The international trade front has had some important developments over the last few weeks that will likely have significant impacts on the construction of domestic wind, solar, biomass and other types of renewable energy projects. One major development was the announcement of the section 232 steel and aluminum tariffs, where President Trump has informally announced the adoption of the harshest of the remedies recommended by the Department of Commerce – universal tariffs against all products from all companies. As detailed below, the political and business reaction to these tariffs was swift and generally negative (with the not-surprising exception of the aluminum and steel companies and the unions at their plants). Unsurprisingly, these new tariffs will have an impact on the costs associated with any component made with steel or aluminum, such as turbines, racks and tracking systems, and numerous other items, due to the increase in price of steel and aluminum sold in the US.
The details related to the 232 steel and aluminum tariffs are as follows:
Section 232: Steel
On March 1, 2018, President Trump announced that he would direct the US Government to impose global tariffs of 25 percent on all imported steel. Many of the details are vague. There have been fierce wars within the administration regarding what section 232 relief should be adopted – if any – with the agencies believing that they would take the full amount of time up until the April statutory deadline. As a result of the President's unilateral decision to release the determination early, there is what internal sources have called widespread "chaos" regarding the announcement, what forms of steel and aluminum are is covered, and the full details regarding the likely remedy to be imposed. These details will need to be worked out in the coming weeks. But the overall impact is clear: absent a complete reversal by the President, there will be broad tariffs imposed on most forms of steel, from most countries. Further, there is a strong likelihood that at least initially, the tariffs will be on all forms of steel from all countries.
Details are hard to come by at this point; we will be monitoring the situation closely to determine how the implementation occurs. With the large fall in the US stock market on the day of the announcement being blamed on the section 232 news, and with there being a strong political pushback from the President's own party, the details of the implementation are being subject to strong forces that could significantly impact the actual implementation. In addition, there will likely be a strong push from major downstream consuming industries, such as the automotive industry, to carve out exemptions. How these pressures will play out is unknown, as these industries have been lobbying on this issue for months and did not succeed in blocking administrative action.
Based on the information known to date, the responses to the most important open questions are as follows:
- What was announced?
The Department of Commerce presented the President with three suggested options on steel:
- An across-the-board tariff of 24% on imports from all countries.
- Tariffs of at least 53% on imports from 12 countries: Brazil, China, Costa Rica, Egypt, India, Malaysia, South Korea, Russia, South Africa, Thailand, Turkey and Vietnam. These countries also would have a quota that would prevent them from exporting more steel to the United States than they did last year.
- A quota that would cut world-wide imports of steel by 37% from all countries.
President Trump chose the first option – a tariff on all steel products – rounding it up for good measure (reportedly because 25 percent "sounds better"). This remedy mirrored the action taken in the section 232 aluminum review, which had similar options, including a proposed tariff of 7.7 percent (also rounded up to ten percent).
- Why was the announcement made early?
Numerous administration sources were surprised by the announcement, which occurred after what several people said was a night of "chaos" as the administration internally changed its position back and forth on the form of relief. According to insiders, the President has grown impatient with progress on the issue, which was discussed in weekly meetings without anyone coming to a clear consensus. The President had promised the steel industry during the campaign that he would take action to protect steelworkers and steelmakers and determined that there was no reason to delay an announcement. Thus the announcement came out more than a month before the statutory deadline.
- Why did the President choose global tariffs?
The President was concerned that if there was an exemption for any one country then other countries would "line up" to ask for an exemption as well. President Trump also told steel company executives that a global tariff was needed to prevent transshipping through exempted countries, which he felt would undermine measures if they were only against the twelve identified countries.
- Is the administration uniformly in favor of the relief?
No. This is the largest trade action ever taken. Steel imports account for $29 billion of annual imports (and aluminum is another $17 billion). There were concerns that such a large trade action would have major – and unknown – impacts on the economy, particular heavy consumers of steel.
Defense Secretary Mattis argued that steel and aluminum use by the US military accounted for only three percent of US production and stated that the Department of Defense was "concerned about the negative impact on our key allies" if the US Government imposed large tariffs. The Department of Defense argued that any tariffs should be "targeted" and not global in effect. Secretary of State Rex Tillerson and National Security Adviser H.R. McMaster argued that large tariffs or quotas would undermine US relations with crucial allies. Gary Cohn, the director of the National Economic Council, has been lobbying to postpone or narrow the proposed remedies.
On the other side, Commerce Secretary Ross, US Trade Representative Robert Lighthizer, and White House trade adviser Peter Navarro strongly pushed for relief. The President sided with them, stating that it was a "disgrace" how prior administrations had let imports harm the US steel (and aluminum) industries.
- What was the political reaction?
The political reaction was strongly negative – even at times from Congressional members who represent districts with steel makers:
- Agricultural Retaliation Fears: Senator Pat Roberts, who chairs the Agricultural Committee, strongly disagreed with the tariffs, stating that "every time" there is a trade war other countries retaliate against US agricultural goods. Along these lines, China already has threatened to target such goods as US soybeans and sorghum, while the EU has indicated that it will consider retaliation against agricultural goods as well.
