economic downturn as well – and that is almost always a positive sign for gold.