Trump Announces Plan to Impose Global Steel and Aluminum Tariffs

March 2, 2018

Copyright © 2018 McLarty Associates. All rights reserved.

KEY POINTS:

• On March 1, President Trump declared he would order a global 25% tariff on steel imports and a 10% tariff on aluminum imports next week. Announcing the decision in a meeting with steel and aluminum industry executives, the President promised domestic producers “protection for a long time” and said he expected to see the companies “immediately expanding.” The President doubled-down on March 2, tweeting “trade wars are good, and easy to win.”
• If applied as widely as suggested, this decision would impose higher tariffs than levels recommended by the U.S. Commerce Department and would break precedent by not exempting U.S. allies from the duties. MA’s analysis of the Commerce recommendations are here.
• The move has already heightened tensions with allies. If implemented, it is sure to provoke challenges at the World Trade Organization and lead to retaliation against U.S. exports.
• The announcement was made despite pushback from presidential advisors, senior Republicans, and domestic users of steel and aluminum inputs, in the starkest illustration yet of the battle within the Trump Administration between globalists and nationalists.
• Details of the tariff implementation are still under consideration, leaving stakeholders a week to seek relief by explaining the economic and geopolitical impact of the 232 determination.

SECTION 232

Since its creation 56 years ago as part of the Trade Expansion Act of 1962, this rare investigatory provision designed to protect national security has been initiated 26 times, and the President has only taken resulting action vis-à-vis imports in 6 of the 26 cases. Action will be unusual in terms of time (first action levied since 1982) and scope (previous actions targeted oil and ferroalloys and excluded U.S. allies).

WHAT’S NEXT

Given the confusion around the president’s announcement yesterday and the blanket nature of his comments, speculation around the targets of 232 implementation – China and trans-shipment countries vs. global steel and aluminum production – is running rampant. White House Press Secretary Sanders said that the details would be revealed next week. In a recently leaked letter, Defense Secretary Mattis recommended a targeted approach, warning that blanket trade restrictions could have a negative impact on important bilateral relationships with little impact on national security.

FOREIGN RESPONSE

Canada, Brazil, South Korea, Mexico, Turkey, Japan, Taiwan, Germany, and India are among the top ten suppliers of steel to the United States. Canada, Russia, and the UAE exported the largest share of aluminum to the U.S. in 2016. Many of our trading partners have asserted that a blanket measure would be disruptive and fail to address the core issue of Chinese overcapacity.

Over the past week, representatives visited Washington to make this case, including Mexican Economy Minister Guajardo and Brazilian Trade and Industry Minister Jorge. With a more defensive stance, South Korean Trade Minister Kim and senior Chinese economic adviser Liu also addressed 232.

Many of our allies immediately reacted to the President’s surprise announcement by noting that they have no choice but to retaliate in response.

• European Commission President Jean-Claude Juncker unveiled a proposal for countermeasures to be published in the coming days. The EU’s list of American exports for retaliation is rumored to include agricultural products such as orange juice, potatoes, tomatoes, and dairy, as well as motorcycles and bourbon whiskey. European Commissioner for Trade Cecilia Malmström confirmed that the EU would impose safeguards on top of its retaliation.
• Canadian Foreign Minister Freeland said any restrictions against Canadian steel imports would be “absolutely unacceptable.” She noted that Canada buys more American steel than any other country, accounting for half of U.S. exports. “Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers,” she said.
• Mexican officials said privately that a failure to recognize that Mexico is a strong U.S. ally and should not be subject to 232 duties would damage the NAFTA talks and that Mexican retaliation would be “not a drizzle but a hurricane.” Mexico maintains target lists from its previous retaliation against the U.S. on trucking.
• Following Minister Jorge’s visit to Washington, Brazil issued a statement affirming that its steel industry is “not a threat to U.S. national security,” adding that the Brazilian government may pursue “multilateral or bilateral” action against the U.S. to preserve its national steel and aluminum industry.
• Japanese Trade Minister Seko said the government is seeking clarification regarding which countries will be targeted and which, if any, will be exempt. “I don’t think exports of steel and aluminum from Japan, which is a U.S. ally, damages U.S. national security in any way, and we would like to explain that to the U.S.”
• Chinese and South Korean officials indicated publicly they will be in communication with the Trump administration in advance of a prospective formal announcement of tariffs. Both had condemned Commerce’s recommendations. Korea is considering filing a complaint at the WTO, while China warned that it will take necessary measures to defend its rights. While China has already targeted U.S. sorghum, we do not anticipate that an immediate 232 retaliation will be forthcoming. Retaliation on the pending Section 301 investigation of Chinese IP practices could be another matter, however.
• We expect other trading partners will further speak out on the 232 in the coming days. Members of Congress from agricultural states like Senator Sasse (R-NE) have already attacked Trump’s announcement, recognizing the retaliation threat against U.S. farm production, in particular.

INDUSTRY RESPONSE

While lauded by steel and aluminum interests, the announcement sparked a strong response across industries outside the metals sector, with users of steel and aluminum being the most forceful. The American Petroleum Institute (API) released a statement calling the actions “inconsistent with the Administration’s goal of continuing the energy renaissance and building world class infrastructure” and added that “implementing this trade policy could create confusion in supply chains, unnecessary costs and impacts to U.S. capital intensive projects, and threaten high-paying industry jobs.”

The Business Roundtable stated: “Using ‘national security’ tools to implement tariffs could embolden other countries to impose ‘national security’ tariffs on U.S. exporters or otherwise restrict U.S. goods and services sold to their markets. The Business Roundtable shares the President’s goal of addressing global overcapacity of steel and aluminum. We urge the President to pursue other approaches that target unfair traders without putting various parts of the economy at such high risk, such as strongly enforcing U.S. unfair trade laws.”

The National Foreign Trade Council stated: “These are massive tariff hikes and they are going to raise costs for many of our world class industries like autos, machinery and equipment, oil and gas, and construction. These are all huge sectors of the economy, and the negative impacts on them will surely outweigh any benefits to the steel and aluminum industries.”

The Association of Global Automakers urged against tariffs, saying they could force auto prices and those of other consumer goods higher. “With one stroke of the pen, much of the promised benefit of tax reform and other administration initiatives aimed at reviving manufacturing and protecting national security could be undercut.” Ahead of the announcement, the American Automotive Policy Council released a statement, expressing concern about “the unintended consequences the proposals would have, particularly that it will lead to higher prices for steel and aluminum here in the United States compared to the price paid by our global competitors.”

RECOMMENDATIONS

While Trump is apparently resolute in his commitment to pursue 232 tariffs in as broad a fashion as possible, we believe it is worthwhile to pursue country carve outs, particularly for allies. However, China and countries trans-shipping Chinese steel (Korea, Vietnam, Thailand, Taiwan and Malaysia) will certainly remain in the cross-hairs. It is worthwhile to push for exemptions for critical inputs to U.S. manufacturing, although success in this endeavor is likely to come only in the longer-term. Meanwhile, companies should refine their contingency plans for restructuring supply chains to minimize disruptions.