- General Retaliation. Even representatives who are not in agricultural states, such as Senator Pat Toomey from Pennsylvania, argued that retaliation would make section 232 relief a bad idea.
- Concern for Downstream Users. Many representatives stated their opposition to the tariffs, out of concern that it would harm major employers within their districts.
- Concern about Allies. There was general concern that hitting NATO allies and other friendly countries would be counterproductive to efforts to cooperate on national security, military, and foreign policy issues.
- Concerns about a Trade War. Finally, many political actors expressed fears that a trade war could spin out of control, hurting US exporters.
- What was the business reaction?
Secretary Ross stated his belief that the International Trade Commission had found that the earlier steel safeguards, which imposed restrictions on all forms of steel, had not led to a meaningful loss of jobs in downstream industries, and that the same would be true for the section 232 tariffs. Most economists, however, believe that the number of jobs saved in the steel industry will be far less than the number of jobs lost in downstream steel-consuming sectors. This is because employment in the US steel industry is only around 60,000 people while employment in steel-consuming companies is estimated to be 15-20 times larger. Because steelmaking has become highly automated, even a sharp increase in output would create only a moderate amount of new jobs.
The stock market reaction mirrored this logic. AK steel's stock price rose almost 10 percent, US Steel rose over five percent, and Nucor rose over 3 percent. Steel consumer Ford fell 3 percent and GM fell almost four percent. Overall, the stock market fell, with most business analysts stating that this was a reaction to the section 232 news.
- What was the international reaction?
The EU issued a rapid condemnation, stating that these "unfair" tariffs on steel "represent a blatant intervention to protect US domestic industry and [are] not ... based on any national security justification." The EU promised that it would "if necessary ... propose WTO-compatible safeguard action to preserve the stability of the EU market." This is a threat to impose safeguard actions to prevent a surge of steel imports into the EU. Canada promised that it would "take responsive measures" to defend its interests.
The last time there were similar tariffs imposed – by the George W. Bush administration under the "safeguards" laws – the European Union, China, and numerous other countries put their own tariffs in place to prevent the deflection of steel into their own markets. They also pursued retaliatory duties on other goods. It is highly likely that these types of responses will occur again.
- Can the announced option change?
Yes. The action is not yet formal. As Press Secretary Sarah Huckabee Sanders stated: "The president is announcing his intent to sign those actions next week. We're not going to get into any more details until those details are finalized." As part of the finalization process, the shape of any plan could change to a small or large degree.
Nonetheless, now that the President has announced the broad outlines of a global remedy, it would be politically difficult to back off and announce a completely different type of remedy.
- How will section 232 tariffs be implemented?
This is unknown, in that the last time the provision was used (for industrial tools) was in 1986, under the Reagan administration. It is not difficult, however, to change tariff rates. Once the relevant Harmonized Tariff Schedule codes are identified, the Department of Commerce instructs US Customs & Border Protection what the new tariff rates are and then the importers of record are required to pay the new, higher duties.
The President did not state how the tariffs would be formally announced, but it is likely that they will be announced by some form of Executive branch announcement, which will become effective once it is published in the Federal Register (generally 5-7 days later).
- Will there be exemptions?
In its initial section 232 report, the Department of Commerce recommended that the President include a process to allow US companies to grant requests to exclude specific products if there are no US producers of that product, if those producers cannot produce adequate quantities, or for "other" national security considerations. Presumably the President will implement this process, as otherwise the section 232 relief would have a major disruptive impact on downstream producers, who might need to shutter factories or cut employment to pay the large tariff increase. There is, however, no requirement that there be such a process.
In 2002 and 2003, when the George W. Bush administration imposed safeguard actions on broad steel imports, there were hundreds of exemptions issued within six months of the measures being imposed.
Some observers indicated that country-specific exemptions also might occur, whether as part of the initial implementation or later. These might arise due to a negotiated solution between governments. The most commonly cited example was Canada, which also is the leading seller of steel to the United States. (South Korea and Brazil round out the top three; China, which is the country with the largest amount of steel overcapacity, is not a top-ten import source for steel any more, due to the large number of antidumping and countervailing duty actions brought against it in recent years.) The President, however, has taken the position that granting any exemptions could open the floodgates to further requests.
- What is the timing of any new implementation?
President Trump stated to the steel executives that "we'll be signing it next week and you'll have the protection you need." It is likely, however, that the announcement will not contain implementation details and will be general in nature. This is because there has not been sufficient time for the Department of Commerce and other relevant agencies to come up with an administrable system. Among the open questions are what the scope of the order will be (i.e., whether it covers steel substrate, whether it covers moderately transformed downstream products, and so forth), what Harmonized Tariff Schedule numbers it will cover, what the exemption process (if any) will be, and other issues.
Due to the way the tariff system works, it is possible to take months to establish the tariff rates, as it is possible to adjust the rates up until the time of "liquidation," which is the final assessment of duties. This generally occurs six or more months later after entry of the goods into the United States. The uncertainty will likely sharply cut steel imports as importers of record will be reluctant to import goods if they do not know what the final tariff rate will be.
- How long will section 232 tariffs last?
