WASHINGTON — The Trump administration’s announcement that it will impose tariffs on steel and aluminum imports from Europe, Mexico and Canada may hurt America‘s defense sector and imperil domestic jobs, analysts warn.
The tariffs, which will impose a 25 percent surcharge on imported steel and 10 percent on aluminum, will go into effect Friday, as the administration follows through on the penalties after earlier granting exemptions to buy time for negotiations. U.S. President Donald Trump announced the tariffs in March, citing national security concerns.
Europe and Mexico pledged to retaliate, exacerbating trans-Atlantic and North American trade tensions. The European Commission’s president, Jean-Claude Juncker, said Trump’s decision amounted to trade “protectionism, pure and simple,” adding that Europe would respond with countermeasures.
Mexico said it would penalize U.S. imports including pork bellies, apples, grapes, cheeses and flat steel. Kathleen Wynne, Ontario’s premier, made it clear more retaliation is coming, saying: “Donald Trump is a bully. And the only way to do deal with a bully is to stand up and push back.”
The U.S. action widens a rift with Germany and other close allies, and it threatens to drive up prices for companies and consumers that buy steel and aluminum. The move also heightens uncertainty for businesses and is already alarming investors in global financial markets.
Financial markets fell amid fears of a trade war, as the Dow Jones industrial average dropped more than 200 points. The stocks of the “big five” defense firms followed the market, trading down amid predictions of weaker demand from abroad and rising prices at home — but they stayed well above their 52-week lows.
The worst damage to U.S. defense firms may be on the horizon, should overseas defense markets ― which are heavily government-influenced ― punish America over the new tariffs. The Trump administration has sought to increase American defense exports, but analysts warn that’s now in danger.
Aerospace Industries Association CEO Eric Fanning told reporters Thursday that he understands the need to focus on fair trade, but shared fears that American firms in the aerospace and defense sector could be particularly hurt by retaliation from potential customers.
“We have concerns about tariffs for a number of reasons: Its impact on the global supply chain, what that could mean to our companies. Certainly what escalation might mean in retaliation,” Fanning said. He noted that AIA’s member companies rely heavily on exports and employ 2.4 million Americans with above-average paying jobs.
Asked if those concerns had been conveyed to the White House, Fanning said: “They know. I think we can find ways to focus on fair trade and free trade. I don’t think it has to be either-or. “
Analyst Byron Callan, a director at Capital Alpha Partners, predicted the tariffs will “ripple through security relationships.”
In areas where there are no competing European products, like heavy-lift helicopters or C-130J cargo aircraft, Callan expected U.S. products to hold steady. “But if Europe has options, I would expect the U.S. will be its second choice,” Callan said.
There are dimmer prospects for F-35 Joint Strike Fighter sales to Belgium, Finland and Germany — where the slim possibility has been up for debate. Germany is an “even less likely” customer now, Callan said.
Brookings Institution’s Michael O’Hanlon downplayed fears of retaliation, however, citing the military interdependence among NATO allies, many of which rely on U.S. suppliers. “As such, I don’t expect dramatic repercussions — at least at this stage of the incipient would-be trade war,” O’Hanlon said.
Yet, America’s defense industry, which already faces a shortage of qualified workers and other long-term challenges, could eventually see parts suppliers move operations overseas — the exact opposite of the Trump administration’s stated goal.
“It’s possible that some of those companies could decide they’re in an untenable business situation and shift operations offshore, where tariffs don’t have to be paid,” said Andrew Hunter, a former Pentagon acquisitions official now with the Center for Strategic and International Studies. “The parts can be imported without tariffs. It’s the raw material that’s being taxed.”
Though the American defense industry buys the majority of its steel and aluminum from domestic suppliers, the tariffs are expected to allow those suppliers to raise prices unhindered by foreign competition. Price increases should find their way into the supply chain as firms use up their stockpiles, Hunter said.
Even some Trump allies in Congress said the trade moves are a raw deal for the American public. “Tariffs on steel and aluminum imports are a tax hike on Americans and will have damaging consequences for consumers, manufacturers and workers,” said Sen. Orrin Hatch, R-Utah.
Senate Armed Services Committee Chairman John McCain, R-Ariz., has said the tariffs would raise the cost of critical military systems the U.S. needs to maintain its military edge.
House Ways and Means Committee Chairman Kevin Brady, R-Texas, said Thursday the move hurts American jobs by hindering American exports. He called on the administration to “continue exemptions and negotiations with these important national security partners.”
The Associated Press contributed to this report.
Joe Gould is the Congress and industry reporter at Defense News, covering defense budget and policy matters on Capitol Hill as well as industry news.
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.