SMU Explains: How the TRQ With the EU Works

Other key details of the deal are below.

They come from USTR documents that you can find here. They support much of what SMU reported last week ahead of the deal officially being unveiled.

• The quota. The quota limit will initially be set at approximately 3.3 million metric tonnes (3.6 million short tons). That amount will be divvied among EU member states and among 54 steel product categories. The quota limit was based on import volumes from 2015-17. The quota will be administered on a “first-come, first served basis.” And the U.S. government will create a public website showing how much quota tonnage remains available by product for any given quarter.

• Rollover tons. The annual TRQ on the EU, like the Section 232 quotas on South Korea and Brazil, will be administered on a quarterly basis. This is aimed at preventing surges in imports at the beginning of the year. Any unused volume from the first quarter, up to 4% of the total quota volume for that quarter, can be rolled into the third quarter. Unused tons from the second quarter will roll into the fourth quarter. And unused tons from the third quarter will roll over into the first quarter of the following year. Think of it like rollover data on your cell phone plan.

• Yearly adjustments. The quota will be adjusted annually based on U.S. Steel demand, also known as apparent steel consumption, as determined by the World Steel Association. If demand is 6% above 2021 levels, the quota will increase by 3%. And the reverse is true should demand fall by 6%.

• Melted and poured. Only steel “melted and poured” in the EU will be eligible for duty-free treatment. Material rolled from slabs melted and poured outside of the EU – in Russia or China, for example – would remain subject to the 25% tariff. It is up to importers to provide documentation proving compliance with melted-and-poured requirements. It was not immediately clear to SMU whether this language might result in reduced slab imports from Russia but increased pig iron imports.

• Exclusions. The Section 232 exclusion process has been grandfathered into the new TRQ deal with the EU. Material from the EU that had been exempted from Section 232 tariffs – assuming it was shipped in fiscal year 2021 – won’t count against the new quota. At least not initially. Products that were exempt from Section 232 will remain exempt from the TRQ for two calendar years. In other words, importers of these products won’t need to re-apply for exemptions until Dec. 31, 2023.

• Review process. The U.S. will evaluate how the TRQ is working every three months beginning no later than April 1, 2022. The EU can also request that a review be conducted if there is “substantial” underuse of the TRQ.

Background

Recall that Section 232 national security tariffs and quotas were rolled out by the Trump administration in 2018. The measure imposed across-the-board tariffs of 25% on steel from EU member states and many other nations – regardless of whether they were U.S. allies. Some nations – Brazil and South Korea, for example – agreed to an absolute quota, or “hard quota,” in exchange for exemption from the 25% tariff.

A TRQ, also known as a “soft quota,” allows imports below a quota ceiling to come into the U.S. without a tariff. After that quota limit is reached, imports can still come in – but they are subject to a 25% tariff.

That flexibility is the primary difference between a TRQ and an absolute, or hard, quota. And it allows business flows to continue largely uninterrupted.

An absolute quota means once the quota ceiling is reached, no more material can come in. That has caused supply chain problems for domestic re-rollers, for example, that source slabs from Brazil.

Brazilian slab is cheaper than slab from other countries because it is not subject to the 25% tariff. But once the Section 232 quota ceiling is reached, the material cannot enter the U.S. until the following quarter – resulting in mills sometimes running short of their slab requirements.

The EU had always opposed Section 232 because it was based on national security grounds. That made no sense to the EU, which is a key U.S. ally. And the EU from the time Section 232 was unveiled had expressed a preference for a TRQ.

The deal with the EU could set a precedent for TRQs with other U.S. allies such as Japan and the UK, market participants have told SMU.

By Michael Cowden, Michael@SteelMarketUpdate.com