Threat of Global Trade War
Test of the National Security Exception
On Thursday, March 1, 2018, the Trump White House announced its decision to impose a 25% tariff on steel imports and a 10% tariff on aluminum imports, tying them to the national security and the objective of increasing the American production of these metals and rehiring workers in the plants that produce them.
The announcement comes on the heels of the February 16, 2018, U.S. Department of Commerce investigation report that found that the quantities and circumstances of steel and aluminum imports “threaten to impair the national security” of the United States as defined by Section 232 of the U.S. Trade Expansion Act of 1962. Canadian importers and exporters should be carefully reviewing their trade patterns and supply chains to mitigate the impact of these measures. Given the very high likelihood of retaliation by U.S. trading partners, the impact will extend well beyond the steel and aluminum industries.
Decades of experience have proven that such tariffs, while implemented to help protect a lagging domestic manufacturing industry, ultimately cause more harm than good. There are 80 times more U.S. workers employed in the steel and aluminum fabrication industry than in the production industry. The fabrication industry will be forced to use higher-cost inputs, whether they are imports subject to tariffs or domestic sales profiting from the tariff wall, and will pass on that increased cost to end users and consumers. The last time steel duties of this sort were levied by the George W. Bush administration, the duties resulted in a loss of over 200,000 jobs in the downstream industries that relied on steel." This was the job cost of protecting what was estimated to be, at most, 10,000 jobs.
Moreover, while tariff levying may be attractive to states seeking a “quick fix” to perceived trade imbalances, it induces trading partners to take countermeasures against the levying country. Trade is stunted, the efficiencies which trade brings are lost, domestic consumer costs increase, and intergovernmental relations are strained. In the process of escalating tariffs and counter-tariffs, considerable uncertainty and disruption of supply chains are imposed on business deciders. The cost of tariffs is thus compounded by the costs associated with the uncertainty.
Further, as EU Trade Commissioner Cecilia Malmström has noted, global efforts to address the problem of Chinese overproduction of steel and other materials will be weakened.
Canada in the Cross-Hairs
The tariffs will have minimal impact on China, which has frequently been accused by the U.S. steel and aluminum industries, and by President Trump, of engaging in unfair competition. In June 2017, there were more than 20 trade remedies in effect against steel mill imports from China. Today, very little steel or aluminum imported into the United States comes from China, due to a series of product and country-specific tariffs introduced recently. In fact, China is not even in the top ten suppliers to the United States. However, Canada is an extremely important exporter of both metals to the United States, though the United States enjoys a considerable trade surplus in steel.
Canada will be the country most directly affected by this measure.According to the U.S. Department of Commerce, Canada is the largest source of steel and aluminum imports into the U.S. Canada alone represents 16% of steel imports. However, Canada is the largest buyer of U.S. steel, accounting for 50% of U.S. steel exports.
The Canadian and U.S. steel industries are extensively integrated. Canada has stated that these trade restrictions would not only harm the industry on a North American basis, but would harm workers and manufacturers on both sides of the border. Canada and U.S. steel suppliers feed critical North American manufacturing supply chains, and those users will have considerable readjustment to consider if these tariffs are put into force.
It is curious that the Trump administration does not exclude its NAFTA partners from these measures. Indeed, various spokesmen have made clear that there is no question of exemption of any country, on the ground that exemptions for this country would mean even higher tariffs for the rest. In a Tweet, President Trump has indicated, though, that those partners could earn exemption if they grant the U.S. other concessions in the NAFTA negotiations.
Testing the National Security Exception – Do We Want to Go There?
It is highly likely that these new U.S. tariffs will be challenged by U.S. trading partners at the World Trade Organization (WTO). Given the legislative basis invoked for the tariffs, the United States can be expected to rely on Article XXI of the General Agreement on Tariffs and Trade 1994 (GATT 1994) which allows WTO members to impose measures, “which it considers necessary for the protection of its essential security interests… taken in time of war or other emergency in international relations”.
There is some debate in international trade law circles whether this exception is entirely self-judging or whether its use is subject to WTO to ensure that it has been exercised in good faith and/or its conditions have been satisfied. It seems in this case highly debatable whether there is truly any national security concern.
