Leibowitz: U.S.-EU Deal on Steel, Aluminum Tariffs—Breakthrough or Blip?

Because the announcement of the deal occurred on a Saturday, news coverage has not been extensive. There are also gaps in what we know about the deal. Certain details have been leaked, but leaks are not necessarily accurate. Nevertheless, we know a bit and can ponder the implications.

1. The TRQ

The deal appears to eliminate Section 232 tariffs on imports of steel up to a level approximating the volume of imports before the imposition of the tariffs in March 2018. Estimates of that figure, according to anonymous sources, are about 3.2-3.3 million metric tons. U.S. government statistics vary from this number: imports of steel from European Union in 2017, the last year before the tariffs, were about 5 million metric tons. In 2020, U.S. imports from the EU were about half that (2.5 million MT). Based on the 3.3 million MT figure for duty-free imports from the EU, the new deal would increase duty-free imports by about 800,000 MT.

2. Exclusions

The estimates of the degree to which duty-free imports will increase are seriously oversimplified, because it does not include the effect of steel exclusions, which permit a good deal of tariff-free importing. News reports about the deal estimate that steel product exclusions permit about 1 million MT of steel imports per year. The announced agreement extends existing product exclusions for an additional two years. The details of this have not been revealed, but a two-year extension of exclusions could be a very big deal for EU exporters. News reports suggest that about 1 million MT of EU steel is already exempt from tariffs because of exclusions.

3. “Melted and Poured”

The deal is reported to require that EU exports must be entirely produced, “melted and poured” and finished in the EU to benefit from the new duty-free status. Thus, steel finished in Europe from substrate made outside of Europe will not be eligible for the exemption from tariffs. Very little is known about how this will work in practice, but more information will doubtless come soon, and it could raise many more questions about the deal.

The U.S. side, in a conference call yesterday, emphasized the clean technology employed by U.S. and EU producers and the lack of same by other producers, especially China. The two sides committed to develop a plan (no specifics yet) to reduce global “overcapacity” especially from China, the producer of more than half the world’s steel. The “melted and poured” requirement allows the U.S. to differentiate between imports from “clean” and “unclean” sources, an important tool in addressing the effects of climate change. It also could prevent indirect exports of steel from China and other countries of raw steel.

4. Effective Date

The effective date of the new rules had not been announced as of Sunday morning. There are too many possibilities to mention regarding how that will be calculated. Suppose (this is just an example) that the U.S. announced tomorrow that the agreement would take effect with U.S. Customs on or after Dec. 1, 2021. Another possibility is the issuance of new rules for showing that the imported steel was “melted and poured” in Europe. New information would be needed that is not required now, such as which facility melted and poured the steel. The government would need to publish new standards about verifying or certifying to the accuracy of these claims.

5. WTO Cases

The agreement suspends all dispute settlement cases on steel and aluminum, effectively calling a truce. The EU has said that this is not permanent. A number of issues must be resolved before cases are formally withdrawn—but this truce will likely last a while.

6. Early Reaction to the Deal

The United Steel Workers union announced its support for the deal. The American Iron and Steel Institute (AISI) cautiously supported it; some domestic producers have already praised it. The Steel Manufacturers Association (SMA) took a similar position, and urged the administration to “narrow” the steel exclusion program. On the aluminum side, the American Primary Aluminum Association announced its support.

Clearly, these groups would have preferred the tariffs to remain in place. Equally clear, larger issues compelled the Biden administration to move on the tariff issue under serious EU pressure. The outcome is neither surprising nor damaging to the core priorities of domestic producers of steel and aluminum.

As is often the case, groups that are concerned had to examine the core principles and the most important issues from their standpoint. On steel and aluminum, perhaps the most compelling issue was preventing a surge of steel and aluminum imports. Price spikes have already led to significant import increases.

Back to the stats (Commerce data): The price per metric ton of steel imports from the EU averaged $1,315 per MT in 2021 (January through August), down a bit from $1,332 in the previous year. Imports from the world increased in the same period 25%, from $822 to $1,027 per MT. Clearly, imports of EU-origin steel are not likely to cause a collapse of historically high steel prices in the United States.

Nor are surges of imports from the EU likely; Europe will not send vastly increased quantities of cheap steel to the U.S. Their praise of the deal for preventing future import surges has credibility.

7. What’s Next?

We will no doubt hear statements from other major U.S. allies and others reacting to the news of this deal with the EU. Japan and Taiwan, two countries with major U.S. defense relationships, will press for similar treatment. In addition, Brazil, Korea and Argentina (the “absolute” quota countries under Section 232) may seek similar treatment.

One basis on which the Biden administration might resist pressure from other countries is the effort to mitigate climate change. The EU had no trouble with this issue, because Europe already has a “cap and trade” regime that ensures that European producers will make steel and aluminum as cleanly as possible. Other countries, to receive similar treatment, will need to prove their case.

Those countries that can prove their environmental case may have a receptive ear in the administration. The breakthrough with the EU on TRQ arrangements and the “melted and poured” standard will give other countries the idea that, if they agree to these terms, they too can increase their presence in the U.S. market.

Domestic consumers, who have borne the brunt of the tariffs for nearly four years now, are not satisfied with this arrangement; but they can benefit from increased competition in the U.S. market, which may signal a retreat from the huge price increases we’ve seen in the last year. They will certainly press for more relaxation; I expect that the reforms in the product exclusion process that result from the EU deal will be spread to other aspects of that program, which benefits consumers of steel and aluminum in the U.S.

8. Conclusion

The Section 232 tariffs are a highly controversial legacy of the Trump administration. The agreement with the EU is a roadmap for reform of this regime, which has transferred a great deal of wealth from U.S. consumers of steel and aluminum to domestic and foreign producers of those commodities. The federal government has also reaped significant financial benefits.

In the EU deal, the U.S. government has sacrificed tariff revenue, but has avoided continuing disputes that poisoned the atmosphere of U.S.-EU relations for four years. The domestic industries have not sacrificed much—the deal may reduce prices in the U.S. market, and may increase prices slightly in global markets as European steel flows a little more to the U.S. and a little less to other markets. But the domestic producers in the U.S. will have continued protection from the surges of imports that they fear (and not without justification, given the experience of the Asian financial crisis 20+ years ago).

Lewis Leibowitz

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PS – Leibowtiz will be one of the featured speakers at the Tampa Steel Conference on Feb. 14-16. Joining him will be other trade experts, including SMA President Philip Bell, AISI President and CEO Kevin Dempsey, and AMSCI President Richard Chriss. Learn more about the event and register here.