Steel, Aluminium, And The New Trade War

‘Trade War'

The term strikes fear into the hearts of globalists. They think of the tit-for-tat retaliatory tariff hikes in the late-1920s and early-1930s that exacerbated the Great Depression in the United States.

The term is a just crusade for the dislocated. They demand their jobs back from foreign countries that have traded unfairly.

‘Trade war' has no official definition. But, make no mistake: with its Section 232 action, slapping 25 percent tariffs on steel and 10 percent tariffs on aluminium, America confirmed it has launched one. The only question is how the rest of the world will respond.

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don't trade anymore-we win big. It's easy!

Remember this action is a shot in a furious salvo from Commander-in-Chief Donald Trump:

• January 2017: America withdraws from the Trans-Pacific Partnership.
• March 2017: America threatens to ignore World Trade Organisation rulings that infringe on its sovereignty.
• May 2017: America triggers renegotiations of the North American Free Trade Agreement.
• July 2017: America notifies South Korea it wants to renegotiate the Korea–U.S. Free Trade Agreement.
• August 2017: America starts an investigation against Chinese intellectual property practices under Section 301 of the Trade Act of 1974.
• Summer 2017-present: America opposes all candidates to fill vacancies at the WTO Appellate Body.
• January 2018: America imposes safeguard actions against imported washing machines and solar panels under Section 201 of the Trade Act of 1974.
• January 2017 - February 2018: America launches anti-dumping (AD), and countervailing duty (CVD) investigations against an array of foreign merchandise, resulting in 169 AD-CVD orders on steel (29 against China), and two AD-CVD orders on aluminium (both against China).
• February 2018: America declares the World Trade Organization a “catastrophe.”

But, the March 2018 Section 232 action is not like the other shots in the salvo. It's the shot heard around the world.

International trade is supposed to be a positive sum game played at three levels: multilateral, under WTO rules; regional, under free trade agreement rules; and national, under domestic laws.

With this shot, it's clear each level is a combat theatre, the game is zero-sum, and the ‘laws of war' – especially WTO and FTA rules – are being shredded.

Thus far, most U.S. trade ‘adversaries' have responded rhetorically, threatening counter-attacks, but holding fire. Some, such as the TPP 11 (all the original TPP signatories, minus the United States), have avoided being distracted by the salvo and will sign their Comprehensive and Progressive Agreement for a Trans-Pacific Partnership on March 8.

But, the Section 232 shot will test their restraint.

The spectre of same-sectoral and cross-sectoral retaliation looms.

America exports steel, with Canada and Mexico being its first and second largest customers, respectively. They may impose barriers. China is contemplating measures against American sorghum and soybeans. The European Union is weighing tariffs on Kentucky bourbon, Wisconsin cheese, Harley-Davidson motorcycles, and Levi's blue jeans.

What major trading nations, India included, do now will determine how long and bloody this new trade war is. 

So, it is vital they – and all the world's businesses and consumers in the line of fire – understand the ‘weapon' (Section 232), and the intentions and morale of their ‘adversary' (America).

Here are the key considerations, including whether the New Trade War is justified.

What Is Section 232?

The only U.S. trade weapon explicitly based on national security considerations.

During the John F. Kennedy Administration, Congress delegated power to the Executive Branch via the Trade Expansion Act of 1962 to investigate whether an article “is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security…” (emphasis added.) Unlike AD-CVD law and Section 201, under Section 232 there is no need to prove ‘injury' or ‘threat' to an industry, nor is there any need to show imports ‘caused' impairment to national security. And unlike Section 201, under Section 232 there is no need to show an “unforeseeable” import increase.

So, Section 232 is one of the easier trade weapons to fire in America's arsenal.

What Do ‘Impairment' And ‘National Security' Mean?

They are left strategically ambiguous.

To maximise Presidential discretion and the worries of adversaries, they are undefined.

A 2001 Section 232 case suggests national security is impaired if imports foster U.S. “dependence,” and the source is “unreliable” or “unsafe,” or if imports “fundamentally threaten” the ability of a domestic industry to meet U.S. national security needs.

Now, the Commerce Department adds ‘national security' is not limited to defence, as in ordnance, but also includes infrastructure. That cut well with the Diamond Sawblades Manufacturers Coalition: it said its diamond-tipped sawblades are essential to build airports, bridges, highways, and hospitals, but it needs protection from a cheap import surge.

What Are The Legal Criteria For Deploying Section 232?

Domestic production capacity versus imports in relation to defence needs.

There are six variables:

• What are U.S. production needs relative to national defence requirements?
• Does the U.S. industry have the production capacity to meet those requirements?
• Are resources, supplies, and services essential to national defence available?
• What is the pattern of imports, and do imports affect the capacity of U.S. industry to satisfy national security?
• What impact does foreign competition have on U.S. industry?
• Is there substantial unemployment, revenue declines, loss of skills or investment, or other serious effects thanks to the displacement of U.S. products by excessive imports?