Historically, the national security exception has rarely been relied up in trade disputes and it has never been litigated at the WTO. In 1975, Sweden used it to justify a global import quota on footwear (on the argument that the army needs boots). In 1985 and then in 1996, the United States used it to justify the trade embargo of Nicaragua and Helms-Burton measures regarding “confiscated property” in Cuba. One of the reasons for the historically limited recourse to Article XXI is the awareness among trading countries of the destructive impact that overuse of Article XXI would have on the rules-based world trading order.
That may be now changing as just within the last year or so it has come up in at least three trade disputes: China’s new cybersecurity law, Ukrainian trade measures against Russia, and the economic boycott of Qatar by Bahrain, Saudi Arabia and United Arab Emirates. The implementation of the new U.S. tariffs on the basis of national security may encourage others to do so, and may also prompt WTO deciders to accept to review the merits of this basis.
The United States so far argues that it needs a reliable domestic supply of steel and aluminum for its tanks and warships, and that this justifies recourse to the exception for such broad measures that target allies such as Canada. Even leaving aside the fact that there is a domestic supply of just these commodities, and leaving aside also the Buy America provisions which favour that domestic supply. It is noteworthy that the primary voices against adopting these tariffs included the U.S. National Security Advisor and the Secretary of Defense. Secretary of Defense Mattis has been particularly strident, noting that he views Canadian steel and aluminum as a strategic asset of the U.S. Armed Forces.
Besides, the present factual matrix would provide a perfect WTO test case for clarifying that the invoked necessity must have at least an air of plausibility. This modified test would curb potential excesses, while retaining significant policy room for countries acting in their bona fide national security interests.
Given the facts, and the Tweets, it is difficult to see how the WTO could uphold these tariffs as bona fide national security measures and not as safeguards without making a mockery of the entire system.
The Prospect of Retaliation and Safeguard Action
Canada and the European Union have both expressed serious reservations concerning the proposed trade actions, and those reservations have come with warnings that the U.S. moves will necessarily bring reactions, raising the fear in many countries of a trade war depriving all economies of the efficiencies of free trade.
A successful challenge at the WTO would permit Canada, the EU and other trading partners to take retaliatory measures which can include tariffs, quotas or other restrictions on trade with the United States.
These need not be restricted to the steel and aluminum industries. Indeed, the EU has already threatened to impose tariffs on Kentucky bourbon, Harley-Davidson motorbikes, and Levi’s jeans. Past threats of similar U.S. tariffs have brought retaliation in the form of barriers to such things as Florida orange juice and North Carolina textiles. Donald Trump has already provided his views through the semi-official channel of his Twitter account that the U.S. would counter-retaliate against any such tariffs by levying tariffs on European automobiles.
Implementation of the U.S. tariffs on steel and aluminum imports also raises the threat of diverting those imports to other markets including Canada and the EU. In this regard, the EU is considering imposing “safeguard” measures in reaction to the U.S. measures. WTO rules state that a member can take “safeguard” action to restrict imports of a product temporarily if a domestic industry is put at risk due to a significant rise in imports. This may result in the imposition of European tariffs and/or quotas on steel and aluminum imports.
Timing is also an important consideration when contemplating WTO-consistent retaliation. It can take 18 months or more before a WTO Panel and the Appellate Body make determinations regarding the offensive measures and proposed retaliation is approved.
To address the problem of delay, the EU is reportedly contemplating treating the US tariff measures as a safeguard thus enabling it to respond with retaliatory measures on an expedited basis as permitted under the WTO’s Agreement on Safeguards. Under this approach, U.S. trading partners would refuse to recognize them as national security measures and labelling them as what they resemble, safeguard measures designed simply to protect designated U.S. industries. This could allow the EU, Canada and other countries to impose countermeasures within shorter delays foreseen by the WTO treaties.
Canada will not be able to sit patiently waiting for lengthy WTO proceedings to run their course or for the extraordinary U.S. tariffs to outlive their political usefulness to the Trump White House. Canada will feel considerable pressure to find ways of preserving, for example, the Canadian infrastructure market from U.S. steel which is itself tariff-protected against Canadian competition.
What Can Canadian Companies Do?
Canadian exporters of steel and aluminum to United States should be carefully reviewing the U.S. section 232 measures to determine whether their products fall within scope of the new tariffs.
All Canadian businesses who import or export should analyze their positions and buying and selling patterns, with a view to adjusting them to new tariffs or other restrictions which can arise on both sides of the Canada/U.S. border, and around the world. They would also be well advised to prepare to have their voices heard by Canadian federal and provincial governments in their choice, or renunciation, of retaliatory and market-protecting measures.