Brace Yourself: How the Construction Industry Can Roll with the Punches of Steel, Lumber, and Retaliatory Tariffs
On March 1, 2018, President Trump announced his intention to enact a 25% tariff on imported steel and a 10% tariff on imported aluminum, which went into effect on June 1. Before the tariffs, the U.S. imported about a third of all steel used domestically, particularly specially designed steel products necessary to the oil and energy industries. In the months before the steel tariffs went into effect, steel prices in the Mid-Atlantic Region increased, with the Producer Price Index for steel mill products increasing from January to April from 187.6 to 2017.
While tariffs may help manufacturers of raw materials like steel, aluminum, and lumber, the inevitable costs are to those industries which utilize those raw materials. In the case of steel and aluminum, the construction industry is a big target. One steel supplier estimates that the steel he typically imports from Canada has risen in price by about 30-40%. Additionally, many general contractors are finding that previously anticipated projects were put on indefinite hold. Many heavily steel-based public projects, such as highway and bridge construction, will now cost much more, leading state authorities to cycle down future construction and maintenance contracts as they expect public works funding to remain at pre-tariff levels. The unstable price of steel is even more concerning considering that only 13 states use steel price adjustment clauses in their public works contracts, using fixed-price contracts instead and putting more of the risk of unforeseen rising steel costs on general contractors, subcontractors and materials suppliers.
While the steel tariffs have only recently been put into place, it is useful to look to the November 2017 tariffs that the U.S. enacted on Canadian lumber for a comparison to see the impact on the construction industry. These lumber tariffs imposed a 20% price increase on Canadian softwood lumber, causing the overall price of lumber to rise by approximately 18%. This increase directly affected the residential construction industry, which dealt with decreased profit margins by passing along the costs to consumers, causing the cost of mid-priced residential homes to increase by $6,000- $10,000. The amount of time taken to complete a residential single-family project also increased as supply reduced, leading to both increased delays and financial overhead.
Similarly, the short-lived steel tariffs imposed in 2002 by the Bush administration could hint at the current steel tariff’s long-term results. The Bush steel tariffs stayed in place just under two years, eventually being removed after allied nations imposed retaliatory tariffs and the World Trade Organization declared that the tariffs breached global trade guidelines. The tariffs themselves, meant to protect the lagging U.S. steel industry, saw a short-term modest increase in employment outcomes in the steel industry, but then saw sharp long-term decreases as overall steel prices increased.
Supporters of the tariffs say that previously closed steel mills and aluminum smelters can be up and running sooner rather than later. Others argue that the capacities of these re-opened mills and smelters will not be able to satisfy domestic demand, leading to continued usage of imported steel. Meanwhile, Canada, Mexico, the EU, China, India, and Turkey, among other countries, have enacted retaliatory tariffs on American exports including steel products as well as agricultural and consumer goods.
Individual businesses are petitioning the U.S. Commerce Department for exemptions from the tariffs for specific products, arguing that the wait for domestic steel production to be able to meet their needs will result in lost profits, lost contracts, and even compromised production and manufacturing. While the Commerce Department has granted some of these exemptions, many more have been denied, especially if the exemption application is based merely on the fact that the buying domestic steel is more costly. To try to improve the effect of tariffs on the construction industry, larger metals suppliers may petition the Commerce Department for an exemption from the tariffs, allowing the government to refund the higher price of metals. Very few are granted, however, and the process generally takes at least 90 days to obtain a decision.
So what is a general contractor or a steel subcontractor to do? A viable option would be to try and negotiate for steel price adjustment provisions within contracts. These provisions would allow for periodic readjustment of contract price for erratic steel price increases as the market price fluctuates. Additionally, contractors, subcontractors, and suppliers should consider using imported prefabricated steel products where they can, which are not targeted by the tariff. Early price lock-ins for raw steel products are also a way for players in the construction industry to attempt to stem fluctuating steel costs. Contractors and subcontractors on current contracts should also familiarize themselves with the procedure for seeking time extensions as supply chains are slowed, as well as applicable force majeure and change in law clauses to see if the tariffs may fall under that language and provide relief.
With all of the recent fluctuations based upon the recent tariffs, there are no ironclad guarantees on how to proceed. If you have any questions about how the recent tariffs will affect you, reach out to counsel for guidance.
Cohen Seglias Summer Associate Stasha Sosnowicz also contributed to this article.