One might think that US policymakers would welcome this announcement. It is a “win” for policies that have protected domestic production through tariffs; Nippon Steel’s offer to US Steel reflects its desire to expand steel production capacity in the United States to serve North American markets through domestic (and therefore tariff-free) production. Those concerned about industry consolidation and antitrust issues should prefer this deal to other potential buyers, such as Cleveland-Cliffs and Nucor, which are both major domestic competitors of US Steel. In contrast, Nippon Steel has very few production capabilities in the United States.

The acquisition will preserve more than fourteen thousand US jobs, and Nippon Steel is better positioned than was US Steel to invest in advanced technologies necessary to keep production profitable and growing. The company has ambitious goals to increase its global production to one hundred million tons a year, and therefore will likely invest in plant expansions that will create new jobs for US workers. The prospect of job creation and the fact that US Steel would retain its name and Pittsburgh headquarters would usually be seen positively in an election year. The outcome might, for example, be viewed as a sign of a booming domestic steel industry with lucrative employment opportunities in the industrial Midwest, an area of the country with outsized influence over presidential election outcomes.

The transaction is also a “win” for “friendshoring” policy objectives, which were first announced by US Treasury Secretary Janet Yellen in April 2022 at the Atlantic Council. These objectives emphasize cultivating closer trade and investment connections with reliable geopolitical allies, especially for critical supply chains. There is very little risk that Nippon Steel would offshore production, as the business rationale for the acquisition rests on serving North American markets and low US production costs due to low energy prices compared to prices in Europe or Japan. Instead, the company’s expansion into the US market can help provide both the United States and other countries the ability to further diversify their steel supply needs away from China. As Biden administration officials have repeatedly admitted, the United States cannot reduce its reliance on Chinese-made critical inputs alone.

Despite all the benefits of the deal, some policymakers have voiced vociferous opposition to it, arguing that the deal is bad for union workers and also a danger to US national security. Several members of Congress have requested that the Committee on Foreign Investment in the United States (CFIUS) review and potentially block the transaction. The Biden administration has also expressed wariness, saying that the deal needs “serious scrutiny.”

A CFIUS prohibition would be a mistake. First, CFIUS is supposed to be narrowly focused on national security risks, not broad economic competitiveness or national prestige concerns. It is very hard to credibly argue that a Japanese owner of a US business would suddenly stop selling steel to US buyers, particularly since the business rationale for the acquisition is so that Nippon Steel can more competitively serve the North American market. Washington blocking such a sale to a close Group of Seven (G7) partner would indicate that CFIUS has veered from narrow national security concerns to the business of broader economic protection. This would invite retaliation against US companies abroad and undermine US messages about the importance of an open, market-oriented, and rules-based economic system.

Second, US leaders are understandably concerned about China’s willingness to use its control over critical supply chains to engage in coercive economic practices. To address these concerns, the United States needs other countries—and particularly its closest allies—to trust that it remains an open and welcoming place for their businesses. If Washington won’t allow this transaction—involving a buyer from a G7 country—then what foreign buyer would it see as a permissible owner? A block would communicate that the steel industry is completely closed off to foreign investors. Allied and partner countries and their companies would understandably lose confidence that the US market will remain open to them. A lack of trust has the potential to frustrate efforts to invest resources in restructuring these critical supply chains at global volume to effectively insulate the United States and its friends from coercive Chinese trade practices.

Finally, there is one concern regarding foreign acquisitions in critical industries that is worth considering. Because Nippon Steel is listed on the Tokyo Stock Exchange, this deal would likely cause US Steel to delist from the New York Stock Exchange, which would limit the power of the US Securities and Exchange Commission (SEC) to regulate the company. Many Japanese-listed companies that have acquired US businesses voluntarily provide annual financial disclosures to the SEC, as should Nippon Steel.

More importantly, because Nippon Steel is listed in Japan, it is subject to Japanese corporate governance rules rather than US ones. The US government may worry about the national security implications if the company acquires US Steel and then is subsequently acquired by a more problematic third party, such as a Chinese entity. If Japan had weak corporate governance practices, this would be a more relevant concern. However, Japanese corporate structures are notorious for guarding against hostile takeovers, making this scenario exceedingly unlikely. Still, other countries don’t always have as strong protections; rather than blocking transactions with close allies, the United States should be engaging in greater outreach to allies and partners with weaker corporate governance structures to encourage reforms that alleviate these kinds of worries.

