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Importers Cast Doubt on Premise of Trump’s Section 232 Tariffs

Posted May 04, 2018

Just hours ahead of a looming midnight deadline, the Trump administration announced on Monday that it would take another 30 days to decide whether to impose steep new tariffs on more than $22 billion worth of steel and aluminum imports from the European Union, Canada and Mexico.

The White House indicated this would be the final period to reach a deal with key trading partners, having already reached agreements in principle on tariffs with Australia, Argentina and Brazil, which are expected to be finalized in the next month.

The temporary reprieve is the latest development in a series of events that have unfolded rather haphazardly following Trump’s abrupt announcement prior to a March 1 cabinet meeting that within a week his administration planned to impose a 25% tariff on steel imports and 10% tariff on aluminum, a highly controversial move that the president framed along economic and national security lines.

The duties went into effect for most countries on March 23, but Trump delayed implementation for seven trading partners until May 1 to give them more time to make concessions that would address U.S. concerns.

As negotiations proceed over the next month, downstream users spanning all aspects of domestic industry can be expected to step up their opposition to Trump’s Section 232 tariffs, which they say will result in lost manufacturing jobs and higher prices for consumers. In support of their case, a coalition of American metal users representing more than 30,000 companies in opposition to the Section 232 tariffs recently commissioned a study to determine whether the proposed restrictions will be effective in achieving the administration’s key objective — raising the industry’s average capacity utilization rate to more than 80%, up from last year’s figure of roughly 72%.

Analysis prepared by Martin Associates, an economic consulting firm, found there is no correlation between steel imports and steel capacity utilization, meaning the imposition of steep tariffs on imports would not lead to bolstered capacity utilization. According to John Martin, the firm’s founder, this undermines the crux of the administration’s rationale for the tariffs, which is the assertion that at least 80% capacity utilization of the U.S. steel industry has to be attained in order to have sufficient production to meet national security needs in the foreseeable future.

The new report, however, states that “capacity utilization tends to increase as imports increase and decrease when imports decrease.” In other words, what really drives steel capacity utilization is the domestic output of durable goods like automobiles and heavy equipment. When durable goods output goes up, steel industry capacity utilization goes up and when durable goods output goes down, steel industry capacity utilization goes down.

The Commerce Department dismissed the April 18 report as “just a series of charts” with significant flaws, including the “failure to include 2017 data,” and argued that “correlation does not equal causation.”

Suggesting the study was likely biased in favour of the “consortium of foreign steel companies and importers” that paid for it, Commerce said the report was “flawed because it ignores other factors that would influence capacity utilization, imports, or production levels” and instead unduly focuses on “short term variations in capacity utilization rather than longer data.” Commerce insisted that “the tariffs are designed to address a long term issue.”

Martin Associates hit back at Commerce in a lengthy rebuttal in which it took issue with Commerce’s negative characterization of the American Institute for International Steel, saying it “represents the entire steel supply chain, including importers” while also noting that it received no compensation for its analysis.

Stating that “use of quarterly data from 2001 through 2016 is not short-term data analysis,” the firm indicated the reason 2017 steel industry data wasn’t used is that the American Iron and Steel Institute annual report with 2017 data has not yet been released. It stressed, however, that the analysis did include official government data for waterborne steel imports in 2017 and although it showed an increase in steel imports from 2016 to 2017, the level was still less than that in 2015.

The company, it said, “does not assert causality, just the fact that the levels of capacity utilization and imports are positively related to the level of durable goods manufacturing output and further that the steel industry capacity utilization fell constantly during the 22 months in which the Section 201 tariffs were in effect.” The latter point refers to steel import restrictions imposed by the Bush administration where capacity utilization actually fell from 90.7% in March 2002 to 79.2% in December 2003.

While Canada, Mexico and the European Union are all pushing for a permanent exemption to the steel and aluminum tariffs it remains unclear whether avoiding the new import duties will be the end of matters. Earlier this week, Peter Navarro, assistant to the president for trade and manufacturing policy, told a conference hosted by the American Iron and Steel Institute and the Steel Manufacturers Association in Washington that all countries spared from the Section 232 tariffs will still be hit with quotas “or other restrictions.”

In a statement on Tuesday, Navarro said: “The guiding principle of this administration from the president down to his team is that any country, or entity like the EU, which is exempt from the tariffs, will have a quota and other restrictions which are necessary to defend the aluminum and steel industries from imports in defense of our national security.”