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- Sourabh Gupta
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Photo Credit: President Trump signs the Section 232 Proclamation on Steel and Aluminum Imports on March 9, 2018. (Source: Official White House Photo)
Resident Senior Fellow
Section 232(b) was one of three statutory enforcement tools listed by Trump during his presidential campaign as part of his 7 Point Plan to rebuild the American economy. The tool is a highly controversial and is used to limit imports based on their detrimental impact on U.S. national security. President Trump has taken recourse to the Section 232 statute to limit steel imports and, in the process, fulfilled a campaign promise to his blue-collar base.
Contrary to the assertion of the Trump administration that the purpose of the 25 percent tariff on steel imports is intended to reverse the potential threat to national security, the purpose of the tariff is to restore the economic viability of the domestic industry. The steel requirement of the Department of Defense is modest and U.S. domestic steel production—not counting employment or profit margins—has been remarkably stable over the past two decades. As such, the tariff is a case of textbook protectionism designed to protect a politically-connected ‘sunset’ industry.
Section 232(b) was one of three statutory enforcement tools listed by Trump during his presidential campaign as part of his 7 Point Plan to rebuild the American economy. The tool is a highly controversial and is used to limit imports based on their detrimental impact on U.S. national security. President Trump has taken recourse to the Section 232 statute to limit steel imports and, in the process, fulfilled a campaign promise to his blue-collar base.
The size of the tariff (25 percent globally) is based on a back-calculation to ensure that an 80 percent capacity utilization rate (at 2017 demand levels plus exports) is obtained within the domestic industry. U.S. steel mills operated at an average utilization rate of 73 percent during the 2011-2017 period. With Canada and Mexico—the No. 1 and No. 4 steel exporter to the U.S—temporarily exempted from the measure, the tariff might need to be adjusted upwards in due course to attain the quantitative reduction in imports that is the key to attaining the 80 percent utilization rate. De facto ‘managed trade’ targets, as is the case with this tariff imposition, has no place in the post-World Trade Organization (WTO) global trading system.
Global trade law includes a national security exception clause (GATT Article XXI Security Exceptions) that permits a country to depart from its international trade obligations, including tariff bindings, at a time of war or other emergency in international relations. However, during a time where there is no international emergency, a dispute settlement panel will likely look unfavorably on the United States’ claims if a foreign trading partner files a legal challenge arguing that its legitimate expectations of trade benefits were nullified or impaired by the American action. When the 25 percent steel import tariff measure is challenged within the WTO’s dispute settlement system, it will be worth observing if the administration cites the national security exception clause in its defense. There is no prior jurisprudence on this point, although a national security exception-related case involving Qatar and the United Arab Emirates is currently being heard within the WTO system.
Finally, the key intended target of the measure, China, is not among the top 10 steel exporters to the United States. Of the almost $30 billion of total steel imports to the U.S. market in 2017, China’s exported less than $1 billion of steel related products. All of China’s top ten steel exports markets are in East, South or Southeast Asia (aside from Saudi Arabia). By the time the 25 percent tariff penalizes China, it will have inflicted significantly more damage to other steel exporting countries, including five U.S. allies. The willingness to disregard establishment opinion and impose a highly controversial tariff portends ominously for the results of the Section 301 investigation of China’s intellectual property rights (IPR) practices.
On March 8, President Donald Trump issued a tariff proclamation to adjust the imports of steel into the United States with the intent to counter trade practices which, in his view, was undermining U.S. national security. As per the Proclamation:
Section 232(b) authorizes the Commerce Secretary to investigate the effect of imports on U.S. “national security” and on this basis enables the U.S. President to raise tariffs or otherwise regulate imports as necessary to strengthen national security. The important criteria considered during the investigation are: (a) requirements of the defense and essential civilian sectors; (b) growth requirements of domestic industries to meet national defense requirements; (c) impact of foreign competition on the economic welfare of an essential/critical domestic industry; and (d) the displacement of any domestic products by imports causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity.
Historically, Section 232(b) has been invoked to limit imports of only particular items. Since the U.S. joined the WTO in 1995, only two Section 232 investigations had been initiated until the onset of the Trump Administration – on crude oil, and on iron and steel. In neither case was action recommended to the president. Much earlier though, in 1971, President Nixon had used Section 232(b) authority (in addition to other statutes) to famously impose his across-the-board 10 per cent surcharge at the time of the impending collapse of the Bretton Woods fixed exchange rate parities. President Ford, too, had sought to use 232(b) authority to impose a fee on petroleum and related products in 1975.
