New Aluminum and Steel Tariffs: Is a Trade War Imminent?

Well, this should get real ugly real fast. The Trump administration has announced the forthcoming imposition of tariffs on imports of steel and aluminum, with rates of 25 percent and 10 percent, respectively. Canada and Mexico are exempted, for now, and other countries may receive such favorable treatment as well. Otherwise, the new duties will take hold on March 23, 2018.

National Security Rationale

The ostensible reason for the tariffs is national security. Section 232 of the Trade Expansion Act of 1962 authorizes the President to “adjust” imports that “threaten to impair the national security” following an investigation by the Commerce Department.[1]  Commerce initiated Section 232 investigations of steel (primarily, flat, long, pipe and tube, semi-finished, and stainless) and aluminum imports in April 2017, and duly reported its findings on January 11, 2018.

Commerce’s steel report determined that steel, and domestic steel production, is essential to national security, including “defense requirements” and “U.S. critical infrastructure sectors including transportation systems, the electric power grid, water systems, and energy generation systems.” The domestic steel industry has been “adversely affected” by lower-priced steel imports, Commerce concluded, losing market share and closing production facilities. The agency provided several recommended remedies.

The aluminum report sets forth a similar analysis, likewise concluding that “present quantities and circumstance of aluminum imports are “weakening our internal economy” and threaten to impair the national security as defined in Section 232.”

“Trade Wars Are Good, and Easy to Win”

Not surprisingly, President Trump accepted the findings in the Commerce reports and ordered the imposition of additional tariffs through two Presidential Proclamations issued on March 8, 2018. The one concerning steel establishes a 25 percent ad valorem tariff on articles classified in Harmonized Tariff Schedule subheadings 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90 from all countries except Canada and Mexico. It also holds open the possibility that other countries will be removed from coverage if “a satisfactory alternative means to address the threat to the national security” can be negotiated with them.

The Proclamation on aluminum imports imposes a 10 percent tariff on products covered in specified HTS subheadings: “(a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70).” Here, too, Canada and Mexico are exempted, and other countries can negotiate carve-outs as well.

Both Proclamations further provide for product-specific exclusions for covered articles “determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality” as well as “based upon specific national security considerations.” The exclusion process entails the filing of a request “by a directly affected party located in the United States”, along with publication of successful applications in the Federal Register. Commerce is directed to publish procedures for exclusion requests within ten days of the Proclamations.

“Everybody Has a Plan until They Get Punched in the Mouth”

The mere prospect of the additional quotas brought forth promises of retaliation from the European Union and China. If other countries follow through on their rhetoric, U.S. exporters may face restrictions on their market access abroad. Coupled with the higher costs of imports due to the tariffs, domestic producers could face a double whammy. A plan designed to save American jobs could well have the opposite effect.

The steel and aluminum tariffs are clear breaches of the United States’ “Most Favored Nation” and “bound tariff” obligations, two of the bedrock principles of the WTO. The former holds that differential tariffs applied to WTO members are impermissible except in defined circumstances (such as free trade agreements); by letting Canada and Mexico and, possibly, other countries escape, the Proclamations establish discriminatory treatment that is inconsistent with the MFN requirement. The bound tariffs principle holds that WTO members cannot raise tariff rates above agreed-upon limits, with narrow exceptions that are not satisfied by the Proclamations.

Therefore, other countries may, with some justification, consider the new tariffs to be improper and move to impose their own measures in response. But here’s the thing about retaliation. Under World Trade Organization rules, member countries are required to bring dispute resolution proceedings to challenge alleged violations by others. Withdrawal of their own tariff concessions, which is what retaliation really means, must follow a lengthy process to establish that a violation has occurred. Immediate, unilateral actions outside the WTO process would be as violative as the steel and aluminum duties themselves.

Moreover, there is a real question of whether the tariffs, based as they are on documented national security concerns, really do qualify as violations of U.S. commitments. The WTO agreements set out “Security Exceptions”, that exclude “any action which [a member state] considers necessary for the protection of its essential security interests . . . relating . . . to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment.” The Section 232 proceedings arguably suffice to shoehorn the tariffs into this exception.

Wouldn’t it be ironic if retaliatory duties were inconsistent with WTO requirements, while the initial U.S. steel and aluminum tariffs were not?

In the meanwhile, United States importers and exporters have to plan for the financial and legal blowback that will surely follow once these tariffs take effect.

[1]   The statute requires consideration of “domestic production needed for projected national defense requirements, the capacity of domestic industries to meet such requirements, existing and anticipated availabilities of the human resources, products, raw materials, and other supplies and services essential to the national defense, the requirements of growth of such industries and such supplies and services including the investment, exploration, and development necessary to assure such growth, and the importation of goods in terms of their quantities, availabilities, character, and use as those affect such industries and the capacity of the United States to meet national security requirements.” This list is not exclusive, so Commerce may take other factors into account.


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