A New Urgency: Next Steps on the U.S. Steel and Aluminum Tariffs

Tuesday, October 12, 2021 - 2:30pm

By John Murphy

With U.S. steel prices soaring, shortages multiplying, and the EU poised to double its retaliatory duties on U.S. exports, it’s past time for the United States to rescind the so-called Section 232 tariffs on steel and aluminum. Doing so will avert further harm to American workers and allow the U.S. and its allies to refocus on the true challenges facing global metal markets.

U.S. and EU officials are engaged in increasingly intense discussions on the issue, with a nearly weekly tempo emerging. As French Finance Minister Bruno Le Maire told CNBC last week:

“We are all totally determined to find a compromise; there is a possibility, even on aluminum and steel, to avoid sanctions and to avoid a kind of new trade war between the two continents... The key point are the overcapacities, and the overcapacities in the production of steel and aluminum are coming from China. This is not an issue between the U.S. and the EU.”

Why is resolving these tariffs so urgent?

(1) Foreign retaliation against U.S. companies and the workers they employ is set to spike absent swift action by the administration.

Notably, the EU on December 1 will double its retaliatory duties on exports of made-in-America products ranging from Harley-Davidson motorcycles — on which EU tariffs are set to soar to 56% — to Bourbon, Tennessee Whiskey, and other American Whiskey exports — on which duties are slated to double to 50%. Workers producing about 200 different categories of goods — from cosmetics and motorboats to cranberry juice and playing cards — are likely to be affected.

The tariffs in place have already exacted a heavy toll from U.S. businesses and the workers they employ. For example, U.S. spirits exports to Europe have slumped by about 40% since the retaliatory duties were imposed at their lower level, and the expected doubling of tariff rates is expected to hit hard.

The Biden administration’s emphasis on a “worker-centered trade policy” certainly needs to take into account the plight of American workers whose livelihoods will be endangered by continued adherence to the Trump-era tariffs.

(2) The tariffs are contributing to nosebleed-high prices for steel and inflicting substantial harm on U.S. metal-consuming industries.

Prices for steel have soared in the past year as the economy has recovered — and the 25% tariffs add to the burden. The Wall Street Journal in September reported that a “Midwest steel index calculated by CRU Group estimated prices at $1,940 a ton at the start of September, up from around $560 in September for both 2019 and 2020” — an increase of nearly 350%. For many steel products, U.S. prices are multiples of their levels in Europe and Asia.

It isn’t just prices: Shortages are also hammering steel-consuming industries. “Lead times for steel delivery had pushed out to as long as 16 weeks, the [Coalition of American Metal Manufacturers and Users] said, compared with four to six weeks in late 2020,” Bloomberg reported in September; imports through July were at their “second-lowest volume for the period in a decade.”

A “worker-centric” trade policy needs to take into account the U.S. workers employed in manufacturing industries that depend on steel as an input. These workers outnumber those in steel production by approximately 45-to-1, and these much larger industries are badly harmed by the higher costs and shortages imposed by tariffs. At one point, some U.S. auto manufacturers reported new tariff costs in the range of $1 billion. Their foreign competitors, of course, enjoy substantially lower metal prices.

(3) The stated objective of the Section 232 tariffs — blocking subsidized Chinese steel from the U.S. market — has been achieved using other tools.

Overcapacity in China resulting from subsidies and other Chinese government support to its steel producers is widely recognized as the principal challenge for global steel markets. However, other U.S. actions — not the Section 232 tariffs — have barred nearly all steel imports from China.

Import penetration for steel products was just 22% in June 2021, meaning that domestic steel production accounted for 78% of the U.S. market. Chinese steel imports account for about 1% of U.S. steel consumption.

How was this achieved? U.S. anti-dumping and countervailing duties (AD/CVDs) are applied to dumped or subsidized imports, and nearly half of the roughly 600 orders in place apply to iron and steel imports. Steel imports from China have been targeted far more often than those from any other country. These duties soar into the double and triple digits.

The aggressive application of these tariffs, together with the separate Section 301 tariffs of 25% also applied to steel imports from China, have almost entirely blocked Chinese steel from the U.S. market.

By contrast, the Section 232 tariffs have had their most notable effect on metals imports from U.S. allies such as Britain, Germany, Japan, and Korea. Given that the underlying statute for the Section 232 tariffs allows their application when imports “threaten to impair the national security,” it’s understandable that these countries — America’s closest allies — have taken umbrage at the charge.

(4) The elements of a deal to end the Section 232 tariffs are widely understood.

The case for terminating the Section 232 tariffs is strong, but there are measures the Biden administration can adopt with key allies to facilitate such a move. There are indications the following are indeed under discussion with the EU, and the Chamber has encouraged the administration to do the same with other key allies such as Japan, Korea, and the UK.

First, the administration is working with the EU to refocus on the widely acknowledged challenge posed by Chinese overcapacity by reviving the Global Forum on Steel Excess Capacity. It was created by the G20 and Organization of Economic Cooperation and Development (OECD) in 2016 to tackle this problem. While it offers no panacea, the Trump administration did not prioritize it; the Biden team should certainly seek to leverage this multilateral approach.

Second, the U.S. and the EU appear to be discussing measures to guard against transshipment of Chinese steel through third countries. In September 2020, the Department of Commerce took steps to modernize the Steel Import Monitoring and Analysis (SIMA) system, which allows officials to “more readily identify transshipment and circumvention involving steel imports.” A similar system for aluminum was set up shortly thereafter. Other countries have similar systems; coordinating these efforts with U.S. allies makes sense.

Third, the U.S. and the EU appear to be discussing mechanisms to monitor against import surges. When the United States agreed in 2019 to drop the Section 232 tariffs on Canadian metals — and Canada dropped its retaliatory measures — the two governments committed to monitor for surges and for transshipment. (The same arrangement was agreed with Mexico.) U.S. allies would certainly agree to similar joint efforts.

The price of inaction is high, and the path forward is clear. It’s time for the administration to strike a deal with America’s allies and rescind the Section 232 tariffs.