Steel 232 Investigation—Update from the Front Lines

To put the steel proceeding in context, I would like to acquaint you with a couple of other proceedings that are “proceeding” right now.  We’ll see how all of these developments may fit together.

First, there are important negotiations with Mexico to resolve a raging sugar dispute.  Sugar producers filed antidumping and countervailing duty petitions against Mexico in 2014. The result was a “suspension agreement” regulating Mexican exports of sugar to the United States. To make a very long story short, the operation of the suspension agreement did not satisfy domestic sugar interests, who are politically very powerful.  The Commerce Department (Connection One to the steel story) decided to terminate the agreement effective June 5 if a revised agreement to the liking of the domestic industry couldn’t be reached. The parties were reported close to a deal on Monday night.  Tuesday afternoon, Commerce announced a revised agreement.  The deal would avert a threatened trade action in Mexico on high-fructose corn syrup, a $3 billion export product.  The U.S. corn industry is pushing hard for a revised deal.  Mexico is effective at negotiating.  The deal has still not been accepted by the domestic sugar industry.  

Second, antidumping and countervailing duties were imposed in 2013 on washing machines from Korea and China.  The principal manufacturers targeted (LG and Samsung) reacted predictably, opening new factories in new countries and supplying the US market from those factories.  The US petitioner, Whirlpool, instead of filing new AD/CVD petitions, decided to combat what they regarded as “circumvention” of the previous orders by filing a global Safeguard action (under Section 201 of the Trade Act of 1974).  The new action was filed May 31.  It asks for global trade barriers on large residential washers for a period of three years.  The International Trade Commission has not yet initiated that investigation.  If the Commission finds “serious injury” caused by increased imports, they will recommend relief to the President, much like Section 232.   Then the President will fashion relief if he deems it appropriate.

Third, the Section 232 investigation on aluminum, initiated a week after the steel 232 investigation, took an unusual turn last week.  The schedule was actually accelerated (a very unusual development in Washington)—Commerce announced that public comments would be due on June 23, one day after the public hearing.  Originally, the schedule for comments tracked the steel 232 proceeding, one week after the public hearing.  Clearly, there is an urgency on the aluminum 232 proceeding.  The Commerce recommendation is expected in July, and the President will act within 90 days thereafter.  A global discussion on shutting excess production capacity is one of the goals. 

Fourth, the U.S. rejected Chinese calls for negotiations to revise the WTO rules on antidumping remedies, in preparation for this December’s Ministerial meeting.  U.S. Trade Representative Bob Lighthizer said the U.S. does not want to discuss changing the current global rules on antidumping any time soon, probably because most other countries would want the U.S. to make concessions that would allow trade to continue with fewer restrictions.

These proceedings raise interesting parallels and contrasts with the current steel 232 investigation.

The proceedings illustrate a common problem:  the antidumping and countervailing duty remedies do not operate as desired by domestic industry interests.  Those interests appear to believe that trade should stop in the wake of AD/CVD cases.  The intention of these remedies, though, is not to stop trade but to take out the “unfair” practices—pricing below cost and receiving subsidies that artificially reduce prices below competitive levels.  Because new global realities give manufacturers the opportunity to shift production around the world, remedies like AD/CVD orders, which cover a limited range of products from certain named countries, companies are likely to keep trading from new locations.  Domestic petitioners get frustrated playing “whack-a-mole”.  They are looking for a way to keep imports out without having to file complex and expensive petitions.

This describes the rationale for the steel 232 “national security” case.  Nobody files more AD/CVD petitions than the steel industry. About half the existing orders under the AD/CVD laws deal with steel or products made from steel.  Petitioners argue that orders are being “circumvented” (for example the Vietnam proceeding on cold rolled and corrosion resistant steel).  However, there are perfectly legitimate ways to avoid paying antidumping or countervailing duties: (1) manufacture advanced products overseas that enter the U.S. in a form that is not covered by the orders; (2) move production to a country not covered by the orders; or (3) stop importing altogether.  Those are all legal.  The U.S. has just announced that it will not negotiate any changes to the rules on antidumping, so it must be content with the current state of affairs.  

There are also illegal methods of avoiding AD/CVD remedies—lying about the nature of the imported products to avoid paying duties, or lying about where they were made.  People argue incessantly about whether the legal or illegal methods predominate.  That issue will likely never be resolved—but there are certainly legal means to avoid AD/CVD duties.

Steel producers reportedly are pushing for across the board tariffs on all steel products and some are insisting that “downstream” products be covered also.  One wonders what they think that will do. Downstream industries have commented in the steel case that the consequences of across the board tariffs would be disastrous for them. Worlds are truly colliding in this case—it seems that the modern world is confronting the world we became familiar with and don’t want to disappear.  

The modern world will probably win out eventually; however, it is impossible to predict how the Secretary of Commerce and his team will come down on the issue by the end of June, when the Commerce recommendations on steel are expected.  Past is generally prologue—and previous efforts to assist the domestic steel industry have resulted in nothing more than temporary respites.  

To avoid catastrophic consequences on steel using manufacturers in the United States, there will have to be a patchwork of product exclusions and a process for showing particular hardship once the trade barriers are imposed.  But the shortness of time for analysis makes it hard to see how Commerce can construct an effective system to provide relief without undue harms or burdens.

Steel appears to believe it will benefit from a comprehensive reordering of the manufacturing economy.  That is a lot to ask for.  Should steel prosper at the expense of automobiles, capital machinery, construction, metal forming and many other sectors?  Steel has not shown that it will create hundreds of thousands of new jobs if it gets relief, or that relief for a brief time will permit the industry to adjust (the Section 201 rationale).  The record seems devoid of evidence that the country will be defenseless without this reordering. Nevertheless, steel is trying—and they have political support—like sugar.  

Our trading partners have a lot on their plates as well.  If the President accepts a recommendation to protect the steel industry from foreign competition, trading partners could bring cases before the World Trade Organization.  The General Agreement on Tariffs and Trade has an exemption for actions taken in the name of national security; but many argue that using national security as a pretext without proof is not going to pass muster in the WTO.  There has not been a case to date that is instructive on this issue.  

The comments have been filed (more than 1500 pages of them) and battle lines have been drawn.  The next month will see what the Commerce Secretary thinks.  Within 90 days after Commerce makes its recommendations, the President must act.

The sugar, aluminum and washing machine cases all point to a trend—antidumping and countervailing duty cases are not as effective in sealing off the U.S. economy as petitioning industries would like.  Signs in all cases point to a negotiated settlement for all these questions.  However, the options for negotiated settlement are limited.  If negotiated solutions can’t be worked out, we must ask ourselves whether we would be better off if the U.S. economy seals itself off from global competition to protect those industries.  We may be about to find out.

SMU Note: Lewis Leibowitz will be on two panels at this year’s SMU Steel Summit Conference in Atlanta on August 28-30th. Leibowitz will work with former ITC Chairman, Daniel Pearson to help explain the various trade suits and remedies during our first “Pre-Summit” Conference program on Monday afternoon, August 28th at the Marriott Gateway Hotel located next to the Georgia International Convention Center. The following day both gentlemen will team up with Steel Manufacturing Association President Philip Bell and President Emeritus William Gaskin of the Precision Metalforming Association to discuss what is “Free and Fair Trade” in today’s world. You can find more information about our full program, speakers biographies, costs and how to register on our website or you can contact our office at 772-932-7538 or info@SteelMarketUpdate.com.