As a tool of trade policy, tariffs can profoundly affect costs and supply chain dynamics within the construction sector.
The construction industry is a vital part of the global economy and is often susceptible to impacts by trade policies, particularly tariffs. Tariff increases affect the sector by driving up material costs, disrupting supply chains, compressing profit margins, altering competitiveness, creating investment uncertainties, and potentially adversely affecting the job market. These factors collectively reshape the construction landscape, presenting challenges that require careful navigation by policymakers and industry stakeholders.
Impact of Tariffs on the Construction Industry
The construction industry is deeply connected to sectors like real estate and infrastructure development, making it a cornerstone of the global economy. Tariffs, as a tool of trade policy, can profoundly affect the cost structures and supply chain dynamics within this sector.
Rising Material Costs
Tariffs impose duties on imported construction materials including steel, aluminum, and lumber, leading to significant cost inflation. This can affect a wide range of projects, from residential to commercial and infrastructure. For example, tariffs on steel and aluminum imports can elevate costs for commercial and infrastructure projects, while tariffs on Canadian lumber can increase new home construction expenses.
Tariffs were intended to boost domestic production and safeguard jobs in the U.S. steel and aluminum industries. However, they often result in increased prices for imported steel and aluminum, which affect downstream industries that rely on these materials.
Previously, steel imports were subjected to a 25% tariff and aluminum imports to a 10% tariff, affecting various products including mill products and derivative articles. Exemptions and quotas were applied to certain countries based on security relationships, but many exemptions were replaced with quotas or tariff-rate quotas, limiting the import amounts. This led to foreign producers increasing shipments of derivative articles to bypass tariffs, prompting the extension of tariffs on these products. Furthermore, specific articles could be excluded from tariffs due to lack of domestic production, and the Bureau of Industry and Security established processes for requesting such exclusions.1
Supply Chain Disruptions
Over the past three decades, global supply chain activities have significantly expanded due to reduced trade barriers and free trade agreements, supported by the development of theoretical frameworks and decision-making tools in global supply chain management. However, recent debates on trade barriers, like tariffs, and uncertainties in trade policies, are prompting companies to re-evaluate their global strategies.
Construction firms often conduct costly searches and negotiations with potential suppliers only to have the home government surprise them with an input tariff. This can lead to renegotiation with initial suppliers or the search for replacements and make imports more costly or less available, forcing construction companies to seek alternative suppliers. This often results in project delays and increased operational expenses, complicating supply chain management. The need to find new suppliers and renegotiate contracts adds an administrative burden, further straining resources and affecting project timelines and client satisfaction.2
Impact on Profit Margins
Increased costs from tariffs can squeeze profit margins for construction firms. Larger companies might have the financial resilience to absorb these costs or pass them on to customers, but smaller firms may struggle. The industry may also face rising labor costs and high interest rates, further impacting profit margins. Reduced profitability can lead to decreased investment in new projects and innovation, hampering industry growth.
Competitiveness and Domestic Industry Effects
Tariffs can alter the competitive landscape by making imported goods more expensive, potentially benefiting domestic producers. However, this can also lead to higher prices and reduced innovation, affecting global competitiveness. While tariffs might protect domestic industries, they can also cause inefficiencies and stifle innovation. Increased material costs can reduce firms’ global competitiveness, and while domestic production might rise due to tariffs, this scenario highlights the trade-offs involved in such policies.
Investment and Planning Uncertainty
While trade liberalization can result in economic growth and increased competitiveness through reducing or eliminating the barriers to trade between countries, the uncertainty surrounding tariff policies can hinder investment and planning, especially in the construction industry. Companies may delay or cancel projects due to unpredictable material costs and availability, leading to conservative investment strategies that affect long-term growth. The industry may also face challenges related to sustainability and efficiency as both require significant investment. This uncertainty can lead to a decline in foreign direct investment, with companies hesitant to commit to large-scale projects in an uncertain economic environment.
Job Market Implications
There are winners and losers in trade policy reform. While tariffs aim to protect jobs in domestic industries, they can sometimes result in net job losses when considering downstream effects. Higher material costs can lead to reduced demand for construction projects, potentially resulting in job losses. However, the effects of tariffs on employment are country- and trade policy-specific. Tariffs can potentially result in a recession in the country on which they are imposed.
Overall, the construction industry is dealing with a shortage of skilled labor, exacerbated by strict immigration policies. This not only affects workers, but also has broader economic implications, as reduced construction activity can lead to lower economic growth and reduced tax revenues for local governments.
[1] Economic Impact of Section 232 and 301 Tariffs on U.S. Industries.
[2] Grossman, Gene M., Elhanan Helpman, and Stephen J. Redding. 2024. “When Tariffs Disrupt Global Supply Chains.” American Economic Review, 114 (4): 988–1029
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© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
