Last Friday, the US Department of Commerce (DOC) released public versions of two reports provided to President Trump in January related to its Section 232 investigations of whether imports of steel and aluminum are threatening US national security. These reports explain the basis for the DOC’s conclusion that imports threaten national security, and give the president a menu of proposed remedies, in the form of tariffs and quotas, to address this threat. President Trump now has until April 11, 2018 in the steel investigation and April 19, 2018 in the aluminum investigation to determine what relief, if any, he will impose in each of these proceedings. But a memo released today from the US Department of Defense (DOD) suggests that these remedies should be more limited, and more targeted, in order to address the perceived threat to national security.

Background on Investigations

Section 232 of the Trade Expansion Act of 1962 authorizes the Secretary of Commerce to investigate the effect of imports of any article on the national security of the United States. Prior to the current administration, such investigations were rare, with the last one having been conducted in 2001. These aluminum and steel investigations were self-initiated by the DOC in April 2017. Despite direction by the president to “proceed expeditiously” in both investigations, the DOC used nearly the full nine months permitted by statute before it submitted its reports to the president in January 2018. As expected, the DOC found that imports of both aluminum and steel posed a threat to national security and gave the president various tariff and/or quota recommendations relating to each product. A summary of the DOC’s national security findings for each industry is provided below.

Recommendations for Import Relief

In its steel report, Commerce states that “the only effective means of removing the threat of impairment [to the US national security] is to reduce imports to a level that should, in combination with good management, enable US steel mills to operate at 80% or more of their rated production capacity.” In order to reach this goal, the DOC recommends that one of the following options be implemented:

  • Global Tariffs: A tariff of 24% or greater on all steel imports from all countries
  • Country-Focused Tariffs: A tariff of 53% or greater 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
  • Global Quota: A global quota, “applied on a country and steel product basis,” on all steel products from all countries, equal to 63% of each country’s 2017 exports to the United States

To address the threat to national security posed by aluminum imports, the DOC recommends quotas and/or tariffs on both primary and semi-manufactured aluminum to allow US producers to return to capacity utilization rates at or above 80%. The report suggests that this will allow US producers to recover financially and sustain operations sufficient to respond to defense and infrastructural needs in the event of a national emergency. Specifically, the aluminum report recommends that one of the following options be implemented:

  • Global Tariff: A tariff of 7.7% or greater on all aluminum exports from all countries
  • Country-Focused Tariffs: A tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela, and Vietnam. All the other countries would be subject to import quotas equal to 100% of their 2017 exports to the United States.
  • Global Quota: A quota on all aluminum imports from all countries, set at a maximum of 86.7% of their 2017 exports to the United States

In both reports, the DOC proposes that these remedies would be imposed in addition to any existing antidumping and countervailing duty remedies that may already be in place on covered steel and aluminum products.

While the aluminum report suggests keeping remedies in place for nine months might be sufficient, no such time limit is suggested in the steel report.

Product Coverage

The proposed quotas and/or tariffs relating to the steel investigation would apply to all steel-mill products, including (but not limited to) carbon and alloy flat products, carbon and alloy long products, carbon and alloy pipe and tube products, carbon and alloy semi-finished products, and stainless products (see pages 21-22 of the steel report for complete descriptions of covered steel products).

The proposed quotas and/or tariffs in the aluminum investigation would apply to primary aluminum as well as semi-manufactured products including (but not limited to) aluminum castings, forgings, plates, sheet (including can sheet), foil, wire, rods, and pipes. Aluminum scrap, powders, and flakes would not be subject to the measures as, according to the report, they were not subject to the Section 232 investigation (see pages 7 and 20 of the aluminum report for complete descriptions of covered aluminum products).

Country Exclusions

The DOC proposes that the president “could” exclude certain countries altogether from the global tariff or quota “based on an overriding economic or security interest of the United States.” The DOC recommends that presidential determinations of country exemptions be made “at the outset and a corresponding adjustment be made to the final quota or tariff imposed on the remaining countries” to ensure that domestic capacity utilization objectives are met.