There is no time limit under the law. The President has enormous discretion and can decide, on his own, how long the tariffs will last. President Trump himself has vowed that relief will be put in place "for a long period of time." Whether this promise will be carried out depends on the results of the inevitable court and WTO challenges. The closest analogue to this situation – the safeguard steel remedies that were put in place in 2002 by the Bush Administration – lasted only around eighteen months, as they were struck down by a WTO panel.
- Will there be a court challenge?
Without a doubt. There is too much money at stake for there not to be. At this point it is unclear how such challenges will be undertaken or how successful efforts to establish judicial jurisdiction will be, because of the rareness of the remedy and the lack of meaningful precedent.
Assuming that the challenge is accepted by the court, the administration has left itself open to judicial scrutiny. Prior to the initiation of the section 232 action, the President, Commerce Secretary Ross, and other administration figures pre-judged the conclusions, stating that they were beginning a process to give the steel industry relief. Further, the section 232 report leaves itself open to challenge, in that it ignored the hundreds of briefs and myriad factual information put on the record as part of the section 232 process, which developed the national security pitfalls of granting section 232 relief, such as the potential hollowing out of downstream industries that rely on imported steel. Instead, the section 232 report that is the basis for the President's actions lays out only the national security concerns of the US steel industry. It is not difficult to put together an argument that this is not reasoned decision making when the agency acts as if key information on the record did not exist.
An additional problem for the US industry is that it is widely reported that the Department of Defense itself was opposed to the remedy chosen, based on the fact that the US military consume only three percent of US steel output and the potential impact on major defense suppliers. Any reviewing court would also note that when an earlier attempt was made to bring about section 232 iron and steel relief, the Department of Commerce came to the opposite conclusion, finding that there was no national security interest given the small amount of steel purchased by the US military.
The section 232 report does not deal with any of these issues. Nonetheless, the ability to make these arguments would depend upon getting a court to accept jurisdiction. Further, the arguments might be "trumped" by counter-arguments that there is no place for the courts to intercede on issues of national security, which are entrusted mostly to the Executive branch, not the courts.
- Will there be a WTO challenge?
Yes. The steel safeguard remedy was struck down by the WTO, resulting in the early termination of that relief under the George W. Bush administration. This will be viewed as a model as to how to respond.
It is highly unlikely that a WTO panel would look kindly on the use of section 232's national security arguments to support action on the steel industry. Although the WTO Agreements do have a national security exemption, it has long been believed that using this exemption broadly would be the "nuclear option" that could actually lead to the end of the WTO system altogether. If the United States can unilaterally determine that an industry needs national security protections, then the same is true of any other WTO member. This would allow countries to circumvent the WTO opening of trade based upon their own political circumstances and would undermine 75 years of progress in opening up international trade and lowering trade barriers.
On the other hand, Secretary Ross has pointed out that other countries maintain global tariffs on key industries. These include automobile tariffs imposed by the United States (2.5%), the E.U. (10%), and China (25%). According to Secretary Ross, this shows that there can be exceptions that are compatible with WTO restrictions and also justify the United States taking similar actions to protect the steel (and aluminum) industries.
- What will be the impact on antidumping and countervailing duty tariffs already in place? Will it impact new case filings?
The United States currently has 169 anti-dumping and countervailing duty orders in place for steel (29 of which are against China, which is estimated to have the majority of the world's excess steel production capacity).
It is unclear how the US steel industry will respond. Reportedly, the industry has prepared antidumping and countervailing duty petitions on additional steel products, but was holding back on filing them pending the release of the section 232 results. There is still an incentive for the US industry to file these actions, especially if they have taken the costly step of preparing petitions. As noted above, the lifespan of any section 232 relief is unknown. The earlier safeguard action on steel lasted only eighteen months. Antidumping and countervailing duty actions, by contrast, are countenanced by the WTO and generally last for fifteen years or longer. (While they can be sunsetted every five years, this hardly ever happens until the third review or later.) Thus, there is every incentive to still file cases..
On the other hand, the presence of the section 232 relief will make it harder to win these cases. In order to achieve an antidumping or countervailing duty order, the US industry must show that it is suffering "material injury" that is "by reason of" the subject imports or that the subject imports "threaten" the US industry with "material injury." This determination is made by the International Trade Commission (ITC). The presence of uniform tariffs of 25 percent on imports is going to make material injury arguments harder to make at the ITC.
Section 232: Aluminum
The President also announced that he would impose a similar remedy for the aluminum industry. Here, the Department of Commerce had issued three recommendations: (1) a 7.7% tariff on all aluminum exports from all countries; (2) a 23.6% tariff on all products from China, Hong Kong, Russia, Venezuela and Vietnam, with other countries facing a quota set at 100% of 2017 exports to the United States; and (3) a quota on imports from all countries to a maximum of 86.7% of their 2017 exports to the United States.
Once again, the President chose the global tariff option, rounding it up to ten percent.
The reaction was the same from trading partners, who largely grouped their responses to the two forms of tariffs together. The aluminum industry, which has been injured by imports from China, was supportive of the measures. The issues related to this decision mirror those for the steel industry.
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