On June 3, 2025, President Trump announced that tariffs on steel and aluminum will double from the already elevated 25% (set in March) to 50%. The increase to 50% is historically exceptional. Before Trump's initial hike, nearly 80% of steel imports entered the U.S. tariff-free. Now, the U.S. is effectively taxing a key input to the manufacturing sector.

While the move is detrimental to foreign exporters of the metals, the real damage will be borne within the US itself.

Historically, tariffs on intermediate inputs were characteristics of failed development strategies. It is therefore surprising to see the President of the most economically advanced nation reviving a long-abandoned import-substitution strategy. The import substitution strategy, common until the 1980s in developing countries, aimed to industrialize by protecting "infant industries" (“infant industries” in the US?) from international competition through tariffs. Trump's justification mirrors this outdated policy: by shielding U.S. steel and aluminum producers from foreign competition, he hopes to boost their profit margins and thereby incentivize domestic and foreign investment in these sectors. According to Trump, previous taxes had “not yet enabled” domestic industries “to develop and maintain the rates of capacity production utilization that are necessary for the industries’ sustained health and for projected national defense needs.”

From an economic point of view, taxing steel and aluminum have two effects: a) to protect US producers of steel and aluminum and b) to penalize all US downstream industries that use these inputs making them less competitive. Tariffs on intermediate goods are equivalent to a subsidy for US steel and aluminum producers financed by industries which utilize these products.

The 50% tax increase, on steel and aluminum products, enables national producers of these products to raise their price by 50% above the international price.

On June 2, the domestic prices of aluminum (aluminum delivery contract prices) in the U.S. surged by 58% above global levels, because of the tariff protection. but the increased input costs act as a tax on downstream producers, which face international competition and thus cannot pass the cost increases on to their customers.

To estimate this de-protection effect, on the enterprises which use steel and aluminum as inputs, we use the methodology of Bela Balassa (Development Strategies in Semi-industrial Economies, WB, 1982) and Max Corden, "The Structure of a Tariff System and the Effective Protective Rate." Journal of Political Economy,  1966. These authors’ contribution shows that nominal tariff can be misleading, this is the protection to value added that matters, if you protect one sector, it will be to the detriment of others. The concepts elaborated by these economists apply to every country, including the superpowers, economic laws are not limited to the countries of the South. What is important for the producer is the value added of the firm (the value of the output minus the costs of its inputs). The value added (VA) is distributed in the form of wages, profits and taxes.

A 50% tariff on inputs (steel and aluminum) allows domestic producers of these products to increase their prices by that amount since they are protected; if firms using these inputs cannot raise their output prices, because of international competition, then their VA declines sharply. The following table gives an estimation.

Table 1 Trump decides to raise tariffs on imported inputs (steel & aluminum) by 50%