Michael Best Strategies: Steel and aluminum trade action alert
STEEL AND ALUMINUM TRADE ACTION ALERT
On March 1, 2018, President Trump announced he planned to impose tariffs on steel and aluminum imports into the United States using his authority under Section 232 of the Trade Expansion Act of 1962. He plans tariff measures of 25 percent on steel imports and 10 percent on aluminum imports, and will be signing them “next week.” He made the announcement during a meeting with executives from American steel and aluminum manufacturers yesterday, March 1st. Executives at the meeting, when asked about details, responded that the President didn’t mention any exemptions and that they would apply to imports from all countries. No other details are known yet.
Section 232 allows the President to take action against imports that threaten to impair the national security interests of the United States. The President’s announcement followed the completion of two investigations by the Department of Commerce (“Commerce”), which found that the steel and aluminum industries are vital to national security and that steel and aluminum imports threatened to impair the national security of the United States. A number of White House officials and Cabinet members have disagreed with the study, including National Economic Council Chairman Gary Cohn, and the Secretaries of the Treasury, State and Defense, to name a few. There has been a very public debate about the recommendations at the White House.
On steel, Commerce recommended a tariff of at least 24 percent on all imports of steel products from all countries; a “tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States;” or a “quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States.” These remedies were “intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry.”
On aluminum,” Commerce recommended that President Trump impose a “tariff of at least 7.7% on all aluminum exports from all countries;” a “tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela and Vietnam. All the other countries would be subject to quotas equal to 100% of their 2017 exports to the United States;” or a “quota on all imports from all countries equal to a maximum of 86.7% of their 2017 exports to the United States.” The tariff would cover “aluminum ingots and a wide variety of aluminum products” and they were intended to raise production of aluminum from the present 48% average capacity to 80%, a level that would provide the industry with long-term viability.”
Sectors impacted include food and beverage, appliances, construction, manufacturing, auto-makers and energy, to name a few key sectors. For example, a 25 percent tariff on tinplate steel is expected to increase the cost of a can of green beans by 2 cents/can.
The GOP has reacted strongly, including Senate Majority Whip Cornyn, Senate Finance Committee Chairman Hatch, who characterized it as a “tax increase,” and Senate Agriculture Committee Chairman Roberts who is concerned not only about retaliation against agriculture but also increased prices for food and beverage packaging.
The President pushed back against the wave of criticism against steel tariffs, tweeting out Friday morning that not only are trade wars good, they are easy to win. He tweeted, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win”. Under current global trade rules, the United States can get away with it. Article XXI of the World Trade Organization (WTO) agreements states that countries are free to take actions they deem essential to their security interests.
These U.S. tariffs also risk provoking retaliation, particularly from Beijing. China has already launched a probe into U.S. imports of sorghum, and is studying whether to restrict shipments of U.S. soybeans -- targets that could hurt Trump’s support in some farming states. While direct steel and aluminum imports from China account for just a fraction of U.S. imports of the metals, it’s accused of “flooding the global market and dragging down prices" because of its practice to “transship” those products through other countries (e.g., Mexico and Canada) in order to avoid tariffs. The European Union, as well as many other trading partners, has also publicly threatened retaliation.
Additional details about the tariff announced by President Trump should be included in the final trade action that will be signed by President Trump next week.
In closing, there are two big questions looming: 1) Is this the beginning of a trade war that will extend to other products and services, and 2) is Thursday’s announcement a “one and done” deal, or is this the beginning of a series of announcements that will lead the country in a more protectionist trade direction – i.e., is this announcement a precursor to an announcement to withdraw from NAFTA, or will a more nuanced approach be taken as the debate over the contentious trade policy issues unfolds.