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Viewing Steel As An Example Of "America First"

20.06.2017 Barath Harithas
Viewing Steel As An Example Of "America First"

The word "fair" has increasingly re-entered the U.S. trade lexicon alongside its old mantra of "free" as US President Donald Trump seeks to do more to enforce or renegotiate trade agreements in the name of protecting traditional American jobs - particularly in manufacturing.

In line with this narrative, in mid-April 2017, under Section 232(B) of the Trade Expansion Act, Secretary of Commerce Wilbur Ross and other interested agencies were tasked to determine if steel imports into the United States threaten to impair national security and recommend suitable courses of action in a final report to President Trump, possibly by end-June 2017.

While Section 232 was commissioned to focus narrowly on national security, i.e. specific products tied to defense applications, it is also useful to see this action as part of a broad-based program of action – under the banner of ‘America First.’

Trump believes that the global economy is rigged against America, and he wants to change the rules fundamentally. It is simplistic, misleading even, to characterize his approach as merely protectionist. Rather, it seeks to recover lost territory ceded by the perceived weaknesses of his predecessors.

However, translating campaign rhetoric and woolly pledges into policy is a different matter. Section 232 for steel can be seen as an opening salvo in transitioning to a more appropriate trade policy for the United States by limiting unfair imports.

But how does one differentiate between ‘good’ and bad’ imports?’ For example, a number of steel groups have suggested the investigation should focus on countries like China and have urged the Commerce Department to exempt others, like Canada, from the investigation.

However, Canada is by far the largest source of steel imports into the US, accounting for 17% of steel imports in 2016. Chinese steel imports, in comparison, ranked only 11th and represented less than 1% of total steel imports. (Source: IHS Global Trade Atlas, March 2017)

Importantly, import restrictions would not address the real problem – Chinese overcapacity. It is perhaps understandable that this is something the US believes it has to act against. The global steel market has been distorted by surplus production in China, driving down worldwide prices, which could have the effect of discouraging long-term investment in the US domestic steel industry.

However, it is difficult to see how any threat of import restrictions into the US would affect the problem of overcapacity in China. Many steel mills in China are inefficient, debt-laden “zombie” state-owned mills. In fact, steel capacity China actually rose in 2016 despite a high-profile closure program targeted at shutting idled plants.

Even if successful, Chinese surplus inventories will continue to be released periodically into global markets, causing it to remain over supplied, and keeping prices depressed for the foreseeable future. No matter how high the United States tries to build a tariff wall, these import restrictions will do nothing to address the real causes of global price declines for steel.

Section 232 in this instance will cause a "whack-a-mole" scenario of shutting out unfairly traded imports from China only to see shipments increase from elsewhere or transshipped through third countries.

Because the recent Section 232 investigation was self-initiated by the Trump administration, many believe it pre-ordained that some type of import restriction will be imposed.

However, past Section 232 determinations indicate that steel imports were not a “national security” threat. Only 26 investigations have ever been conducted under Section 232 to date. Most (19 out of 26) resulted in either a finding of no national security threat or no action taken in any way.

The most recent Section 232 investigation was concluded in October 2001 and was also centered on steel. Even taking into consideration the national security requirements of the post 9/11 climate, the Department of Commerce found then that imported steel did not threaten to impair U.S. national security.

In that report, Commerce found that the entire US military’s steel requirements was less than one percent of the domestic steel industry’s production capacity. Commerce concluded (1) that the U.S. was not dependent on imported steel, and (2) that steel imports did not threaten the ability of domestic producers to satisfy any US national security requirements for steel.

Even if current US military requirements for steel have doubled from 2001 requirements, this would still be less than one percent of the 88 million tons of steel produced in the United States in 2016. The objective data shows steel (and, likely, aluminum) imports do not pose a threat to national security interests.

However despite the legal precedents, we should not underestimate the resolve of the Trump administration on this front for 3 reasons:
  1. For all of his diplomatic fumblings and erratic behavior, Trump has consistently moved to deliver on his campaign pledges, even those dismissed by his detractors as being impracticable. His optimal strategy is the maximal retention of existing supporters, and what better way than to deliver grandly on his campaign promises including those on trade?

  2. The triumviate of Wilbur Ross, Peter Navarro and Robert Lighthizer. Trump’s trade team is mostly cut from the same cloth -- with Ross, Lighthizer, and Navarro viewing trade deficits with great suspicion, holding protectionist attitudes, and sharing a critical view of China’s trade practices. There are also clear links between the aforementioned personalities and the steel industry. Ross was actually personally involved in the industry, having formed the International Steel Group in the early 2000s. Lighthizer has a clear record of advocacy for the steel and has worked on numerous antidumping and countervailing duty cases for the sector.

  3. The recent, April 11, invocation of the Particular Market Situation rule by the Department of Commerce in the Korea oil country tubular goods (OCTG) ruling. The case is somewhat complicated, but in short, Korean steel producers were accused of dumping goods into the US because the Koreans were said to be using unfairly subsidized Chinese steel to make cheap oil tubes.
Additional tariffs, quotas, or other import restrictions may, of course, temporarily create a pocket of artificially higher market prices for steel in the US, particularly when compared to depressed global prices. This may provide a short-term benefit to US steel producers who could have substantially less competition after import restrictions are imposed.

BUT downstream manufacturers will either have to bear the increased costs, or more likely pass those increased costs down to the ultimate buyer/consumer in the form of higher prices. For every US steel job saved through Section 232, significantly more US manufacturing jobs will be put at risk, because their foreign competitors would gain a cost advantage over them because of the import restrictions driving up US steel prices.

Though the Section 232 national security investigation would appear to be the perfect forum to single out the Chinese for their unfair dumping practices, doing so also might put in jeopardy the budding relationship Trump has developed with Chinese President Xi Jinping. The recently announced “early harvest” deal has been profiled as a reset of US-China trade relations and going after China now will most certainly ruin the goodwill earned.

Moreover if the US tries to justify a broad-based tariff or quota for all steel products on the grounds of 'national security,' it will embolden other countries to use the same justification on other categories of products leading to retaliation. Restrictive unilateral actions will not provide lasting solutions either.

In short, labelling steel imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners.

But such a rational decision may not be so likely.

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