As the Trump administration announces sweeping new tariffs on many U.S. trading partners, the Wells Fargo economics group has released a new report about the impact of tariffs on the construction industry.
According to the report, “Trade policy changes seem likely to exert upward pressure on construction costs through higher material prices. Although the construction industry does not have outsized exposure to international trade, increased levies on foreign producers will likely reduce international competition, increase domestic demand, and ultimately push up domestic material prices. The knock-on effects of tariffs on economic growth, interest rates and construction demand are highly uncertain, though risks are skewed to the downside.”
How Will New Tariffs Impact Construction?
- A flat 10% import duty was applied to all countries, while a long list of trading partners was targeted for reciprocal tariffs ranging from 11%-50%. Though the reciprocal tariffs now appear to be suspended, China is still subject to levies of over 100%.
- Steel, aluminum, lumber, copper and other key building materials were not included in the reciprocal tariff announcement. However, many of these goods were either already subject to product-specific tariffs earlier or are currently undergoing investigations, which could lead to higher tariffs in the future.
- Trade policy changes seem likely to exert upward pressure on construction costs though higher material prices. Although the construction industry does not have outsized exposure to international trade, increased levies on foreign producers will likely reduce international competition, increase domestic demand and ultimately push up domestic material prices.
- The knock-on effects of tariffs on economic growth, interest rates and construction demand are highly uncertain, though risks are skewed to the downside. Weaker economic growth could drag down some commodity prices, a trend which appears underway for oil and lumber.
- Roughly 10% of construction materials are imported, not far above the all-industry average. Select inputs are imported in relatively higher shares, including major household appliances, lighting, HVAC and plumbing.
- The shift in trade policy arrives as construction cost inflation has normalized. Prices for many materials and components, however, are still significantly above their pre-COVID norms.
- Higher material prices, if not fully absorbed by producers, could constrain residential construction and further erode housing affordability. Increased construction costs could also be a limitation for commercial real estate development, which has downshifted markedly alongside higher interest rates.
Construction Has a Moderate Exposure to International Trade
- The construction industry depends on imported materials, but not as much as other industries like manufacturing. The share of imported intermediate inputs used in construction was 10% in 2023, not far above the all-industry average of 8.9%.
- Although the sector’s exposure to trade is moderate, the extent varies significantly by building type. Construction of educational, healthcare and manufacturing buildings utilizes relatively higher shares of imported materials compared to office, commercial and residential buildings. The general difference between import shares appears owed to greater utilization of HVAC, lighting and plumbing components produced abroad.
Trade Policy Shifts Could Ripple Through The Construction Value Chain
- A diverse array of materials is used throughout the various stages of construction. Some key inputs—like concrete, asphalt and wood kitchen cabinets—are mostly procured from domestic producers. Other materials are sourced predominantly from global producers but comprise a low share of total construction inputs, notably lighting fixtures, household appliances, wires and tires.
- Even low import intensity materials purchased from domestic firms are exposed to international trade. The integrated nature of global supply chains means many unprocessed construction materials cross the border at some point in the production process. For example, the ready-mix concrete industry, which primarily uses domestic materials, still utilizes small quantities of cement and stone produced in other nations.
Residential Construction In Focus
- Zooming in on the residential segment, the vast majority of construction materials are produced domestically. In 2017, the latest year of detailed data available, imports accounted for 7.6% of the materials used in residential construction. Of the top ten inputs used in residential construction, veneer, plywood & engineered wood products, millwork and HVAC equipment have the highest import intensity.
- Approximately 27% of home building imports originate from China, which as of this writing, is subject to levies of over 100%. Aside from “other” nations, Canada and Mexico represent the next largest shares. Notably, roughly 70% of sawmill and wood imports are sourced from Canada and 71% of lime and gypsum imports are sourced from Mexico.
Tariffs Look Likely to Exert Pressure on Material Prices
- Although the long-term level of tariffs remains highly uncertain, recent history suggests that newly imposed levies will lead to higher prices for construction materials. Tariffs on steel, lumber and other products increased overall construction costs above trend in 2018 after new levies were imposed.
- Construction material prices have risen sharply in recent years. The Producer Price Index for intermediate construction materials and components has increased nearly 43% since 2019, ahead of the all-commodity average. Over the past year, material price inflation has steadied alongside normalizing supply chain functionality and slower pace of construction activity.
Click here to read more: https://www.wellsfargo.com/cib/insights/economics/special-reports/