Sarah Bauerle Danzman is a 2023-2024 scholar-in-residence at the Atlantic Council’s GeoEconomics Center’s Economic Statecraft Initiative and an associate professor of international studies at Indiana University, Bloomington.

To read the full blog post, click here.

The post The US Steel Deal is a Test of Friendshoring—And the US is Failing appeared first on WITA.

For starters, the new agreement doesn’t even touch the Section 232 tariffs on aluminum from Japan, nor does it actually eliminate Trump’s steel tariffs. Instead, the deal simply replaces the steel tariffs with a complex “tariff rate quota” (TRQ) system, under which 1.25 million metric tons (MMT) of Japanese steel — applied to 54 different product categories on a first‐​come, first served quarterly basis (with little period‐​to‐​period flexibility) — will be allowed to enter the United States tariff‐​free. Any Japanese imports above that amount will remain subject to the existing 25%, “national security” tariffs.

Given the quota amount and design, moreover, it’s quite likely that significant volumes of Japanese steel will still face — and American importers will thus keep paying — U.S. tariffs. Most obviously, the 1.25 MMT quota limit has been set well below pre‐​tariff volumes and even further below the amounts that would likely enter the U.S. today in the absence of any trade restrictions. According to my former colleagues at the law firm of White & Case, for example, Japanese steel imports “averaged approximately 2.03 MMT during the pre‐​duty 2015–2017 period” — a period that was experiencing far less industrial demand than today. Thus, the new TRQ level is, at best, set at a paltry 61% of current U.S. market demand and probably much lower than that. As we explained with the EU agreement, the U.S.-Japan deal will therefore keep U.S. steel prices high, leaving steel‐​consuming American manufacturers at a significant disadvantage versus their global competitors. Indeed, the EU deal has now been in place several weeks, and U.S.hot-rolled steel prices are still far higher than prices in Europe and elsewhere:

White & Case further notes that the Japan agreement is actually more restrictive than the EU deal because it likely will count Japanese steel currently excluded from the Section 232 tariffs against the new TRQ limits. (The EU deal expressly exempted these imports from the TRQs, meaning more duty‐​free European imports overall.) The tariff‐​supporting Steel Manufacturers Association naturally celebrated this provision, noting that 550,000 metric tons of steel products — almost half of the new TRQ — entered under an exclusion last year. Once you factor in this already‐​excluded steel, the Japan deal’s tariff liberalization — and thus its effect on U.S. prices and relief for U.S. manufacturers — becomes even more modest.

The quota’s design, which essentially mirrors the EU agreement, will further limit this tariff relief. As we discussed in November, for example, “TRQs administered in this fashion are sure to introduce distortions, for example, large U.S. importers stockpiling early in a quarter and paying higher prices to do so.” According to the Coalition of American Metal Manufacturers, this very problem has already emerged with the U.S.-EU agreement: “some steel products’ quota filled up for the year in the first two weeks of January,” and so they now worry that the Japan deal will “lead to market manipulations and allow for gaming of the system that puts this country’s smallest manufacturers at an even further disadvantage.” Other concerns with the EU system, such as its “melted and poured” rule for qualifying products, are also present in the new Japan agreement.

So, for those who support free markets and the removal of U.S. trade barriers, the Biden administration basically took a bad trade deal and made it even worse.

Finally, the new Japan agreement once again shows the emptiness of the United States’ “national security” justifications for these tariffs — the term isn’t even mentioned in the official documentation — and of the Biden campaign’s promise to improve U.S. foreign policy and heal Trump‐​era tensions with major allies. As has been widely reported, the Japanese government sought the Section 232 tariffs’ complete removal, which President Biden could achieve with the stroke of a pen. They still don’t seem to be thrilled with this deal, but apparently figure that a little liberalization — and some sweet quota rents for Japanese steelmakers — is better than nothing. If fixing obvious and absurd Trump‐​era wrongs to critical regional allies were really more important to the White House than placating U.S. steel companies and unions, the president would have removed the tariffs entirely. He didn’t.

