Leibowitz: Banning Inputs and Components—Effective Policy or Not?

Other countries (and the European Union) have joined in. The EU recently adopted new regulations restricting imports sanctioning Russia. The EU regulation punishing Russia for its annexation of Crimea in 2014 precluded imports of steel and other products.

After the invasion of Ukraine in 2022, additional sanctions were adopted. The latest was a ban on imports of products containing Russian steel that had been processed in countries outside Russia and the EU. This new rule is effective Sept. 30.

Trade rules generally provide that countries can act in times of war or other “emergency in international relations” to restrict imports. Sanctions such as these are hardly new. But extension to imports from third countries means that importers will need to know what is in the products they buy and, more importantly, where the production inputs are made.

Finding this out reliably can be very difficult for importers and customers, which will encourage them to find non-Russian sources for all those inputs. And the penalties for not knowing that Russian components are in the products they buy can become very expensive.

The United States also has some rules that require tracing of inputs for manufactured goods. They apply to free trade agreements, such as USMCA, and requirements to avoid goods made with forced labor. The Russian sanctions imposed by the US generally apply only to goods from Russia and Belarus and do not require tracing of components from third countries. But future rules could require that.

The issue for me is whether the costs are less than the benefits of such third-country tracing. The EU rules seem to apply to all countries. If steel components of subject products are “processed” in third countries, it appears that everything from steel pipe to automobiles from any country will require proof that Russian steel products (from semifinished products such as slab to stainless steel sheet) are not present in those products.

If the United States were to adopt these rules, importers here would have their work cut out for them. The EU rules provide for whistleblower protection, meaning that if there is any doubt about where steel was made the government would be likely to investigate.

In general, governments do not require this level of attention. Where they do require it, the burden on companies is substantial. In 2010, Congress passed, as part of the Dodd-Frank Act, a conflict minerals reporting statute. It requires reporting by public companies of any listed minerals whose sales could be financing African armed conflicts, particularly in the Democratic Republic of Congo. In contrast to the EU requirements, the statute required companies to use “due diligence” in determining where the minerals came from. The US did not ban the importation of products mined in African countries.

So, the EU is going several extra steps, requiring due diligence of companies that are subject to EU regulation in determining where product inputs are made, and prohibiting the importation of those products from any country where the provenance of certain inputs cannot be proven.

The crisis in Ukraine may present a clear example of requiring this extra layer of protection. When the EU regulation was first issued in 2014, it only applied to imports from Russia (or in some cases Belarus). It was not until 2023 that the regulation was amended to apply to imports from any country that included Russian steel products. The EU must have thought that Russia was selling steel to third countries and circumventing the sanctions.

In the long run (and it may be very long), the Ukraine war will be over. One hopes that the sort of sanctions imposed in the aftermath of the Russian invasion will be repealed. There is no indication that European companies are trying to get around these sanctions and allow Russia to benefit from the circumvention.

If these kinds of third-country restrictions proliferate, importers will be forced to respond by moving away from indirect Russian suppliers. That may be a good thing in that situation, but in others, the costs and benefits might well differ. If countries react to foreign policy issues that are less critical, the global trading system will suffer.

Wars are generally temporary. But other concerns can become chronic (for example, softwood lumber from Canada, or the tariff on pickup trucks). Prohibitions on imports should be reserved for the most serious situations. And importers should not be asked to get involved lightly in law enforcement.

If the EU sanctions on third-country processing can help prevent money from getting to the Russian war machine, so much the better. We should be careful about relying on a sanction as drastic as an import ban for “light and transient causes.” The world trading system is still worth saving from destruction through embargoes.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz

5335 Wisconsin Avenue, N.W., Suite 440

Washington, D.C. 20015

P: (202) 617-2675

M: (202) 250-1551

lewis.leibowitz@lellawoffice.com

Editor’s note: This is an opinion column. The views in this article are those of an experienced trade attorney on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.