Steel Tariffs - Here We Go

What is the President after?  He wants to feel the love of Dan DiMicco and John Ferriola and other steel company executives.  He does not seem to mind the wrath of almost every other CEO that uses steel and aluminum in manufacturing.

I have some questions for the president:

1. Does anyone think that steel and aluminum tariffs will work?

That depends on what “work” means.  Let’s start with the radical idea that he is preparing for the 2018 midterm elections.  Steel industry executives will gush for a few days.  The stock market already voted—steel tariffs laid an egg on Wall Street.  Will Rust Belt states flood to the president’s side?  Well, steel workers probably will.  The most prominent senator praising the president is someone who is not exactly his ally—Sherrod Brown of Ohio.  Ben Sasse of Nebraska hates the tariffs, as do most Republicans.

The one thing we’ve learned since the Smoot Hawley tariff of 1930 is that protectionism has one serious problem: it doesn’t work.  Jobs are not saved.  The efficient industries (the ones that export) tend to lose business in favor of the inefficient ones (unfortunately, steel is one such industry).

2. Will the tariffs apply to all steel products?

We don’t know yet.  There could be tariffs on all countries of 25 percent on all steel products.  But there would not be tariffs on advanced products containing steel and aluminum.  These tariffs will create the most irrational of tariff structures—the inverted tariff, where components and lower value articles are taxed at a higher rate than more advance products.  In most cases, imports of advanced products increase while imports of basic steel product imports decrease.  The steel industry cannot cash in, however, because the companies making products from steel are too busy heading for the exits.  They will leave the U.S. if they can.

There could be exemptions for products (the Commerce report discussed this possibility).  In a piece I wrote a couple of months ago, I reviewed the exclusions in the steel 201 case in 2002-03.  There were 430 exclusions granted in 18 months.

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3. Will the tariffs apply to all countries?

Countries could also be excluded.  Countries closely allied to the United States like Canada, Mexico, Japan, the United Kingdom and Germany are not a threat to national security, either because of overcapacity or because of hostility in times of trouble.  They will surely challenge the national security rationale.  For every country that is exempted, the hammerlock on steel customers becomes weaker, undermining the rationale for commercial viability as national security.

4. When the Proclamation is published, what will happen?

Litigation in the WTO and in U.S. courts.  Companies that are injured by the tariffs (U.S. steel-using manufacturers, who do not have standing in traditional trade remedy cases) will have standing under Section 232.  U.S. importers, the nation’s port authorities who stand to lose business from high tariffs, will also be able to challenge the legality of the relief.  They may win, they may lose.  But the public perception that this case is about money rather than national security will take hold. 

The WTO will see a lot of action.  The WTO Appellate Body is in the throes of controversy because the U.S. refuses to fill three vacancies in the seven-member body.  But the first round of any case is a panel proceeding, which will go forward.  Once a number of countries resolve to take to dispute settlement, it will be harder to buy them off with special deals allowing greater access to the U.S. market.  There have been very few national security cases in the WTO because countries are very loath to threaten the entire world trading system with destruction. Again, unfortunately, this existential threat is quite real in this case. 

Other countries may also construct their own national security castles in the air.  Any country can turn an economic disadvantage into a national security issue and quite a few may do so, focusing on the most vulnerable U.S. exports, especially agriculture.

5. How long will the tariffs last?

Until the retaliation affects enough industries to be listened to at the White House.  Under Section 232, because it does not have the normal limits of other methods of trade remedy, the tariffs could be imposed indefinitely.  This would create the opportunity to lure more and more steel and aluminum users to overseas plants where they can be globally competitive.  As long as the tariffs are in effect, the door to competitiveness will be closed to thousands of American companies.  While they could endure for a year or two, they can’t last forever without going under or going out.  But the news so far is that President Trump wants the tariff to last for a “pretty long time.” 

There may be opportunities in this—but while it never hurts to look, it could waste valuable time.  Steel and the U.S. government have declared war on steel customers. 

Differences abound between the steel and aluminum industries.  Aluminum producers are not thrilled with the 232 remedies because many aluminum producers are truly global.  The first reaction from Leo Gerard, the president of the Steelworkers union (which represents unionized steel and aluminum workers) was to call for Canada to be exempted from the aluminum tariffs.  He feels the same way about steel from Canada.  After all, Leo is a Canadian himself—yep!  Aluminum production in the U.S. has plummeted in recent years, while steel production has declined a bit, but generally holds steady.

6. What is the justification for the tariffs?

Ostensibly, the companies that make steel are in precarious financial shape so that if we had to fight a war of production (like World War II, for example), we might find our companies have gone bankrupt.  So we all have to pay more for the products we want to prepare for World War II.  Not kidding—this is basically the rationale as I see it.  Autos, shipbuilding, heavy equipment, earthmoving machinery (all of which use large amounts of American steel) are much less important to the Secretary of Commerce and the President, apparently than steel producers.  Do they believe we can fight a war by throwing hot rolled coils at the enemy?  Steel is important because of what you can make with it—something that steel producers just don’t do much. 

We have seen that the Defense Department appreciates that it depends much more on manufacturers that use steel than on steel producers.  That is a major reason that the Defense Department has opposed these blanket tariffs.  This controversy will continue. 

Lewis Leibowitz

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