So much for national security.

Scott Lincicome is the director of general economics and Cato’s Herbert A. Stiefel Center for Trade Policy Studies.

To read the full commentary from the CATO Institute, please click here. 

The post This (Steel) Deal Is Getting Worse All the Time appeared first on WITA.

The October 2021 agreement to lift barriers on steel and aluminum trade was widely hailed as helping both sides of the Atlantic turn the page after a long and bitter confrontation. The accord—announced by President Joseph R. Biden Jr. and European Commission President Ursula von der Leyen—achieved a breakthrough and perhaps presaged further cooperation on economic and climate issues. But it also created myriad problems to be addressed down the road.

The agreement was more complex than Biden’s statement that “it immediately removes tariffs on the European Union” suggested. It called for zero US tariffs on European metal exports—but only at a volume set by historical patterns, through a new system of bilateral tariff rate quotas (TRQs). These quotas could turn into voluntary export restraints, ushering in a return to the “managed trade” era of the 1980s, when governments, not market forces, controlled much of international commerce.

The deal does remove European duties that targeted iconic US–made goods, including Harley Davidson motorcycles, Kentucky bourbon, and Levi’s jeans, and it staves off an additional round (covering over $4 billion of US exports) of retaliatory tariffs that had been scheduled to take effect later in 2021.
Europe embraced the agreement because much of its steel and aluminum exports will resume tariff-free. American manufacturers stand to benefit because they have suffered from high steel and aluminum prices. But how much US prices will fall remains unclear.

There is no doubt that the October accord is an improvement over the status quo. President Trump’s tariffs on European steel and aluminum damaged the US economy. They protected some US metal producers—but at the cost of raising prices for the many US domestic manufacturers that use steel and aluminum. Trump’s rationale of protecting national security was undercut by the fact that his actions hurt US allies, not adversaries. And nothing—not even his signature Phase One agreement with Beijing—was done to address the overproduction of steel and aluminum by China that has flooded markets throughout the world.

The main benefit of the new accord will occur, however, only if it paves the way for Washington and Brussels to cooperate on other goals that neither has made any progress on alone. One example was included in the announcement: a new framework to negotiate a Global Arrangement on Sustainable Steel and Aluminum, which aims to lower the carbon intensity of metals production worldwide. A second— addressing the trade challenge China poses to both the United States and Europe—went unstated but was implicit.

THE STORY OF TRUMP’S STEEL AND ALUMINUM TARIFFS

The Trump restrictions on steel and aluminum were a response to investigations under Section 232 of the Trade Expansion Act of 1962, led by Commerce Secretary Wilbur Ross. Concluding that metal imports threatened national security, on March 1, 2018, Trump announced tariffs of 25 percent on imports of steel and 10 percent on imports of aluminum. Some tariffs were imposed on March 23.

The announcements were awash in contradictions. Although they were motivated by combatting China, they were imposed on NATO and other alliance members, because the United States had largely stopped importing steel and aluminum from China, as a result of antidumping and countervailing duties imposed by earlier US administrations (see appendix table below).

Initially, the administration sought to give the European Union and six other trading partners a chance to negotiate bilateral deals. Some escaped tariffs by almost immediately agreeing to voluntary export restraints (VERs) on steel or aluminum (see appendix table). But unwilling or unable to negotiate settlements, the European Union, Canada, and Mexico were hit with Trump’s tariffs starting June 1, 2018.

The European Union had warned for months that US duties would lead to retaliation. It followed through with tariffs on more than $3 billion of politically sensitive US exports, including those Harley Davidson motorcycles. The European Union also filed a formal trade dispute against Trump’s national security tariffs with the World Trade Organization (WTO). Many countries followed this two-pronged approach (see appendix table).

US STEEL AND ALUMINUM INDUSTRIES BEFORE AND AFTER THE 2018 TARIFFS

The US steel industry and the United Steelworkers Union endorsed the 2018 tariffs, as did Century Aluminum and Magnitude 7 Metals, two of only three firms operating primary aluminum smelters in the United States. Companies making refined aluminum products protested, because they would lose access to low-cost primary aluminum imported from Canada and other countries. The Aluminum Association stated that the tariff did “little to address the China challenge while potentially alienating allies and disrupting supply chains that more than 97 percent of US aluminum industry jobs rely upon.”

