Impact of Trump’s new tariffs on steel, aluminium on U.S. economy Premium

Trump threatens to increase steel tariffs to 50%, impacting U.S. economy, consumer demand, and domestic production negatively.

While addressing steel workers in the U.S. state of Pennsylvania, Mr. Trump threatened to increase the import tariffs on steel and aluminium from the current 25% to 50% from June 4, upset by the slow progress of a trade deal between the U.S. and the EU.

Steel and aluminium are used as basic inputs in a host of industries and sectors ranging from transportation (rail, road, sea and air), defence and aerospace, household appliances, engineering machinery of all kinds, agricultural tools and implements, civil engineering and construction, power generation and transmission and a whole lot of others.

Now that the tariffs have come into effect, they would further increase the domestic prices of goods and services in the U.S. where steel and aluminium are used, either as intermediate products and inputs or as fully finished products, lower the consumer and industrial demand for such products and slow down the overall growth of the economy, as steel and aluminium happen to be key basic inputs used in a wide variety of industries and economic activities. The U.S. economy had contracted by 0.2% in the first quarter of 2025 as compared to the previous quarter, while inflation had declined to 2.31% at the end of April 2025, still higher than the threshold level of 2% for the Federal Reserve to start cutting interest rates again.

With the economic and trade disruption caused by uncertain trade policies and the widening U.S. Budget deficit, there is a fear that U.S. inflation may go up again, forcing the Federal Reserve to postpone its interest rate cuts to September, and in a worst-case scenario, towards the end of the year.

The Paris-based Organization for Economic Cooperation and Development (OECD) has forecast a slowing down of the U.S. GDP growth rate to 1.6% in 2025 from 2.8% in 2024 and a fall in World GDP growth rate to 2.9% for 2025 as compared to 3.3% in the previous year. In April 2025, the U.S. economy added 1,77,000 new jobs, exceeding previous expectations, though falling short of the 2,56,000 new jobs generated in December 2024, the last month of the Biden administration, before Mr. Trump assumed office. The unemployment rate, however, remained steady at 4.2% April 2025.

Economic theory tells us that when an import tariff is imposed on a commodity in a free-market economy following free international trade, the higher tariff-inclusive price will become the new domestic price. It reduces the consumer’s surplus, which is calculated as the notional difference between what consumers are prepared to pay for a product or service and what they actually end up paying - the lower the actual price the higher the consumer’s surplus and vice versa. It transfers some of this lost consumer’s surplus to the domestic producers of the import competing industry as producer’s surplus, while the rest (of the lost consumer’s surplus) is treated as a deadweight loss to society as a whole.

Still, Governments all over the world use import tariffs as measures to increase Government revenue (ultimately paid for by the domestic consumers) and to support domestic manufacturers of the import competing products for generating local employment, incomes and economic growth. Rarely are tariffs used as measures to promote national security which Mr. Trump is signalling in justification of his new 50% levies on steel and aluminium imports.