One distinction regarding country-wide exemptions: in the steel report, the DOC proposes potential country-specific exclusions by permitting imports from said countries at levels equivalent to 100% of 2017 imports; in the aluminum report, the DOC suggests that the president could exempt countries from the import measures by “granting [them] 100% of their prior imports in 2017 or exempting them entirely.”

In the steel report, the DOC justifies this recommendation by implying that full exemptions for certain countries would encourage circumvention by transshipment through exempted countries. It is possible the DOC did not consider including the option for total exemptions problematic in the aluminum report because the aluminum recommendations have already been structured to account for the issue of transshipment. The aluminum report explicitly highlights the fact that imports from Hong Kong and Vietnam may “indicate transshipments,” and for that reason, Hong Kong and Vietnam were included as countries subject to the higher, targeted tariff option. The DOC also may have included the option for a total exemption in the aluminum report to keep open the option of broader exemptions for “important” Canadian aluminum, a concept with strong industry support and, according to Canadian Prime Minister Justin Trudeau, support from President Trump himself – although in Prime Minister Trudeau’s recounting, President Trump had also indicated that Canada should be given an exemption in the steel investigation, which it was not.

Product Exclusions

In both reports, the DOC recommends the president implement a process by which any affected US party “could seek an exclusion from the tariff or quota” for a specific product. The party would need to demonstrate: “(1) lack of sufficient US production capacity of comparable products; or (2) specific national security based considerations.” The DOC would be responsible for deciding whether to grant exclusions, and the process, which would include the DOC’s collection of public comments over a given period, would be completed within 90 days. According to both DOC reports, “the US Department of Commerce will lead the appeal process in coordination with the Department of Defense and other agencies as appropriate.” As with the country exemption processes, the DOC suggests the product exclusion processes could result in modification of the steel or aluminum import measures to ensure that the 80% capacity utilization objectives are reached.

Department of Defense Response

Following the public release of the steel and aluminum reports, Secretary of Defense James Mattis provided a response in a memo to Secretary of Commerce Wilbur Ross. The DOD agrees with the DOC that certain “imports of foreign steel and aluminum…impair national security,” but contends that this does not affect the DOD’s ability “to acquire the steel or aluminum necessary to meet national defense requirements,” as DOD use of these products represents a minor portion of US production.

Instead, Secretary Mattis expresses concern that the recommended import measures could adversely affect “key” US allies. He argues that of the options presented by the DOC, the proposed option of tariffs on a subset of countries would be “preferable” to global measures. Specifically, the memo emphasizes that the steel and aluminum imports of real concern are those “based on unfair trade practices,” and recommends that the administration further refine the import measures to target “Chinese overproduction… [and] attempts to circumvent existing antidumping tariffs.” Secretary Mattis also recommends that “if the administration takes action on steel,” it should hold off on aluminum measures, as the threat in itself of new import restrictions may be enough to improve the aluminum trading environment.

International Reaction

Since the reports’ release, several media reports have suggested potential retaliation by affected countries. The Chinese Ministry of Commerce has been quoted as stating that China would take “necessary measures” to protect its rights, and officials in Brussels are reportedly drafting possible retaliatory measures aimed at US products such as Kentucky bourbon and Wisconsin dairy products if the European Union is included in any action. South Korean President Moon Jae-in instructed his government to be “confident and resolute” in addressing US “unfair protectionist trade measures,” Deputy Trade Minister Kang Sung-cheon said South Korea “will actively consider filing a WTO complaint if [the US] decides to impose duties on the select 12 nations,” and members of the South Korean Democratic Party have raised retaliation against US exports as a response to steel import restrictions. A Russian Industry and Trade Ministry spokesman also noted that any possible action could be challenged at the WTO.