The Trump administration argued that domestic production of the steel and aluminum industries was below capacity and needed to rise to 80 percent of capacity to remain viable. At the time, capacity utilization in the steel industry was under 75 percent (figure 1). The eight aluminum smelters (operated by three firms) had a combined capacity utilization rate of under 45 percent.

Protected by Trump’s tariffs, capacity utilization for steel and primary aluminum did increase—until the COVID-19 recession. The steel industry’s capacity utilization now exceeds the 80 percent target, but primary aluminum peaked at only 64 percent, before falling last year and levelling off at around 50 percent today.

Overall, US companies increased their steel and aluminum production comparatively little after the tariffs (figure 2). And just as metal-using companies had warned, US prices of steel and aluminum initially rose substantially. As global demand for metals softened and uncertainty over the US–China trade war took hold, prices eventually began to decline. Weakened US demand for automobiles did not help; expanded imports of metals from Canada and Mexico also contributed to lower prices after the Trump administration removed tariffs on those countries in May 2019, in order to win Congressional passage of the new US-Mexico-Canada Agreement.

US metal tariffs also contributed to higher production costs for US manufacturers, weakening their sales. Compare the price facing American versus European purchasers of metals (figure 3). Although a price premium for both steel and aluminum existed before the tariffs were imposed, in mid-2018 the US premium increased and remained elevated, and it has recently been rising again. These effects are important. For every job in a US iron or steel mill, for example, roughly 20 people work in industries for which steel inputs account for at least 5 percent of production costs.

Trump’s protection of aluminum and steel and the trade war tariffs he imposed on China hit the US manufacturing sector hard. Several scholars have found that these tariffs were almost entirely absorbed by importers (and not passed on to foreign exporters), squeezing their profit margins and reducing US manufacturing employment. The metals tariffs themselves caused the disappearance of an estimated 75,000 manufacturing jobs in the United States. US exporters have also struggled to compete for customers abroad because of the higher costs paid for metals at home.

Trump’s tariffs also cascaded upon themselves. Faced with rising US costs for domestic steel users, the administration doubled down on its protection, expanding the coverage of its steel and aluminum duties to “derivative” products in January 2020. Higher metals costs had made it difficult for American-made nails, bumpers, body stampings for tractors, wire, and cables to compete with imports, requiring yet another round of tariffs. Elsewhere, other metal-using American businesses clamored for import protection under the antidumping law, some after the Department of Commerce denied their petitions for exemptions from Trump’s metal tariffs.

The COVID-19 recession of early 2020 also hurt both steel and aluminum (see figure 2). Production bottomed out in May 2020, hit by lockdowns and reduced demand from sectors like automobiles. During the subsequent economic recovery, demand for steel and aluminum has surged. But because this expansion outpaced supply, metals prices began rising again in 2021. Recent consolidation of the US steel industry has contributed to the sluggish supply response. Continued steel and aluminum tariffs that discourage imports have thus posed a challenge for US–based manufacturers especially reliant on access to metals.

EU EXPORTS OF STEEL AND ALUMINUM UNDER THE TARIFFS

US imports of metals fell immediately after protection was imposed in 2018. More recently, US imports from other countries have increased, but steel imports from the European Union remain 40 percent lower than they were before March 2018 (figure 4). Before the tariffs, the European Union was the largest source of imported steel. Its exporters have suffered more than exporters from Canada and Mexico, which were hit with US tariffs at the same time but then subsequently agreed to voluntarily restrain exports in May 2019 in exchange for the removal of the tariffs. (In September 2020, Trump temporarily reimposed tariffs on Canadian aluminum to enforce the VER.) EU steel exporters have also fared worse than exporters from Brazil and South Korea, which agreed to binding quotas in 2018. It was thus not surprising that Eurofer, the European steel industry association, welcomed the October 2021 announcement of a US–EU agreement.

