President Trump announced on 1 March that he would impose tariffs respectively of 25% and 10% on US imports of steel and aluminium. The backdrop to this dramatic action is of course the longstanding decline in US steel production, together with the sustained impact on world steel markets of Chinese overcapacity in the sector. The supposedly dire consequences for American industry of these combined trends were a major plank of President Trump’s election campaign. In this article we look a bit more into background behind the Trump’s steel tariff announcements, the implications for world trade, and how trade partners should respond.
Origin of the investigation
The new tariffs do not result from orthodox investigations into allegations of dumping by foreign producers of steel and aluminium in the US market, or of illicit subsidisation of exports by foreign governments. Nor were they safeguard measures, of the sort the Bush administration implemented in 2002, under section 201 of the Trade Act of 1974, which empowers the President to impose duties if a sudden surge in imports is shown to cause injury to domestic industry (measures that are also permissible under certain conditions set out in the World Trade Organisation – WTO – Agreement on Safeguards).
Instead, the basis of the Trump Administration’s action is an investigation carried out by the Department of Commerce Bureau of Industry and Security under Section 232 of the US Trade Expansion Act 1962. That Section gives power to investigate allegations that “any article” is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security. The investigation was notified, as required by the Act, on April 4 2017 by US Commerce Secretary Wilbur Ross to Secretary of Defense James Mattis. The Bureau’s 60-page report, supported by 200 pages of annexed analyses and background documentation, was submitted to the Administration on 11 January 2018.
Findings of the investigation
The Administration’s argument is that the decline in US steel production imperils the US’ ability to manufacture arms for defence purposes. The report notes that by 2017 the capacity utilization rate in the US steel industry had declined to 72%. In a key passage it states:
“The circumstance of excess global steel production capacity is a factor because, while US production capacity has remained flat since 2001, other steel producing nations have increased their production capacity, with China alone able to produce as much as the rest of the world combined. This overhang of global excess capacity means that U.S. steel producers, for the foreseeable future, will continue to lose market share to imported steel as other countries export more steel to the United States to bolster their own economic objectives and offset loss of markets to Chinese steel exports.”
In other words, the US regards it as necessary to introduce general restrictions on steel imports so as to prevent other countries from moving into the space created in the US market by reducing imports from China.
Coverage of tariffs
Steel is produced in many dozens of forms and qualities for different functions, including special steels for high-technology use, and the Bureau’s exhaustive report covers the full range. The preferred option is a “quota or tariff on all steel products covered in this investigation imported into the United States to remove the threatened impairment to national security”.
It is noteworthy that the report, keeping strictly to the terms of the Bureau’s mandate, is exclusively about the steel industry and steel imports. It makes no mention of aluminium. Presumably the Administration, taking into account the possibilities for aluminium to substitute for steel in some applications and knowing that action taken against steel imports must cause a major international row, decided cynically to take the opportunity of doing something about aluminium imports at the same time.
The core of the Administration’s argument is that without an indigenous steel industry with an acceptably high level of capacity utilization the US cannot reliably defend itself. In the strict terms of Section 232, one may question whether the term “any article” stretches to cover all the dozens of different products of a worldwide industry; that is for the debates that have now been launched.
The next question is how the Administration may seek to justify the introduction of tariffs under trade law. Article XXI of the General Agreement on Tariffs and Trade (GATT) 1994 – the basic document of the WTO Agreements – gives legal cover for members to take action that would otherwise contravene their obligations, for “essential security interests”. But such action relates only to trade in nuclear materials; to the arms trade, in particular for supply of military establishments; and to unspecified action “taken in time of war or other emergency in international relations”. It is very doubtful whether these loopholes extend to measures to restrict steel imports as a whole, even if much military ordnance is made of steel. And while the US Administration might claim that the state of the international steel market constitutes an emergency in international relations, probably few other governments, and more importantly, the WTO’s dispute settlement function, would agree.
Politics of protectionism
Why might the Administration have undertaken such measures on so flimsy legal arguments? To answer that, we need to look closely at the politics of steel production. This is concentrated in states like Pennsylvania that are vital swing states in US elections and that played a vital role in Trump’s election. Action that projects the impression of standing up for jobs in these regions is politically attractive. It is also probably not a coincidence that the tariffs were announced shortly after Trump declared his plans to seek re-election in 2020.
The phenomenon is not new. In 2002, having won (like Trump) the presidential election without a majority of the popular vote and facing mid-term elections, George W. Bush sought to shore up political support in rust-belt states by slapping steel with the safeguard duties mentioned at the start of this piece. The WTO eventually ruled that those duties violated the GATT.
The Trump Administration, knowing that on the basis of existing jurisprudence the WTO would likely rule against the use of safeguard measures in the present case, seems to have opted for a much less tested area of trade law in in the form of national security exceptions. This is unlikely to work, for reasons described above. But in the short term, it will score political points, not least because the actions can be portrayed as standing up for jobs and national security, playing at many levels to the wider America First narrative which the Administration has tried to develop. And of course WTO dispute proceedings take time, typically 9 months, or longer if (as would certainly happen in so important a case as this) the findings of the initial arbitration panel are taken to appeal. During all that time the tariffs would be in place, and be collected.
How should trade partners respond?
President Juncker of the EU Commission has threatened prompt retaliatory action, to the point of presenting a hit-list of products to target, clearly increasing the risk of a major trade war. Angry reactions on the part of foreign administrations are understandable, but retaliatory action can quickly spread to a much wider range of sectors causing widespread damage on all sides. It is also worth noting that the reaction from Canada, which has a much higher exposure to the US on steel than the EU, has been more muted. Canadian officials have emphasised instead the danger the US actions could pose to on-going negotiations on re-working the North American Free Trade Agreement.
The EU and other WTO members, however grossly provoked, and despite the immediate damage done by levying the tariffs imposed, would do well to maintain the moral high ground. They can do this by restricting themselves to dispute proceedings for which the WTO effectively provides. This would have two advantages. First, it is extremely likely that the WTO dispute proceedings would find against the US. That would increase the pressure on the administration, not least because elements within it, and the top-brass of the Republican party, do not support the tariffs. Second, if the Trump Administration’s actions are shown to be against WTO, that could help to mitigate the real long term danger these actions could cause. Namely, the possibility that invoking national security exceptions as cover for flagrant protectionism could open a veritable Pandora’s box, with many other countries using “national security” as a fig-leaf for their own protectionist leanings.
The more conspiratorially minded may say that that this is precisely what the Trump Administration would like to achieve – a general dismantling of the multilateral trading system. But if so, it would be to the US’ own cost. It would stand to lose if, for example, major emerging markets like China, India or Brazil suspended their protection of US intellectual property rights on public interest grounds, or if the EU and others raised duties on American carbon-intensive goods on the grounds that the US reneged on its climate protection commitments, creating an “emergency in international relations” (both lines of argument which might receive considerably more sympathy from economists than the US’ position). The bottom line is that the US needs a strong multilateral system since it cannot hope to police world trade on its own and needs a system of rules. There are many in the Administration who know that. The best way for outsiders to convey this point is through quiet persuasion, and to stick by the rules and let them do their work.