The variables need not all be considered, nor equally weighted, and other variables can be examined. When the President launched the Section 232 investigation in April 2017, he ordered the Commerce Department to study each variable, and added two others: any relevant factors weakening America's economy, and all other relevant factors.

How Broad Is The Commander-in-Chief's Discretion Under Section 232?

Very.

If the Commerce Department renders an affirmative finding, then the President must act to ‘adjust' the imports of any “article and its derivatives so that such imports will not threaten to impair the national security” of the U.S. ‘Adjustment' is not tied to the geographical origin of imports, nor to a class of merchandise, as are the AD-CVD and safeguard remedies.

Section 232 allows the Commander-in-Chief to fire at whomever and whatever target he pleases.

‘Derivatives' refer to downstream products that incorporate steel and aluminium. That's why the Coalition of American Flange Producers argued for relief. Aviation jet refueling systems, chemical manufacturing plants, navy ships, and nuclear power reactors all need flanges, but Coalition members feel imperiled by Chinese and Indian imports.

How Often Has Section 232 Been Used?

Twice.

Despite twenty six Section 232 investigations (between the first, launched in 1963, through February 2001, with none thereafter until April 2017, covering a merchandise from circuit ceramic packaging to machine tools), a threat to national security has been found, and a remedy deployed, only twice.

• In 1975, President Ford restricted imports of petroleum and petroleum products (e.g., from Iran and Libya).
• In 1979, President Carter used Section 232 to embargo oil from Iran.

In cases from 1999 and 2001, the Department of Commerce investigated crude oil, and iron and steel, imports, respectively, but recommended no relief.

What Targets Did The Department Of Commerce Give The Commander-in-Chief?

Three, with no a priori exclusions for any country or product.

What Did The Commander-in-Chief Pick?

None... but worse.

Target One, plus a bump stock: steel tariffs of 25 percent (not 24 percent), and aluminium tariffs of 10 percent (not 7.7 percent), with no clear end to the shooting.

Why The Enhanced Tariff?

Jobs, votes, circumvention, production capacity utilisation, and war.

In a June 2016 speech in Pittsburgh, Pennsylvania, candidate Trump declared his intention to use Section 232 to fight what he saw as Chinese mercantilist policies that killed American jobs. Between 2000 and 2016, 51,400 American steel workers were made redundant, with 19,000 layoffs in 2015 alone. Since 1998, steel employment in the U.S. contracted by 35 percent.

In the U.S. aluminium industry, from 2013 to 2016, employment plummeted 58 percent.

A tough, transparent tariff, which also raises government revenues (quotas don't) plays well in the traditional industrial belt, where candidate Trump won vital Electoral College votes. With Congressional elections in 2018, and a Presidential election in 2020, why jeopardise that base?

The base is happy knowing the Administration aims to boost U.S. capacity utilisation to roughly 80 percent in each industry, up from the 2017 level of 73 percent in steel and 48 percent in aluminium, by slashing steel imports by 13.3 million metric tons and aluminium imports by 669,000 tons. The base probably won't question whether 80 percent is a viable target. In steel, world capacity utilisation rates average from 71.7 percent in April 2016 to 73.5 percent in September 2017.

The base also is pleased to learn Section 232 combats foreign tricks to skirt U.S. AD-CVDs. The Administration says Chinese shippers make minor alterations to their goods and trans-ship them through third countries, to confuse U.S. Customs and Border Protection. A big, beautiful Section 232 tariff is a wall against all the subterfuge.

The scariest rationale is a – God-forbid – nuclear war on the Korean Peninsula.

The President said: “When our country can't make aluminium and steel ... you almost don't have much of a country,” and added, “We need great steelmakers, great aluminium makers for defense.” If war occurs, then American steel and aluminium producers will have the capacity to rebuild that Peninsula.

Do Foreign Steel And Aluminium Imports ‘Impair' America's ‘National Security'?

Not enough to justify Section 232 remedies.

The strongest ‘yes' points, culled from the Commerce Department's 262-page Steel and Aluminium Reports, both published in January 2018, are:

However, the rebuttals are overwhelming.

First, the U.S. defense industry purchases less than 5 percent of domestic steel output and about 1 percent of domestic aluminium output.

Only 3 percent of steel made in America is used for defense or homeland security.

So, American producers can fill Pentagon needs, even if they increase, except for certain alloy steels (used in armor plating), where domestic mills lack capacity.

Second, the U.S. is hedged with an array of steel sources – 110 countries and territories. Most steel comes from allies like Canada, which provides 6 percent of steel (the single biggest supplier, and 42 percent of aluminium) consumed in America, as well as Brazil, Japan, South Korea, and Mexico.

Third, while China is the world's largest steel exporter, America is not dependent on it.

China is only the 11th largest exporter to the U.S., accounting for just 4 percent of U.S. steel imports.

On the list of China's top steel export customers, America ranks a lowly 26th, behind the top export destinations, South Korea, Vietnam, and the Philippines.