Unlike steel, the EU aluminum industry came out against the October deal, continuing to argue for the full removal of US protection. One reason for its opposition might be a lack of urgency as the sector has recently exported more to the United States than before protection was imposed in 2018 (see figure 4). The fact that steel is a larger force in the EU economy than aluminum ($5.8 billion versus $1 billion in 2017 US export sales) may also help explain why the European Union went ahead with the deal despite protests from its aluminum sector. (The US Aluminum Association also opposed the agreement, just as it had opposed the original tariffs in 2018.)

FROM TARIFFS TO MANAGED TRADE

The new US TRQs for steel are the most economically consequential part of the immediate arrangement. EU exporters will be able to sell 3.3 million metric tons (MMT) of steel annually into the US duty free. European steel exports that received exclusions from the Department of Commerce from Trump’s tariffs in 2021 will have those exclusions extended for two years. (European Trade Commissioner Valdis Dombrovskis reportedly indicated that 2021 product exclusions cover an additional 1.1 MMT of EU steel exports.) The European Union can thus export up to 4.4 MMT of steel a year duty-free. This volume is comparable to the average 2015–17 (“historical”) volume of US imports from Europe of steel products covered by the original scope of the Section 232 policies—i.e., 4.7 MMT in 2015, 4.0 MMT in 2016, and 4.7 MMT in 2017.

For aluminum, the size of the TRQs is based on volumes in 2018–19, with the exception of foil, which is based on annualized 2021 volumes. Primary aluminum would get a TRQ of 18 thousand metric tons (TMT), and semi-finished aluminum would receive a volume limit of 366 TMT. US imports from the European Union of aluminum products covered by the original scope of the Section 232 policies were 325 TMT in 2018 and 410 TMT in 2019. (Unlike for steel, there was no mention of extending aluminum product exclusions.)

Whether European exporters “fill” the duty-free quotas depends in part on other details of the announced policy. One involves how the licenses to fill the quotas are allocated. Here, the announcement was the quotas would be filled under a “first-come, first-served” approach; an alternative might have been for the US government to auction off licenses to fill the quota. Other details involve additional constraints on how much the European Union can export each quarter (steel) or in the first half of the year (aluminum). On the positive side, there is an allowance for a small amount of unused steel volume to be rolled over to future quarters, a process to adjust the size of the TRQ in the future based on evolving estimates of US steel demand, and a mechanism for the European Union to request a reevaluation of the entire policy if its exporters encounter practical difficulties in filling the quota. On the restrictive side, the 3.3 MMT and 366 TMT quotas are the headline aggregates; separate TRQs are applied to 54 steel products, 2 types of aluminum, and by EU member state. The announcement did not mention the possibility of reallocating unused volume in any given quarter or year—from one product category to another, for example, or from one EU member state to another.

The announcement included at least three other important elements. First, the TRQ policy facing the European Union provides more flexibility for European exporters than the absolute quotas the United States negotiated with South Korea, Brazil, and Argentina in 2018. For example, if a demand surge or other constraint means an EU company wants to sell more steel product than the quarterly TRQ limit would allow duty free, it can do so by simply accepting the 25 percent US steel tariff. (The absolute quotas agreed by Argentina, Brazil, and South Korea in 2018 do not allow firms to export above the limits even if they are willing to face the additional duty.) Second, EU exports of steel and aluminum derivative products—i.e., the products suddenly subject to new tariffs Trump announced in January 2020—do not count toward the TRQs and no longer face US tariffs. Third, EU steel exports face more restrictive rules of origin, as zero-tariff eligibility also requires that the steel be “melted and poured” in the European Union. This requirement is designed to prevent a European steel company from importing cheaper raw steel from, say, China or Russia for processing into finished products to export to the United States.

EXPECTED IMPACTS OF THE US-EU AGREEMENT

One clear benefit of the deal to US exporters and EU consumers is the removal of existing EU tariff retaliation against US exports of motorcycles, bourbon, and other products, as well as the additional retaliation scheduled for December 1, 2021. But the effects of converting Trump’s metals tariffs into a TRQ are harder to predict. The conversion does not go into effect until January 2022, and it will take time to ease supply chain stresses exacerbated by the current tariffs. The impact may also depend largely on difficult-to-forecast changes in US import volumes from both the European Union—determined, in part, by how well it can fill those quotas—and other partners.

