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Controversy over American Tariffs on imported Steel and Aluminium

Controversy over American Tariffs on imported Steel and Aluminium

15 Mar 2018

Gerhard Erasmus, tralac Associate, comments on the recently announced tariffs on steel and aluminium imports into the United States

On Thursday 8 March 2018 the American President announced a 25% tariff on steel imports and 10% on aluminium. He temporarily exempted Canada and Mexico and said his administration would continue talks with these countries as part of the North American Free Trade Agreement (NAFTA) re-negotiations. Major trading partners and allies such as the European Union, United Kingdom, Australia and South Korea are also pushing for exemptions. The tariffs will take effect in 15 days.

What lies behind this drastic step? President Trump justifies his measure as necessary to protect American security interests. However, his own Party, the Republicans, are up in arms. They argue the tariffs will not achieve their major objective, namely to curtail China’s overcapacity of steel. American jobs will be lost, the U.S. economy will be damaged and even national defence will be hurt. The U.S. already has more than 160 duties targeted at specific Chinese steel products, but a glut of global steel has caused prices to drop, hurting U.S. producers.[1]

This announcement seems to be primarily about what Mr Trump promised as part of his election campaign. He said he would defend U.S. workers from the “carnage” of “bad trade deals” and will “put America first”.[2] He specifically promised protection to rust-belt workers. One of his first actions as President was to pull the U.S. out of the Trans Pacific Partnership (TPP) negotiations. Many has since commented that this will weaken American trade and geo-political interests, and benefit China.

What happens next? It cannot be assumed that these tariffs will be implemented in their present form. Trump’s recent announcement does not form part of a well-designed and comprehensive national policy revamp. Opposition to the new tariffs is wide-spread. Gary Cohn resigned as White House chief economic advisor. He opposed the tariffs. Senior Republicans are of the view that “a better way to level the playing field for American companies would be to rally our friends and allies to advance a robust, targeted effort to ensure that only those responsible for excess global capacity pay a price.”[3]

Domestic and international opposition to the Trump measure is bound to increase as the consequences become clearer. Tariffs are taxes that will make U.S. businesses relying on imported inputs less competitive and U.S. consumers poorer. U.S. companies purchase imported steel for use in the manufacturing of a wide range of goods. If the President fulfils all his earlier pledges the results could be “catastrophic” for the U.S. economy.[4] Tariffs also invite retaliation. The EU has already announced that it will increase tariffs on a number of U.S. goods.

Is there a legal basis for these increases? President Trump instructed prior investigations to be carried out under a seldom used domestic legal arrangement, Section 232 of the Trade Expansion Act of 1962.[5] This provision authorizes the Secretary of Commerce to investigate whether imports pose a threat to “national security,” which is not defined. The statute places no limit on the nature of restrictions that may be imposed under this law.

The Bureau of Industry and Security (BIS) in the most recent (2001) Section 232 investigation found, based on the statutory language and congressional intent, that the standard would be met where imports of the product at issue threaten to impair American national security either: (i) “by fostering US dependence on unreliable or unsafe imports”; or (ii) “by fundamentally threatening the ability of US domestic industries to satisfy national security needs.”[6]

There may be challenges against the Trump measures in U.S. courts on the basis that these requirements have not, in this instance, been met.[7] However, if the courts decline to intervene (given that national security interests grounds are invoked) the affected countries could have recourse to the WTO dispute settlement mechanism. The U.S. could then invoke the Security Exceptions in the seldom used GATT Article XXI, which permit a member country to depart from GATT obligations in “time[s] of war or other emergency in international relations.” However, under the present circumstances Article XXI would be a highly controversial basis and could encourage other WTO Members to resort to protectionism under the guise of “national security”. These concerns have historically acted as a check on WTO Members’ invocation of Article XXI.[8]

The new measures are also said to be safeguard measures, but this claim is shaky. If exemptions from these tariffs are granted to some, there will be discrimination. This will make it impossible to invoke the Agreement on Safeguards and Article XIX of GATT 1994. As stated in the WTO’s own explanation: The guiding principles with respect to safeguard measures are that such measures must be temporary; that they may be imposed only when imports are found to cause or threaten serious injury to a competing domestic industry; that they (generally) be applied on a non-selective (i.e. most-favoured-nation, or “MFN”) basis; that they be progressively liberalized while in effect; and that the Member imposing them (generally) must pay compensation to the Members whose trade is affected.[9]

A WTO spokesperson told reporters a day after the U.S. announcement was made that there is still time to discuss this measure within the WTO structures. “There is an obligation for a member who takes a measure such as a safeguard or an anti-dumping measure or a counter-vailing measure to notify the organization of that measure. Now we don’t know what the legal basis for the US measure is, so I can’t comment on whether or not they have an obligation to notify the announced measures from last night to the WTO.” [10]