On April 20, 2017, the Trump administration kicked off a sweeping investigation under Section 232 of the Trade Expansion Act to determine whether steel imports threaten American national security. Under the Section 232 statute, if the Commerce Secretary determines that steel imports “threaten to impair the national security,” the president then has 90 days to determine if he concurs—and, if so, to take action to “adjust the imports of an article and its derivatives” or make non-trade-related moves. Within 30 days of the president’s decision to act, the president must submit a written statement to Congress outlining the reasons behind the decision.
As early as June 2017, during the period leading into last summer’s U.S.-China Comprehensive Economic Dialogue (CED), it was anticipated that U.S. Commerce Secretary Wilbur Ross would find that global steel imports were damaging U.S. national security and that he would place the following three options on President Trump’s desk:
On January 11, 2018, the Commerce Department submitted its “Effects of Imports of Steel on the National Security” investigation report to the White House. In the report, the Commerce Department found that the displacement of domestic steel by excessive imports and the consequent adverse impact on the economic welfare of the domestic steel industry, along with the circumstance of global excess capacity in steel:
To reverse this impairment to national security and place the domestic industry on a sounder financial footing, the Commerce Secretary recommended three options to the president. The options are very similar to those on the anvil in summer 2017. They are:
The U.S. Commerce Department arrived at these conclusions based on a back-calculation whereby the height of the tariff or size of the quota was designed to ensure an 80 percent capacity utilization rate (at 2017 demand levels plus exports) within the domestic industry. A 24 percent global tariff on all global steel imports would reduce imports by 37 percent (i.e., a reduction of 13.3 mmt from 2017 levels of mmt), resulting in imports equaling 22.7 mmt. This would enable an 80 percent capacity utilization rate at 2017 demand levels. Alternatively, a 53 percent tariff on steel imports from the shortlist of 12 countries would also reduce imports by 13.3 mmt from overall 2017 import levels and achieve an 80 percent capacity utilization rate at 2017 demand levels. The report does not provide a breakdown of capacity utilization of domestic industry—and hence the required tonnage of import compression—by type of steel product manufactured, i.e. ‘flat-rolled products’ versus ‘long products.’
Given that the Section 232 steel investigation was first and foremost an investigation into the implications for U.S. national security arising from excess global steel imports, the U.S. Defense Department’s (DoD) official view is worth elaborating upon. Following are the main points:
First, in the DoD’s view, the systematic use of allegedly unfair trade practices to erode the U.S. manufacturing industrial base does pose a risk to U.S. security. As such, the DoD agrees with the Commerce Department’s basic view that imports based on unfair trading practices impair national security.
Next, the U.S. military requirement for steel represents only about 3 percent of U.S. production. As such, the DoD does not believe that the findings of the Commerce Department’s steel investigation strictly impair the ability of the Pentagon to acquire the steel necessary to meet its national defense requirements.
Third, the DoD is concerned about the negative impact of the steel quotas and tariffs on key allies of the U.S. The DoD has several agreements with allies that aim to promote standardization in both countries’ procurement of defense equipment by waiving U.S. restrictions on imported inputs from that ally which are used in military applications. As such, the DoD believes that the targeted tariffs recommended by the Commerce Department are preferable to a global quota or a global tariff. The targeted tariffs do not impact any U.S. allies, except South Korea (which is seen by the Commerce Department as a transshipment point for steel from China to the United States).
Fourth, the DoD’s view is that the targeted tariffs should be temporary and conditional. As such, if countries adhere to good practices again and stop engaging in allegedly “unfair trade practices” they should be taken off the remedy list, or exclusions should be built into the remedy list so that they are not punished.
Finally, the DoD’s view is that the central issue the Section 232 steel investigation pertains to the overcapacity and overproduction in China, which in its view is allegedly distorting the “fair and reciprocal” international economic system. As such, the focus of the remedies should also be primarily on China’s overproduction. In this regard, the DoD’s view is that the Trump administration must communicate and reinforce the message to key U.S. allies that the Commerce Department’s recommended actions are primarily focused on correcting this Chinese overproduction, as well as countering its alleged attempts to circumvent existing anti-dumping duties on steel imports through transshipment via other countries.
The U.S. Commerce Department’s findings are troubling for several reasons, particularly because the findings and recommendations appear to be a protectionist ploy in the guise of national security.