Suppose, for example, that Europe starts coordinating its steel shipments into a VER, perhaps by issuing licenses. (Some form of coordination is likely, given the strong economic incentive for Europe to do so, as described next.) If the conversion from a tariff to a VER simply results in the same amount of steel trade, US prices will remain unchanged. The main effect of changing the policy will be to shift the benefits of that unchanged US price (what economists call “quota rents”) from the US Treasury (which had been collecting tariff revenue) to European steel exporters, without benefit to any US steel-consuming or producing companies.

Alternatively, suppose EU steel exports increase when the tariff policy converts to the new VER. The impact depends on whether that increase is offset by other countries reducing shipments to the United State and whether those other countries’ export shipments would have faced US tariffs. If, for example, additional imports from the European Union only offset US imports from Japan (which currently faces a US tariff), then the United States would lose revenues, as total tariff collections fall. At the other extreme, if EU imports offset only imports from Canada (which also does not currently face a US tariff), then there is no additional loss of tariff revenue and no additional change in US well-being.

Overall, the main benefit to American steel-using industries will emerge if the October deal reduces US prices by increasing the total volume of US steel imports. In that case (e.g., the United States imports more from the European Union, and US imports from other countries do not decline), the downward pressure on US steel prices provides benefits to steel-consuming industries which are larger than the slightly worse- off US steel producers.

The benefits for Europe make it easy to see why the European Union agreed to this settlement with the United States. The Europeans realized that complete removal of US protection was apparently not on the table. Thus, even if a TRQ does little to increase EU export volumes, simply shifting the quota rents from the US Treasury to EU companies makes Europe better off.

The deal also importantly resolves one more bilateral irritant with the United States. This announcement is the third major agreement between the European Commission and the Biden administration in 2021, following resolution of the decades-long disputes over subsidies to Boeing and Airbus and cooperation on global corporate tax reform to remove potential US retaliatory tariffs over European digital services taxes on American Internet companies. It allows Washington and Brussels to push ahead on areas of joint concern—the biggest of which being China—including through their new Trade and Technology Council.

The impact of one other significant component of the October accord is also difficult to predict. The US and the European Union announced a framework to negotiate a Global Arrangement on Sustainable Steel and Aluminum, seemingly aimed at lowering the carbon intensity of metals production worldwide. Details were scant. At a minimum, the two may be creating a way to manage frictions expected to emerge as Europe presses ahead on its July proposal for a carbon border adjustment mechanism (CBAM) that would tax imports of carbon-intensive steel and aluminum. The negotiations could create a path for US metals exporters to avoid an EU CBAM, even if they are unlikely to face a domestic tax on their carbon intensity for the foreseeable future.

NEW PROBLEMS AND THOSE LEFT UNRESOLVED

Shifting the US policy from a tariff to a potential VER creates a number of new challenges. One is the concern over tacit collusion emerging between European companies. Maximizing the value of the 3.3 MMT steel quota, for example, requires that European firms organize to make sure that volume limits are met. That coordination could prove worrisome for European policymakers if it reduces product competition between companies in the European steel market.

Other US allies continue to face tariffs and may seek a similar deal. For example, the Biden administration has announced talks with Japan and the United Kingdom. The restrictiveness of the 2018 quotas (see figure 4) suggests that South Korea, Brazil, and Argentina may also want to revisit their earlier agreements.

The shift toward states—rather than markets—determining who buys and sells what, where, and when is worrisome. It began when South Korea, Brazil, and Argentina signed up to Trump’s steel and aluminum quotas in 2018 and continued with Canada and Mexico agreeing to VERs in May 2019. Next was the voluntary import expansion—which covered $200 billion of purchase commitments—in the US–China Phase One agreement. The worry is that Washington and Brussels increasingly seek to manage the challenges posed by China’s nonmarket economy by settling for imperfect, nonmarket outcomes of their own, leading to less vibrant competition in the United States and Europe.

The US–EU agreement also does not prevent the WTO from being forced to issue a dispute settlement ruling over the politically explosive question of whether the national security rationale of Trump’s steel and aluminum tariffs is justified. The European Union has agreed to suspend its formal legal challenge, but other WTO members may press ahead over the issue (see the appendix table).

