Defense industry braces for hit from Trump tariffs

Defense industry braces for hit from Trump tariffs
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The defense industry is bracing for the fallout from the Trump administration’s decision to impose tariffs on steel and aluminum imports from Europe, Mexico and Canada.

The 25 percent tariff on steel and 10 percent tariff on aluminum, which went into effect Friday, are expected to raise costs for the U.S. defense industry, biting into its bottom line.

Though U.S. defense firms primarily buy steel and aluminum domestically, the tariffs are likely to lead to increased prices in the U.S., said former Pentagon official Andrew Hunter, a senior fellow at the Center for Strategic & International Studies.


“The whole point of the tariffs is to allow those suppliers to raise prices and they’ve already started doing so. It’s definitely going to increase costs. And of course that ultimately leads to increased costs for the taxpayer,” he said.

The tariffs are also likely to make ally countries less inclined to buy U.S.-made defense systems, should they have to absorb added costs associated with the trade rules, Hunter added.

President Trump first announced the tariffs in March, citing national security concerns. He imposed them under Section 232, a law that allows tariffs to be imposed for national security reasons.

The defense industry lobbied against the tariffs and quickly spoke out against them, warning they would lead to retaliation by trading partners. The European Union and Mexico are already poised to hit back with tariffs on U.S. exports.

“We have concerns about tariffs for a number of reasons: the impact on the global supply chain; what that could mean to our companies; certainly, what escalation might mean in terms of retaliation,” said Eric Fanning, CEO of the defense industry lobbying giant Aerospace Industries Association (AIA).

Fanning said AIA has communicated its concerns to the White House, while one defense industry consultant told The Hill that other defense contractor giants, including General Electric (GE), have begun to reach out to Congress in hopes of swaying the administration.

GOP lawmakers have been among those criticizing Trump’s trade policies, though the consultant said there is support for what Trump is doing in some parts of the country.

“GE is asking for pushback, and I think a lot of offices are going to be receptive to that, but some offices are very reluctant to oppose Trump because anti-free trade polls very high in areas where Trump is popular: Alabama, Mississippi, Georgia, etc.,” the source said.

The consultant said the defense industry should worry about retaliatory moves by ally countries against U.S. products and equipment.

Another industry consultant offered the view that the tariffs could be lifted soon, with Trump using them as a bargaining chip.

“I don’t think this is the last move in this kind of back-and-forth,” the second consultant said. “The administration has been very savvily creating leverage, extracting some type of concession and then backing off and then doing it again.”

But Hunter was skeptical that the administration was making such a play.

“It’s reasonable to suppose that this administration may rapidly change course because we’ve seen that, but ... I don’t see what agreement could be reached that would cause these tariffs to go away,” Hunter said.

The administration is seeking to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, and the tariffs have been seen as part of Trump’s strategy to put pressure on those countries to make concessions.

After Trump’s announcement, however, Canada, Mexico and the European Union appeared more interested in striking back against the U.S.

Hunter was pessimistic.

“Obviously the renegotiating of NAFTA is the big one that I think the president is looking to incentivize with putting these tariffs on, but, what I’ve read, it doesn’t look like we're that close to a breakthrough on a NAFTA renegotiation,” he said.

The Pentagon has stayed silent on the tariffs.

Defense Secretary James Mattis in February agreed with the administration that the imported metals are a national security issue, but wrote in a memo that he favored targeted tariffs, and worried that a sweeping policy would have a “negative impact on our key allies,” and “impair” national security.

Defense Department chief spokeswoman Dana White on Thursday said the Pentagon needs time to understand the tariffs’ impact on the defense industry.

“The secretary's statement stands, but what I would say is we have to take a holistic view and consider what the impact is and it's just too early to say right now,” White said.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) said Thursday the tariffs hurt American jobs by kneecapping American exports. He called on the administration to “continue exemptions and negotiations with these important national security partners.”