But challenging import relief measures taken by the United States under Section 232 could present significant difficulties for the WTO. As noted above, several WTO Member governments have already threatened to take this issue to formal WTO dispute settlement. The United States has taken the position that any nation has the right under WTO rules to determine what measures are justified by national security needs. Other countries take a more narrow view, and argue that such measures can only be applied to ensure adequate supply of material to meet specific defense needs. Some WTO officials have expressed the view that this Section 232 proceeding is not appropriate for WTO dispute settlement. In short, this has all the earmarks of a major WTO crisis.

Options for Affected Companies

Section 232 proceedings are different from the more common antidumping/countervailing duty investigations in that the remedy is entirely up to the discretion of the president. As a result, throughout this process, interested parties, from individual companies, to trade associations, to members of Congress, have expressed their views to the DOC and the president regarding this investigation. Parties with interests in the outcome of this investigation should take this opportunity to express their concerns before relief is granted. For some companies, one remedy may be preferable to another, and it also may be possible that certain exclusions be included in the remedy at the time of issuance rather than sought later on through any exclusion process. We recommend that all parties carefully consider their potential exposure to determine which countries and products are of greatest concern, and at a minimum, carefully monitor developments in this proceeding.

Basis for National Security Threat Determination: Steel

In its report, the DOC found that steel is important to US national security due to its use by the defense industry as well as in various critical infrastructure sectors. The DOC identified the main five categories of steel products (flat, long, semi-finished, pipe and tube, and stainless) as all being used for national security applications. The DOC also singled out electrical steel as a product that relates to critical infrastructure, noting there is only one remaining domestic producer. In evaluating the threat to national security, the DOC focused on the statutory language that directs it to examine if any factors result in the “weakening of our internal economy.” See 19 U.S.C. § 1862(d). The first factor the DOC found is that the quantity of steel imports affects the “economic welfare of individual domestic industries,” noting the increase of imports, lost market share as well as marginal net income for US-based steel companies. The second was that there are “serious effects resulting from the displacement of any domestic products by excessive imports,” such as closure of oxygen furnaces, declining employment, and declining steel utilization rate. Finally, the DOC concluded the presence of massive excess capacity for producing steel around the world, particularly in China, means that US producers will continue to lose market share to imported steel. The DOC concluded that due to these three factors, there is a “persistent threat of further plant closures that could leave the United States unable in a national emergency to produce sufficient steel to meet national defense and critical industry needs.”

The DOC distinguished its findings in this report from the previous Section 232 investigation in 2001, which came to the contrary conclusion, by noting industry changes that have occurred in the intervening years, as well as the narrower scope of the prior case, which only covered iron ore and semi-finished steel. Unlike in the 2001 investigation, the DOC did not find that the fact that these imports come from reliable sources plays a role in the conclusion these steel imports threaten to impair national security.

Basis for National Security Threat Determination: Aluminum

Similar to its analysis in the steel report, the DOC focused on the effect of aluminum imports on “weakening our internal economy” as the basis of its finding of a national security threat. In its report, the DOC found aluminum has various applications integral to US national security, including usage in military machinery and weaponry, bridges, energy generation and storage materials, and emergency vehicles. The DOC noted that aluminum imports have increased over the past few years and now account for 64% of total aluminum and 90% of primary (unwrought) aluminum consumed in the United States. In the US primary aluminum sector, significant and increasing imports have led to financial weakness, nearly nonexistent research and development, shuttered smelters, and low capacity utilization. The DOC found current import trends put the “United States…in danger of losing the capability to smelt primary aluminum altogether,” and noted that only one US smelter can currently produce certain high-purity primary aluminum “required for critical infrastructure and defense aerospace applications.” Though the DOC concluded that import competition has most seriously affected US primary aluminum production, the DOC found that as imports of “higher value-added, more sophisticated” aluminum manufacturers escalate, the downstream industry will be “increasingly impacted.”