BUS 495 Module 4 Trade and Investment Example

Who Paid for the Steel Tariff? Trade Policy, a Trailer Hitch Maker's Costs and the Case for Producing in Mexico

Student Name

Business Administration Program, Aspen University

BUS 495: International Business

Instructor Name

Month Day, Year

Who Paid for the Steel Tariff? Trade Policy, a Trailer Hitch Maker's Costs and the Case for Producing in Mexico

Hoosier Hitch Works, a composite manufacturer in Elkhart, Indiana, makes trailer hitches and receivers for pickup trucks and recreational vehicles. Its main input is welded steel tube, about a third of which it once bought from a Canadian mill and a Korean supplier. In 2018, its supplier invoices began rising, and within a year the company's cost per hitch had climbed enough to erase most of its margin on its best-selling model. The owners want to know who really pays for tariffs, how much this policy has cost them and what they should do about it.

Why Countries Trade

Ricardo (1817) showed that two countries can both gain from trade even if one produces everything more efficiently than the other. What matters is comparative advantage: each country gains by specializing in the goods it produces at a lower opportunity cost and trading for the rest. Applied to steel, the theory suggests that if other countries can produce certain steel products at a lower opportunity cost, American manufacturers that use steel benefit from buying it abroad, while American steel producers face competition. A tariff changes that balance by raising the price of imports to protect domestic producers, with costs falling on the domestic buyers of steel.

The Policy

In March 2018, the United States imposed a 25% tariff on most imported steel under Section 232 of the Trade Expansion Act of 1962, which allows trade restrictions on national security grounds. Exemptions and quota arrangements were later negotiated with several countries, including Canada, and the tariff structure was changed again in 2025. For a manufacturer, the practical result was years of rising and uncertain input prices.

Who Paid

Research on the 2018 tariffs reached a consistent conclusion. Amiti et al. (2019) found that the tariffs were passed almost completely through to the domestic prices of imported goods, so American importers and their customers bore the cost rather than foreign exporters. Fajgelbaum et al. (2020) estimated that consumers and firms that bought imports lost tens of billions of dollars a year, partly offset by tariff revenue and gains to protected producers, with an aggregate loss to the economy. Flaaen and Pierce (2019) studied manufacturing employment and found that the tariffs were associated with relative reductions in jobs, because the gains to protected industries were outweighed by higher input costs and by retaliatory tariffs that hurt exporters.

The Effect on One Firm

The table traces the company's cost for its most popular Class III hitch before the tariff and two years later.

Steel prices rose by more than the tariff on imports alone, because domestic mills, facing less import competition, also raised their prices. Total cost rose 14%, less than the steel increase because steel is only part of the cost. The company could raise its wholesale price by only about 6% before losing orders to competitors who import finished hitches, which face their own tariffs but different ones, so its margin shrank.

Beyond the Cost Sheet

The tariff also changed the company's relationships. Its Canadian mill, once its most reliable supplier, cut allocations while exemption talks dragged on, and the company spent months qualifying a second domestic mill whose tube required different welding settings. Customers in the recreational vehicle industry, themselves facing higher steel and aluminum costs, pushed back on every price increase. Meanwhile, importers of finished hitches from Asia faced a separate set of duties that changed on different dates, so the company's competitive position shifted from quarter to quarter for reasons it could not control. Uncertainty itself became a cost: the owners delayed a planned robotic welding cell because they could not predict their steel prices for the following year.

Who Benefited

Domestic steel producers gained. Higher import prices allowed them to raise their own prices and run their mills at higher capacity, and some announced new investments. Workers in those mills benefited from greater job security. These gains were real, but the research shows they were smaller in total than the losses to the much larger number of firms and workers that use steel, which is why studies of the economy as a whole found a net loss.

Dunning's Eclectic Paradigm

Dunning (1988) explained foreign production through three conditions. Ownership advantages are the firm's own assets, such as designs, brands or skills. Location advantages are features of a foreign place, such as lower costs or access to markets. Internalization advantages exist when the firm gains more by producing abroad itself than by licensing or buying from others. Hoosier Hitch has ownership advantages in its tested designs, relationships with recreational vehicle makers in Elkhart and a warranty reputation. Mexico offers location advantages in labor costs and tariff-free access under the United States-Mexico-Canada Agreement for qualifying goods. Internalization is weaker: welding hitch components is a standard process that capable suppliers already perform, and the company's key knowledge is in design and testing, which it can protect without owning a plant.

Three Responses Compared

The first option is to buy only domestic steel. It removes tariff exposure and supply uncertainty but locks in domestic prices, which rose with the tariffs. The second is to buy finished welded subassemblies from a Mexican supplier and do final machining, coating and assembly in Indiana. It uses Mexico's location advantage without the cost and risk of a plant and keeps the work that depends on the company's know-how at home. The third is to build a plant in Mexico. It offers the lowest long-run cost but requires about $8 million, takes two years and commits the company to a location whose trade treatment could change at the agreement's scheduled review.

Recommendation

The company should pursue the second option. Sourcing subassemblies from a qualified Mexican supplier lowers cost per hitch, keeps the company's design and testing in Elkhart and avoids committing capital while trade policy remains uncertain. The company should confirm that the subassemblies meet the agreement's rules of origin, sign a two-year contract with price adjustment clauses and keep one domestic steel supplier qualified as a backup.

Conclusion

The evidence shows that American buyers paid for the steel tariffs, and Hoosier Hitch's costs confirm it. Ricardo's theory explains why protection raises costs for steel users, and Dunning's paradigm explains why the company should use Mexico's location advantages without building a plant it does not need to own. A flexible sourcing arrangement is the best response to a policy that may change again.

References

Amiti, M., Redding, S. J., & Weinstein, D. E. (2019). The impact of the 2018 tariffs on prices and welfare. Journal of Economic Perspectives, 33(4), 187-210. https://doi.org/10.1257/jep.33.4.187

Dunning, J. H. (1988). The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1-31. https://doi.org/10.1057/palgrave.jibs.8490372

Fajgelbaum, P. D., Goldberg, P. K., Kennedy, P. J., & Khandelwal, A. K. (2020). The return to protectionism. Quarterly Journal of Economics, 135(1), 1-55. https://doi.org/10.1093/qje/qjz036

Flaaen, A., & Pierce, J. (2019). Disentangling the effects of the 2018-2019 tariffs on a globally connected U.S. manufacturing sector (Finance and Economics Discussion Series 2019-086). Board of Governors of the Federal Reserve System. https://doi.org/10.17016/FEDS.2019.086

Ricardo, D. (1817). On the principles of political economy and taxation. John Murray.