Leibowitz: More unilateralism, less negotiation as election approaches

Mexico and election-year politics

President Biden, to assuage Democrats in Congress, has bludgeoned Mexico to prevent non-North American steel from entering the US market from Mexico.

A proclamation last Wednesday provides that steel “melted and poured” outside the USMCA countries (Canada, Mexico and the US) will be subject to 25% tariffs under Section 232. As readers will recall, steel products from Canada and Mexico have entered the US tariff-free since 2019.

Some in Congress have charged that China is using Mexico as a platform to send its steel into the US by having it processed in Mexico and attaining Mexican origin. There has been little hard evidence of this.

But the president is in an increasingly difficult and desperate fight for re-election. Facts are not as important as perceptions right now. So, the president has given US steel companies more protection. How much more will it take to satisfy the domestic steel companies? That is not clear yet.

Non-market economies

On Friday, the administration issued proposed rules (not yet effective) that would make antidumping cases against “non-market economies” (basically, China and Vietnam) more burdensome for respondents (foreign exporters as well as US importers and consumers).

Under current Commerce Department rules, exporters from China or Vietnam can escape dumping margins applicable to the “country-wide entity” by showing that they are not under the control of the government. Commerce routinely grants “separate rate” treatment to numerous companies in each case that make this showing.

Under the new proposed rules, it will be more difficult to make the showing that a company is not under the effective control of the government. More exporters from China and Vietnam will face the massive dumping margins that apply to the country-wide entity. Higher duties will ensue. And we can expect that fewer will continue selling to the US market. More protection for the US steel industry.

Section 301 and then some

As I mentioned in a previous column, the steel industry is advocating imposing the Section 301 duties now imposed on China on imports from countries other than China. Namely, if those imports contain components or raw materials from China. And even in the case of complex finished goods if there are any Chinese inputs.

This would mean a revolutionary change in how the US (and most other countries) determine the “country of origin” of imported products. The traditional rule is that the last country where a good was “substantially transformed” into a new and different product is the country of origin.

Section 301 tariffs apply to goods originating in China and have never applied to goods made or substantially transformed in other countries. Could that be about to change?

China’s economic crisis

China has dramatically expanded its exports recently. I’ve noted in previous columns that this is related to the collapse of real estate sales in China. The result: domestic consumption of goods and services is not employing enough workers. This means that exports are the only major way that China can continue to keep employment at high levels.

I firmly believe that China’s economic system is not the equal of the US in developing new products and services. The West is far better at that (iPhones, AI, airliners, to name a few). But China is better at large-scale manufacturing than it once was. China’s proficiency and competitive success is due, in part, to government assistance (subsidies). But that by itself does not explain all the success.

The Biden administration’s actions to protect certain industries from competition from China are largely an effort to curry favor with US companies and labor unions. These steps may not move the needle in terms of competing with China. But they may get votes in November. If US industries were protected completely from Chinese competition by prohibitive tariffs on everything, the US economy would shrink, not grow.

The limits of trade protections

By protecting industries that are not keeping up with China, the incentive to compete is drained. It is replaced by an attitude of complacency that the government will continue to erect barriers to Chinese trade and to prevent them from making hard decisions about the future. But in the long run, Chinese exports will continue to grow until domestic consumption in China takes off again.

In the meantime, US companies that cannot compete without low-cost Chinese production inputs, and American middle-class consumers who cannot maintain their standard of living without Chinese products, will reduce their standard of living. We need better ideas than doubling down on policies that are not effective at changing China’s behavior.

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.