Alternate Explanations
It could be argued that many consumers of steel and steel products use forward or privately negotiated contracts, which means that the price paid by steel consumers will not change immediately and therefore Taiwanese producers will not be immediately shut-out of the U.S. steel market and the world price of steel products will not decrease. This argument has some validity, and as a result, there are some slight modifications that may need to be made to the welfare analysis. While the stated price specified in any given steel contract obviously cannot change as a result of the new tariffs, the steel imported to the U.S. under these contracts is, in all likelihood, not exempt from the new tariffs, thus the tariffs must be paid by either the Taiwanese steel producer or the U.S. steel consumer. The contracts may specify which party is obligated to pay any additional tariffs imposed after the signing of the contract, however it is clear that whichever party has this obligation will be negatively impacted.Should the Taiwanese steel producer be required to pay the additional tariffs, this would represent, in effect, a price decrease for them because they must now incur an additional cost without the ability to pass the expense on to the consumer, at least for the duration of the contract. This will decrease profitability dramatically because the Taiwanese producer is contractually obligated to supply a set amount of steel, so its ability to eliminate other costs by decreasing production and laying off workers is limited initially. Eventually, when the contract expires, the Taiwanese steel producer will not be able to compete with a U.S. steel producer when bidding for new contracts, thus the demand for their goods in the U.S. will decrease and the Taiwanese producer will be likely decrease production and lay off workers.
Be Sure to Continue to Page 6 of "Trade in Iron and Steel Between the U.S. and Taiwan".
