Leibowitz: Remaking the Section 232 Regime

Let’s look at where these new discussions are and how the EU agreement is working, since it became effective on Jan. 1. On Dec. 27, President Biden issued Proclamation 10328, implementing the EU tariff rate quotas. The steel and aluminum products subject to tariff rate quotas are no longer subject to tariffs until the quota levels have been filled. There are 54 separate quota categories for steel and 16 categories for aluminum. Each category is divided into four quarterly amounts. The quota level for any single quarter cannot exceed 30% of the annual quota. A few steel products are not covered by the quotas; those products will remain subject to the 25% tariffs, even if “melted and poured” in the EU.

The U.S. and Europe have announced suspension of their WTO disputes over the steel and aluminum tariffs and initiated a more limited dispute process (arbitration) that they agreed immediately to suspend. Basically, the U.S. and EU have a cease-fire in place at least until late this year.

The UK and Japan talks are proceeding apace. The Japan negotiations started in November 2021 and are continuing. The UK talks started on Thursday last week.

Both negotiations involve blaming third countries, especially China, for building “excess capacity” that has flooded world markets and driven down prices. China produces more than half the world’s steel and consumes a bit less than half, so China is a net exporter. The U.S. and EU have agreed to negotiate for two years on mechanisms to limit competition from steel and aluminum that is produced using environmentally damaging methods, exploiting labor, etc. These talks will strive to isolate China and other non-market countries. Whether these talks bear fruit remains to be seen.

The U.S. has made it clear that it will retain tariffs for countries that do not agree to strive to limit competition from non-market economies, including China, in global markets. So, the UK and Japan are taking these issues seriously; but both want a quick deal, certainly before the talks on “excess capacity” are concluded.

The domestic steel industry has issued warnings of a “surge” in imports as a result of these talks. This is customary. The warnings last week related to the initiation of the UK negotiations. A bit of perspective is in order: In 2017, UK steel imports were 2% of total U.S. steel imports. For 2021, UK imports will come in at about 1.3%. There is no perceptible danger of a “surge” of imports from Britain as a result of replacing the tariffs with quotas.

Japan is not much more important as an import source to the United States. In 2017, Japan accounted for a bit over 4% of steel imports; in 2021, the percentage was 2.9%.

These are much smaller percentages than the EU occupies in the U.S. import picture. While steel imports from the European Union were between 1-2% of U.S. imports from 2017-2021, imports of products made from steel (such as steel pipe and tube) were about 30% of U.S. imports of those products. Yet quotas replaced tariffs.

On balance, the domestic steel production associations seem to have considerably overblown the danger of moving from tariffs to quotas. The import penetration of steel from Europe, the UK and Japan is very small, and the quota levels will preclude major “surges” of imports from those areas. It also makes very little sense to claim that imports are alarmingly high in 2021 compared to the abnormally low levels of imports in 2020, the height of the pandemic lockdowns; and import levels in 2021 were not sufficient to blunt the huge price increases in U.S. steel prices in 2021. Prices are still close to historic highs, well above pre-2018 levels.

The replacement of tariffs by quotas would reduce the likelihood of import “surges.” The prospect of reform (and increase) of steel and aluminum exclusions could be a danger, but the domestic industry has not assessed that. Domestic steel-using industries obviously need exclusions if they cannot obtain the products they need from domestic producers. At the margins, issues like specifications unique to the customer or the relative prices of domestic and international steel products could be important. The exclusion process is likely to be revisited soon, based on President Biden’s proclamation of Dec. 27 (see Proclamation 10328, paragraph 7).

The effort to address overcapacity (defined by OECD as “maximum theoretical equipment capacity”) has a checkered history. In 2016, the Group of 20 (G20) countries formed a “Global Forum on Steel Excess Capacity” that has not come up with a way to address overcapacity in a way that all countries can agree on.

But at least countries can estimate the degree of disparity. In a 2021 paper, a Korean researcher estimated capacity utilization as of 2019 of the 20 largest steel producing countries. The U.S., at 80% utilization in 2019, was seventh highest on the list. China, at 86% capacity utilization in 2019, was tied for second with India. The U.S. does not appear to be doing badly by comparison. Turkey, Mexico, Japan and Ukraine, for example, are far below the U.S. in capacity utilization.

These figures are, of course, of limited value if the goal is to guarantee a sustainable steel industry, which is very capital-intensive. Many other countries rely more on labor than the United States. As an example, flexibility in production levels is easier in countries where workers can be laid off compared to countries where capital assets would have to be taken out of service.

Addressing chronic overcapacity in steel requires that companies and countries take capacity out of service or at the growth of new capacity coming online. The public announcement of the U.S. discussions with other countries have not revealed any major proposals on this subject.

The countries selected by the U.S. to work on overcapacity include the most advanced steel industries in the world in terms of efficiency and environmental compliance (the EU, UK and Japan). The joint announcement by the U.S. and EU at the time of that agreement last October indicated that the parties were exploring limitations on imports of steel that was made with environmentally damaging processes or unfair labor practices. These metrics sound good, but are hard to measure and can conceal less admirable protectionist motives. It appears to me that we are a long way from addressing the problem of steel (and aluminum) overcapacity.

Lewis Leibowitz

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