First, “weakening the U.S.’ internal economy” and “may impair U.S. national security” are flimsy reeds on which to base a finding that calls for the usage of a rarely applied statute in domestic and international law to impose a heavy-handed tariff measure. Because the Commerce Department was unable to find any solid evidence that steel imports are damaging national security, the standard was lowered to suggest that global imports threaten to damage U.S. national security and was lowered yet again to conclude that imports may threaten to damage U.S. national security. The Commerce Department’s allusion to the Section 232 statute’s technical language as justification notwithstanding, this is hardly a rousing basis to impose a highly unconventional and controversial trade remedy measure globally.
Second, the U.S. military requirement for steel only represents about 3 percent of U.S. production. Current and projected demand can be readily satisfied by domestic production. The U.S. Department of Defense also has long-established domestic procurement requirements that apply to all steel in critical national security systems; none of these systems are dependent on foreign steel. The United States sources its imports from numerous countries and is not dependent on any particular source country. The 3 percent figure is also highly suspect. When the United States (under the George W. Bush administration) conducted a narrower investigation of iron ore and semi-finished steel imports in 2001, it found that the domestic industry needed to produce just 0.03 percent of steel within the domestic tariff area to meet its critical national security needs. The Trump administration’s 3 percent figure—a 1000 percent increase—is arrived at by tallying up the requirements of all 16 (mostly civilian) critical infrastructure sectors that utilize high volumes of steel.
Third, a key measure of the non-injurious nature of steel imports can be gauged from the remarkably stable pattern of raw steel production in the United States. For the past two decades, production levels have remained strikingly consistent—even as the employment level in the industry has trended downwards. Each unit of steel produced in the 21st century (and earlier) requires fewer number of workers to produce it. Former steel industry workers require expanded trade adjustment assistance and re-training programs; not artificial short-and-medium term trade protection.
It cannot be the case that an identical level of domestic steel production that was not a national security threat in 2001 has suddenly mutated into one in 2018. Citing dramatic changes in the steel industry since 2001, such as increased global excess capacity, the rise in imports and the number of idled facilities, simple does not cut it – especially when domestic production over the same period remained stable.
Fourth, formulating an 80 percent capacity utilization rate and back-calculating tariffs and quotas might make for nifty arithmetic but it is neither good nor legal trade policy. Quantitative targets and ‘managed trade’ is a legacy of the pre-WTO era where unilateral enforcement ‘might made right.’ In the post-WTO era, such practices are not just frowned upon, but also judged to be explicitly illegal. Trade protection under the guise of national security is neither an adequate or appropriate tool to restore competitive viability or remedy the employment shortfall.
Finally, the key intended target of the tariff hike is China. Levying a global tariff under the banner of national security is not a solution to the problem of Chinese overcapacity. As late as 2006, the United States was the second-largest recipient of China’s steel exports. By 2016, it was not even among the top 10 importers of Chinese steel. Nor did China make the top 10 list of steel exporters to the United States in 2017. Canada, Brazil, South Korea, Mexico, Russia, Turkey, Japan, Germany, Taiwan and India, each exported more steel to the U.S. market than China did. The only real solution to the challenge in the steel sector is to reduce global overcapacity. As a global phenomenon, it also requires a global solution. To this end, the G20-instituted Global Forum on Steel Excess Capacity under the aegis of the OECD has recently made modestly successful, albeit somewhat belated start. Unilateral imposition of tariff measures is likely to damage rather than further this conversation.
The global steel industry showed signs of recovery in 2016 and registered moderate growth in 2017, supported by stronger growth in the global economy. On the back of this cyclical recovery, crude steel production reached 1,691 million metric tons (mmt) in 2017 – up by 5.3 percent compared to 2016. The underlying trend in steel demand however remains weak. Global steel intensity (the amount of steel used to generate one unit of GDP) has been trending downwards and is expected to continue to do so owing to structural trends.
More importantly, the gap between supply and demand continues to remain large and—although the corner appears to be turning in terms of arresting total capacity growth—the excess existing capacity is not likely to be whittled down in any meaningful way over the next couple of years. As per data provided by the key 33 members of the Global Forum on Steel Excess Capacity (GFSEC), in 2016, the global surplus in steelmaking excess capacity is estimated to be 737 mmt. Though total capacity was down by 43.7 mmt relative to the level in 2014, with large capacity decreases reported in China and in the European Union, looking over a longer-term horizon, there has in fact been significant overall capacity growth which has outpaced global demand by a wide margin. The current total crude steelmaking capacity of the 33 GFSEC members stands at 2,031.4 mmt. With capacity of 1,073.3 mmt in 2016, China accounts for the largest share of existing capacity within the GFSEC (52.8%), followed by the E.U. (11.0%), Japan (6.4%), India (6.2%), the U.S. (5.6%), Russia (4.3%) and South Korea (4.1%).
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