There are worrying bigger-picture dangers. The new anti- WTO sentiment in the White House is based on a belief that the U.S. must defend its trade interests bilaterally or in smaller configurations and not be pulled into global agreements. It is claimed they work to the advantage of lesser powers, and apparently at the expense of the U.S. By bargaining from a position of strength, the U.S. could get better deals. This approach runs counter to the inclusive nature of the WTO, of which the U.S. is a founding member. It requires that existing trade arrangements be dismantled or at least their effects be reversed; as is presently done via the push for re-negotiating NAFTA. The irony is that NAFTA is precisely one of those smaller trade arrangements where U.S. interests could be adequately protected.

There is a dangerous logic here. If committed to this approach, the Trump administration will have to follow through and take more measures of the kind just announced. This invokes the prospect of a trade war. American allies will also be targeted by U.S. tariff increases or other punitive measures. Mr Trump has already threatened the EU with restrictions on automobiles. And there can be unpredictable consequences. Trump’s recently announced tariffs won’t hurt China that much. Those affected nations, including NATO partners and American allies such as the EU and Australia, will be harder hit and be pressured to retaliate. That is how trade wars begin, and they do not end well for anyone. It is quite plausible that this is the beginning of a costly tit-for-tat.

There may be unexpected difficulties. The United Kingdom has already indicated that it will try and obtain an exemption for British steel, resulting in a threat from the EU Commission to sue Britain if it secures a unilateral exemption from American steel tariffs.[11]

What are the implications for Africa? The South Africa’s Department of Trade and Industry has already made enquiries about the proposed tariffs.[12] The Department confirmed that, if no alternative arrangement was agreed, the tariff would affect South African exporters from March 23.

South Africa (benefitting from AGOA) is the most important African exporter of steel to the U.S., representing a small portion of total US steel demand of 105-million tons. However, this figure still amounts to around 5% of South African steel production. Losing the US market could put 300 000 tons of steel production at risk, along with some 7 500 jobs in the steel and manufacturing supply chain.[13] The US market for aluminium produced in South Africa and Mozambique currently represents around 20% of annual sales by value. Nevertheless, these sales represent less than 2% of U.S. aluminium product imports.[14]

For the rest of Africa there seems to be more interest now in the first visit by Secretary of State Rex Tillerson to Africa. He is presently on a week-long trip to Ethiopia, Djibouti, Kenya, Chad and Nigeria. It may be a first sign that the Trump Administration is developing a policy for engaging Africa.

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[1] http://thehill.com/policy/finance/377530-republicans-slam-trumps-tariffs-plan

[2] https://www.theglobalist.com/donald-trump-united-states-free-trade-agreements-nafta/

[3] Senator Bob Corker (R-Tenn.), Chairman of the Senate Foreign Relations Committee.

[4] A study by Suffolk University in Boston found that the tariffs Trump promised as a candidate to levy on China, Japan and Mexico could increase prices for U.S. households by over $2,000 a year for five years. https://finance.yahoo.com/news/why-gary-cohn-tariffs-184249989.html

[5] There have been only two Section 232 investigations since the U. S. joined the WTO in 1995; on crude oil in 1999 and iron and steel in 2001. In both cases the Bureau of Industry and Security declined to recommend action under Section 232. President Nixon imposed an across-the-board 10 percent surcharge program in 1971 pursuant to Section 232(b). President Ford in 1975 raised licensing fees on petroleum products and imposed $1 per barrel fee on all imported oil.

[6] http://worldtradelaw.typepad.com/ielpblog/2017/04/invoking-national-security-to-restrict-imports.html

[7] One commentator observed that “it is difficult to imagine how BIS’ current standard would be met today in the case of almost all globally-traded commodities”. Ibid.

[8] http://worldtradelaw.typepad.com/ielpblog/2017/04/invoking-national-security-to-restrict-imports.html

[9] https://www.wto.org/english/tratop_e/safeg_e/safeg_info_e.htm

[10] http://www.miningweekly.com/article/wto-says-there-is-still-time-to-discuss-us-tariff-move-2018-03-09/rep_id:3650:3650

[11] https://www.express.co.uk/news/world/99594/US-trade-war-donald-trump-European-Union-sue-Britain-steel-tariff

[12] http://www.sabcnews.com/sabcnews/l-sa-discussions-us-global-tariff-steel-aluminium-imports/

[13] http://www.engineeringnews.co.za/article/south-africa-to-make-tariffs-submission-as-trump-leaves-door-open-for-exclusions-2018-03-09/rep_id:4136:4136

[14] Ibid.