The October deal leaves unaddressed such questions as, what would happen if the European Union finds the value of its TRQ eroded by a separate policy action? For example, in response to a sudden increase in imports from Europe, the US steel industry could file antidumping petitions against EU steel companies that result in new duties.

None of this is to suggest that the agreement was not a step forward. Many problems lie ahead, but at least the October steel and aluminum accord shows the enduring importance of reciprocity in negotiations, an important departure from the Trumpian view of trade as a zero-sum game. Europe ended its retaliation, which benefits American exporters, and the United States removed its tariffs, which helps European steel and aluminum firms. This small step is a useful reminder that durable trade deals can be win-win.

The post Biden and Europe Remove Trump’s Steel and Aluminum Tariffs, But It’s Not Free Trade appeared first on WITA.

There were 398,829 people employed in the U.S. steel industry in 1980, versus 83,170 in 2020. In 1980, producing a ton of steel required 10.1 man-hours, but that number declined to 1.5 hours by 2017, and some highly efficient mills can now produce a ton of steel in 0.5 hours. In other words, since 1980, there has been an 85 percent decrease in the number of hours it takes to produce a ton of steel. 

Before simply concluding, however, that the industry’s job decline entirely stems from technology improvements, observers should take note of the equally long-term and serious trade challenges the steel industry has faced. I can’t think of another industry that has done a better job of demonstrating over more than 40 years that it has been the victim of dumped and subsidized steel imports. As of August 2021, there were 309 antidumping and countervailing duty orders in place on iron and steel.

The main trade culprit is China, which now has slightly more than half of the world’s steel capacity, illustrating the pernicious problem of non-market economies. When capital is allocated by the state rather than the market, over-investment resulting in over-capacity in favored sectors is inevitable. Companies that have produced far more than they can sell domestically dump it into foreign markets, depressing global prices and forcing other companies out of business. This has happened in steel, aluminum, and solar panels and will eventually be happening in low-end semiconductors.

The U.S. industry has fought back through effective application of our trade laws, but the Trump administration chose an additional path that has become embroiled in controversy—using Section 232 of the Trade Expansion Act of 1962 to impose tariffs on steel and aluminum imports on national security grounds.

Taking the 232 path was classic Trump strategy—shoot first and then negotiate. The theory was that the other countries hit by the tariffs would respond by imposing their own tariffs on China, thereby forcing it to eat the surplus it had created. Instead, some nations, primarily in Europe, chose to retaliate against us even as they were taking similar action against China. As a result, the United States is now enmeshed in a web of tariffs, some of our own making and others retaliatory, with none of them so far producing much change in Chinese behavior.

This has become a political issue in the United States, because just as there are iron and steelworkers who have benefited, there are other workers in steel-consuming industries that have been hurt, and the numbers are not equal. There are around 137,000 of the former and an estimated 6.5 million of the latter. Geography matters as well. Steel production is concentrated in Rust Belt states that were key to Biden’s election victory and will be important in next year’s congressional elections and in 2024.

It appears the tariffs have helped the industry increase its capacity utilization rate above the 80 percent goal of the Trump administration, and steel workers are lobbying hard for continuing them. Businesses in other sectors, in contrast, have had to deal with the double whammy of higher prices for key parts and components as well as retaliatory tariffs that make their products less competitive. This puts the Biden administration in the uncomfortable position of having to decide if one group of workers is more important than another.

The issue is coming to a head because the United States and the European Union have agreed to resolve their differences by November 1. The latest rumor is that the United States has proposed a tariff-rate quota scheme in which the Section 232 tariffs would be removed for up to a specified quantity of steel, but imports above that level would pay the higher tariff. Europe has agreed to market-limiting arrangements in the past, but I would be surprised if it does this time. World Trade Organization (WTO) rules make it harder to accomplish now; the European Union resents the implication that its exports constitute a security threat; and it doesn’t really solve the problem, which has more to do with China than the European Union.