Fourth, the trends are not ominous. Chinese steel exports rose globally by 378 percent (since the second quarter of 2009), but fell in volume and value terms (by 31 percent and 2 percent, respectively, in 2017 and 2016). Chinese steel exports to America fell by 5 percent (2017), and low-end steel fell by over 67 percent (since 2015). China also exported less, and consumed more, of what it made. Chinese exports as a share of output dropped from 13.8 percent (2016) to 9.1 percent (2017).

For India, the situation is nuanced. India is the world's 14th biggest steel exporter, and the U.S. is its sixth largest destination, behind Nepal, Vietnam, Italy, Belgium, and the UAE. Globally, India's steel exports rose by 115 percent, since the first quarter of 2005, and by 68 percent and 75 percent in volume and value terms (2017), respectively.

Indian steel exports to America jumped 162 percent.

India exported more of the steel that it manufactured. Exports as a share of production increased from 9.9 percent (2016) to 15.6 percent (2017).

Fifth, the aluminium jobs saved-versus-endangered figures are not close. The American aluminium industry employs 161,000 Americans directly and supports indirectly a further 700,000 jobs. They don't all have Top Secret Security Clearances. Primary and ingot aluminium, and rolled can sheet, are used for food and beverage containers, lids, and closures – not defense articles. Over 11,000 Americans work directly in the aluminium can industry. American breweries, which support another 2.2 million American jobs, use aluminium for beer cans. Non-alcoholic beverage companies that use aluminium cans employ 240,000 Americans directly and another 788,000 jobs depend on these firms' sales.

So, the likes of Molson Coors and Coca-Cola might try passing on higher can costs to consumers or cut staff.

How Unified Is America To Deploy The Enhanced Section 232 Tariff?

Not very.

Economy-wide collateral damage is likely. The top three American steel-consuming industries are construction (accounting for 40 percent of demand in 2017), autos (26 percent), and energy (10 percent).

What Happens If America Is Targeted For Retaliation In The WTO?

Catastrophe!

America will invoke the national security exception in Article XXI of the General Agreement on Tariffs and Trade. Then, Bahrain, Egypt, Saudi Arabia, and the UAE will do so in defence of their comprehensive boycott of Qatar. And then, China will invoke the analogous clause in the General Agreement on Trade in Services, Article XIV, to justify its draconian Cyber Security Law, which took effect on January 1, 2017 and prevents the free flow of data across borders.

The point is, if WTO members invoke these defences too easily, then they undermine the multilateral trading system.

The defences embolden them to attack when imports pose no bona fide national security threat.

Is Global Over-Capacity The Core Problem American Steel And Aluminium Producers Face?

Yes.

Even the Commerce Department's Steel Report confesses:

• World steelmaking capacity is 2.4 billion metric tons, up 127 percent from 2000, while steel demand grew at a slower rate.
• The recent global excess capacity is 700 million tons, almost 7 times the annual total of U.S. steel consumption.

China is by far the largest producer and exporter of steel and the largest source of excess steel capacity.

China's excess capacity alone exceeds the total U.S. steel-making capacity.

Moreover, the Trump Administration claims Beijing boosted its steel production capacity over 160 percent since 2009 [through July 2017], and says current Chinese steel production exceeds the total combined capacity of America, Brazil, India, and Japan.

Likewise, a July 2017 U.S. International Trade Commission Report concludes China, both the world's largest producer and consumer of aluminium, accounts for most of the 25 percent increase in global aluminium production (2011-2015), causing oversupply and “severe” price decreases.

Ironically, an enhanced Section 232 tariff cannot fix the overcapacity problem.

Then Why Not Collaborate To Reduce Overcapacity?

Ask Xi Jinping and Narendra Modi.

At the September 2016 Group of 20 Summit in Hangzhou, the Organisation for Economic Cooperation and Development established a ‘Global Forum on Steel Excess Capacity'.

In July 2017, following the Hamburg Summit, the G-20 leaders called for an end to market-distorting subsidies, and for a reporting process with a view to developing concrete, swift policy solutions to address excess capacity.

Unsurprisingly, after these communiqués, nothing happened.

Some countries (read: China) see an existential political threat from steel industry contraction. How can they shed excess capacity in harmony with extensions of terms for their political masters?

Other countries (read: India) see a developmental threat from contraction. How can their steel industries be an engine of growth, and thus justify re-election of their leaders?

What Would JFK Do?

On 11 October 1962, President Kennedy signed the 1962 Act, saying:

This is the most important international piece of legislation, I think, affecting economics since the passage of the Marshall Plan. It marks a decisive point for the future of our economy, for our relations with our friends and allies, and for the prospects of free institutions and free societies everywhere.

John F. Kennedy, President of the United States

He didn't intend Section 232 for a trade war. And, he knew to give adversaries a face-saving way out. That's how he kept the October 16-18, 1962, Cuban Missile Crisis from escalating into nuclear war.

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.

The views expressed here are those of the author's and do not necessarily represent the views of BloombergQuint or its editorial team.

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