On 1 June 2018, the US imposed tariffs on imports of steel and aluminium from the EU, Canada and Mexico. The tariffs are 25% on steel and 10% on aluminium. The move comes after months of temporary exemptions granted to imports from the jurisdictions in question.

The EU, Canada and Mexico have already announced that they are going to impose retaliatory measures on certain imports from the US. The EU and Canada are also planning to bring a formal challenge at the World Trade Organisation (“WTO”).

Background

The announcement follows a previous move by the Trump administration to adjust imports of steel and aluminium into the US (please see our previous briefing here). On 8 March 2018, President Trump announced the imposition of global tariffs on the imports of these products, following the conclusion of Section 232 investigations that found that high quantities of steel and aluminium imports were weakening the US economy and threatening national security as a result.

The EU, Canada and Mexico were initially granted temporary exemptions from the new tariffs, with the aim of settling the dispute through negotiations. The deadline for these negotiations was due to expire on 1 June, having already been extended by a month. On 31 May however, the US Secretary of Commerce, Wilbur Ross, announced that insufficient progress had been made to warrant any further reprieve for Europe, Canada or Mexico.

Some other countries initially targeted by the US, including South Korea, Argentina, Australia and Brazil, have agreed to impose limits on the volume of metals they can ship to the US in lieu of tariffs.

The new tariffs apply to a wide range of steel and aluminium products, including sheet, plate, bars, pipes, coils and tubes. These raw materials are used extensively in the US across a variety of sectors, including manufacturing, construction and the oil and gas industry.

Responses from the EU, Canada and Mexico

The breakdown of negotiations and the subsequent imposition of new tariffs has been strongly criticised by the targeted jurisdictions, including individual EU Member States such as the UK, Germany and France.

Back in March 2018, the EU issued a 10-page list of potential tariffs on US imports worth almost EUR3 billion, including food products, jeans, US bourbon and Harley-Davidson motorcycles, to be imposed as re-balancing measures in the event the EU did not secure an exemption from the US steel and aluminium tariffs. It is expected that such retaliatory tariffs will be imposed by mid-June, effectively marking the initiation of a trade war. The EU High Representative on Foreign Policy stated that the EU countermeasures will be “reasonable, proportionate and in full compliance with WTO rules and obligations”.

Canada has also announced plans for tariffs of up to 25% on $13 billion worth of US imports, with the affected goods including American steel, whiskey and coffee. The Canadian countermeasures are currently expected to be imposed on 1 July. Similarly, the Mexican Foreign Ministry has announced new tariffs on steel and a variety of food products imported from the US.

In addition, following the US decision yesterday, the EU and Canada have announced plans to trigger a claim at the Dispute Settlement Body of the WTO.

Potential Effects

EU exports of steel to the US were worth €6.4 billion (£5.6 billion) in 2017, with the UK exporting around £360 million worth of steel to the US every year (approximately 7% of the UK steel industry’s total exports). The potential effect on jobs is not yet clear, though the director of the industry group UK Steel has warned that UK steel producers would be “hit hard” and has called on the UK Government to implement protective measures.

In addition to the increased cost of importing steel to the US, there are fears that European markets could be destabilised by millions of tonnes of steel being diverted away from the US and into Europe. Economists have also warned that countermeasures are likely to raise the cost of everyday goods both in Europe and the US. US farmers in particular are likely to be severely affected, as many of the proposed countermeasures from the EU, Canada and Mexico relate to food products.

The financial markets have also reacted to the news, largely due to fears that the imposition of new tariffs could start a global trade war. Following the announcement of the new US tariffs, the Dow Jones industrial stock index dropped over 1%, while the FTSE closed 0.15% down.

Future WTO Disputes

President Trump has justified the new tariffs on national security grounds, relying on investigations conducted under the US Trade Expansion Act of 1962 which concluded that high quantities of imported steel were weakening the US internal economy and threatening national security as a result.

The EU has already taken steps to trigger a challenge at the WTO, and it is likely that the US will attempt to rely on national security exemptions under the General Agreement on Tariffs and trade 1994 (“GATT”) to justify the imposition of the tariffs.

Article XXI of the GATT allows a WTO member state to take “any action which it considers necessary for the protection of its essential security interests:

(i) relating to fissionable materials or the materials from which they are derived;

(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

(iii) taken in time of war or other emergency in international relations.”

The legality of the application of this exception to imports of steel and aluminium has been questioned, given that the focus of the Article is on military and nuclear products and emergency circumstances in international relations. However, the outcome of any WTO dispute argued on these grounds remains uncertain as the scope of Article XXI has never been properly tested.

Commentary

The imposition of new tariffs is likely to have a significant impact on the EU, Canadian and Mexican steel industries, while countermeasures applied to US imports can be expected to affect a large section of the US economy. The immediate impact of the US decision has already been felt in the financial markets and prompted calls for action from industry groups.

It is likely that the WTO challenge and any tit-for-tat trade war will affect the ongoing negotiations of a free trade agreement between the US and the EU.

At the time the decision was announced, the US Secretary of Commerce claimed that President Trump has the authority to lift or alter the tariffs at any time, adding that “we continue to be quite willing and indeed eager to have discussions with all those parties”. We will continue to follow the situation as events unfold during the coming weeks.

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