On March 8, 2018, President Trump issued two proclamations that impose tariffs on imports of steel (at a rate of 25%) and aluminum (at a rate of 10%) from all countries other than Canada and Mexico. The tariffs go into effect on March 23 and generally apply to raw materials rather than downstream manufactured products. The orders, which the President has described as “flexible,” allow for potential exemptions for other countries that have a “security relationship” with the United States, and for products without sufficient U.S. production. The tariffs for other countries and products may also be adjusted in the future, and the tariffs do not have a set end date. This action follows months of discussions and a tumultuous week of speculation, including strong opposition and lobbying efforts by Congressional Republicans, steel and aluminum-importing industries, and U.S. trading partners.
These tariffs are the result of the U.S. Department of Commerce’s Section 232 investigations into the effects of imports of steel and aluminum on the national security of the United States. The Commerce Department concluded that sufficient quantities of both steel and aluminum are being imported into the United States to constitute a risk to U.S. national security. These conclusions were based on the weakening of the domestic steel and aluminum industry, and the possibility that in a national emergency, domestic U.S. steel and aluminum production may be unable to meet demands for national defense and other critical industries. The proclamations imposing tariffs frame the decision in terms of protecting U.S. national security, but appear to be motivated by trade protection, noting that the “economic welfare of the Nation” is closely related to U.S. national security.
The tariffs will likely help certain U.S. steel and aluminum producers, some of whom have already announced plans to increase production. However, they will have the corresponding effect of increasing prices countrywide – both on imported steel and aluminum (and the domestic market price generally) and on products made by industries dependent on these goods. Since thousands of consumer and industrial goods incorporate steel or aluminum, these price increases will likely be felt throughout the U.S. economy.
The Trump administration has long pointed a finger at China for its overcapacity and for allegedly flooding the U.S. marketplace with cheap steel and aluminum, squeezing out U.S. production. In the run-up to the proclamations issued on March 8, there was bipartisan support for a strategic and narrowly tailored tariff imposed against Chinese steel and aluminum imports. However, the tariffs that were announced are broad and will have little effect on China. The United States imports the bulk of its steel and aluminum from Canada, South Korea, European countries, and other allies. While Canada is the leading supplier of both metals, imports from China have been limited, in part due to antidumping and countervailing duties already imposed on a range of Chinese steel and aluminum products.
Retaliation from otherwise allied countries is certain. The European Union has prepared a list of retaliatory tariffs and EU member state condemnation has been universal. The Brazilian government has issued a press release opposing any tariffs and reserving the right to retaliate, and Chinese Foreign Minister Wang Yi has promised a “justified and necessary response” to the tariffs.
The proclamations include three current or potential exemptions, and the Commerce Department is to issue exemption procedures within ten days. First, any country with which the United States has a “security relationship” is “welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports from that country.” If the United States and the country arrive at a “satisfactory alternative means” to address the national security issue, the tariff may be removed or adjusted. The proclamations do not offer any further details as to what constitutes a “security relationship” with the United States, and it is this provision that makes the tariffs look like a bargaining chip in future trade negotiations. Second, Canada and Mexico are wholly exempted from the tariffs for now, pending the renegotiation of NAFTA. The wording of the proclamations makes clear that if the Trump administration is unable to renegotiate NAFTA into more favorable terms for the United States, Canada and Mexico are at risk of losing their exemption from these tariffs. Third, the Commerce Department has the authority to exclude specific products from the tariffs if it determines that there is a lack of sufficient U.S. production capacity for comparable products.
These tariffs will certainly be challenged in U.S. courts and before the World Trade Organization (WTO). The potential outcome of any challenges to the tariffs is unclear, although any relief would not occur for several years. Section 232 has not been widely used in the nearly 60 years since its passage, and courts and the WTO generally defer to a country’s determination based on national security interests.
The implementation of these tariffs is likely to have a rocky start, given the exemption process and the uncertainty of which countries or products may qualify and based on what criteria. In addition, the “flexibility” touted the president is likely to cause greater uncertainty, since a number of factors may lead to the adjustment of tariff rates in the future, and there is no current sunset provision or expiration date. The president presumably intended the flexibility to increase U.S. leverage in trade negotiations. Overall, the net effect of these tariffs on the steel and aluminum industries – and the U.S. economy as a whole – remains to be seen. It will depend on the eventual level and duration of the tariffs, exemptions for products and countries, changes in import and production patterns, and any retaliatory measures by U.S. trading partners.