There is a better way—a global safeguard agreement in which all the countries whose steel industries have been disrupted by Chinese imports agree to impose a common tariff on Chinese steel, push the excess production back into China, and abandon their tariffs on each other’s steel. The WTO permits safeguard actions under certain conditions, and participating countries would have to use their domestic procedures—in the United States’ case, Section 201—to justify their actions. (An even better alternative would have been for the Organization for Economic Cooperation and Development Steel Committee to negotiate production limits for each country, but it was clear China was not going to agree to that, so another route is necessary.)

In the absence of that kind of solution, we find ourselves in a modern version of George Orwell’s Animal Farm, where all workers are important, but some are more important than others.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. 

To read the full commentary from the Center for Strategic and International Studies, please click here.

The post Animal Farm Redux appeared first on WITA.

Raimondo’s statement is the stuff of negotiations. After all, the U.S. isn’t going to start its talks with the European Union (EU) by unilaterally disarming. Her answer is worrying, however, because it suggests that the Biden administration underestimates the problem. It’s not just that the tariffs are doing more economic harm than good. Raimondo is wrong about this. It’s that these tariffs are far more costly than most precisely because they’re about national security.

Had Trump simply used a “safeguard” instead of Section 232, these steel and aluminum tariffs would never have made headlines. Sure, the EU and other countries would have sued the U.S. at the World Trade Organization (WTO), but this too would have inspired talks about curbing global excess capacity, which is probably all that the U.S. is going to get from these tariffs.

But Trump didn’t use a safeguard. He trotted out Section 232, offered a tongue-in-cheek definition of national security, and compromised U.S. exports by showing other countries how to get around their WTO obligations on tariffs. The tariffs aren’t leverage, they’re a liability of epic proportions.

No one thought Biden would end the tariffs overnight. But make no mistake, there is no time to waste in digging out from this mess. And “no tariffs” is exactly the right place to start, by which I mean end the Section 232 steel and aluminum tariffs.

A few safeguard filings could help provide political cover for what will otherwise be spun as unilateral disarmament. In this sense, and this sense only, Raimondo is right: “No tariffs” shouldn’t mean no trade remedies. But this is about politics, not economics.

In claiming that the steel and aluminum tariffs are “very effective,” Raimondo talks a lot about China. But it is Brussels, not Beijing, that is threatening more retaliation if the U.S. doesn’t end these tariffs. Moreover, Section 232 isn’t about competitiveness. If U.S. trade partners (our allies) aren’t playing by the rules in steel and aluminum, the U.S. can level the playing field with a safeguard, and companies can file for antidumping and (or) countervailing duties.

Why didn’t Trump do this? He probably saw Section 232 as protectionism on the cheap. Unlike a safeguard, it doesn’t require the U.S. to compensate those countries hit. But this was a mistake. Section 232 is going to cost the U.S. dearly for years to come.

In the short run, the main casualty will be trade promotion authority (TPA). Trump’s use of Section 232 bothered many in Congress concerned about delegating to the executive. TPA is vulnerable. It gives the president the ability to negotiate trade deals and bring them for a strict up-or-down congressional vote on a set clock. If Congress saddles TPA with more checks, it will undercut U.S. credibility abroad. TPA isn’t magic, but after four years of Trump’s trade chaos, TPA is the single best way to signal to other nations that the U.S. is open for business.

In the long run, seeking protectionism under the banner of national security will erode confidence in the rules-based global economy. Trump didn’t write Section 232, but he made it almost routine. From autos to titanium sponge and mobile cranes, each investigation was less provocative than the one before it. This will come back to haunt U.S. efforts to secure essential supply chains with allies that were caught up in these Section 232 investigations.

More worrisome still, the logic is catching on with other countries. At a WTO meeting on cybersecurity, for example, China invoked national security to defend its measures on imported goods and services that frustrate the U.S., EU, Australia, Canada and Japan. Ironically, China says that U.S. steel and aluminum tariffs, and Trump’s threat to slap them on autos, are proof positive that things are out of control, and wants the national security exception prioritized in reforming the WTO. Funny enough, this was the U.S.’s concern when it took the lead in drafting the original text of the exception after World War II. 

All of which is to say that it’s time to end the U.S. steel and aluminum tariffs.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.

To read the full blog by The Hill, please click here.

The post It’s Time To End The US Steel And Aluminum Tariffs appeared first on WITA.