Leibowitz on Trade: Thoughts on Unraveling 232

There is an interesting argument in the Court of International Trade scheduled for next week about the constitutionality of Section 232 of the Trade Expansion Act of 1962, which could result in the end of the steel tariffs (and the prospect of tariffs on cars and auto parts, and uranium). No predictions about any of that here—maybe after the court hearing we can talk more about it.

Back to the question: Would the sudden lifting of tariffs be as disruptive as their onset? That caused me to recall the end of tariffs in December 2003, when the “safeguard” tariffs were abruptly lifted. A new reality appeared—traders scrambled to place orders instead of canceling them (or trying to) when the tariffs were imposed in the first place. 

Lifting tariffs is disruptive in different ways. Shipments on the water, when tariffs were expected upon entry into U.S. commerce, all of a sudden resulted in a price that was much more attractive to the traders that introduced the steel into the market. Traders, their suppliers and customers went running to their agreements to see what the result would be; would the contract give the end user a share of the price reduction? Would the importer of record make a windfall? 

The disruption when tariffs went into effect in March, and then were expanded dramatically on June 1, caught shipments on the water. The landed cost of steel and aluminum suddenly skyrocketed. For traders, that is a lot more disruptive than a sudden drop in the price. 

The safeguard tariffs were only in effect for about 19 months in 2002-03. In the Section 232 situation, we’ve had them for less than one year. People have not yet baked them into their planning, marketing and supply chains. If the tariffs remain in effect for a long time, say, into 2020, more baking in will happen. Lifting the tariffs will cause orders from domestic mills to fall as imports all of a sudden become more competitive. But remember—the 232 tariffs are not the only restrictions out there. Trade remedies are also in effect—they were not removed when the 232 tariffs were imposed. Trading steel that is subject to AD/CVD remedies has never been a pleasant prospect.

Should the end of tariffs look possible, careful planning, dusting off contracts and contact lists will be the order of the day. The end of tariffs could be sudden or gradual; in the safeguard days, the tariffs started out at 30 percent for most products and then declined. Depending on the legal pretext for ending them, a gradual reduction may happen—again, no predictions, please.

Another gradual end to the tariffs could come from countries gaining exemptions or quota agreements instead of tariffs. Canada and Mexico come to mind as early instances of such developments. As tariffs apply to a lower percentage of the market, the “baking in” effect of tariffs would be reduced, but a free market would still be a ways off.

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