On March 8, 2018, President Trump signed Presidential Proclamations adjusting imports of steel and aluminum into the US. This action marks the imposition of heavy tariffs on imports of steel and aluminum, in a move that may trigger a trade war with the EU and other countries. Stock markets have already responded. US Steel and AK Steel share prices have gone up by 5.8% and 9.5% respectively, while steel- and aluminum-dependent businesses fear the consequences of potentially higher costs if the measures are implemented as announced.

Background

The US is one of the world’s largest importers of steel and aluminum. However, some economists consider that these imports have been at the expense of the domestic industries. In relation to the steel sector, six basic oxygen furnaces and four electric furnaces have closed in the US since 2000, and employment in the steel sector has dropped by 35% since 1998. In the aluminum sector, employment fell by 58% from 2013 to 2016, with only one remaining US producer of high-quality aluminum alloy needed for military aerospace products.

The Commerce Department has recently initiated anti-dumping investigations to address the dumping of aluminum and steel. As of the end of February 2018, the US had:

• two anti-dumping and countervailing duty orders in place on aluminum, both against China, and four ongoing investigations against China; and
• 169 anti-dumping and countervailing duty orders in place on steel, of which 29 are against China and 25 are ongoing investigations.

Trade Expansion Act of 1962

Section 232 of the Trade Expansion Act of 1962 allows the Secretary of Commerce to initiate investigations into the effects of imports on national security, with a requirement to issue a report within 270 days. A report should include recommendations for action if it is determined that a product is being imported into the US in such quantities or under such circumstances as to threaten to impair the national security of the US.

The President is then obliged, within 90 days from the publication of the report, to determine the nature and duration of any action that should be taken to adjust the imports of the product in question in order to remove the threat to national security. If the President determines that an action is necessary, adjustment measures must be implemented no later than 15 days from the President’s determination.

Under Section 232, for the purpose of assessing whether or not an adjustment to imports is necessary, the Secretary of Commerce and the President shall give consideration to:

• domestic production needs for projected national defense requirements;
• the capacity of domestic industries to meet such requirements;
• existing and anticipated availabilities of 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, availability, character and use, as those affect such industries and the capacity of the US to meet its national security requirements.

In making their determinations, the Secretary of Commerce and the President shall “recognize the close relation of the economic welfare of the Nation to [US] national security, and shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports shall be considered, without excluding other factors, in determining whether such weakening of [US] internal economy may impair national security.”

Prior to 2017, there had only been 14 investigations under Section 232 since 1980, and just two of those proceedings resulted in adjustment measures:(i) in 1982, crude oil imports from Libya were restricted and (ii) in 1986 voluntary restraint agreements were negotiated to restrict imports of machine tools from Japan and Taiwan as a result of a Section 232 petition filed in 1983.

Investigation by the US Department of Commerce

Between April 2017 and January 2018, the US Department of Commerce undertook two separate investigations into the effects of steel and aluminum imports on US national security. On February 16, the Trump Administration released two reports summarizing the findings of the Department. The reports concluded that the present quantities of imports of steel and aluminum products are weakening the US internal economy and threaten to impact the national security of the US.

The reports recommended an adjustment in the level of steel and aluminum imports through quotas and/or tariffs imposed on a broad range of product categories currently produced in the US. The Department of Commerce made the following alternative recommendations:

• steel imports:
  • a global tariff of 24% on all steel imports from all countries;
  • a tariff of 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam), with a quota on steel imports from all other countries equal to 100% of their 2017 exports to the US; or
  • a global quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the US.
• aluminum imports:
  • a tariff of 7.7% on all aluminum exports from all countries;
  • a tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela and Vietnam. All other countries would be subject to quotas equal to 100% of their 2017 exports to the US; or
  • a quota on all imports from all countries equal to 86.7% of their 2017 exports to the US.

The recommendations were aimed at ensuring that US domestic steel and aluminum producers maintain a capacity utilization rate of at least 80%. The reports did not specify the duration of the proposed remedies.

Trump’s announcement and the EU’s response

On March 1, President Trump announced he had decided to impose global tariffs on steel and aluminum pursuant to Section 232 of the Trade Expansion Act of 1962. On March 8, the Presidential Proclamations on Adjusting Imports of Steel and Aluminum were officially signed, marking the imposition of import duties—25% on steel and 10% on aluminum—for an “unlimited period” of time. The tariffs will apply beginning March 23, 2018, to imports from all countries except Canada and Mexico.

The European Commission responded by threatening to levy retaliatory tariffs against imports from the US of more than 100 US products worth €2.8 billion (such as orange juice, Kentucky bourbon and peanut butter). The President of the European Commission, Jean-Claude Juncker, also stated that the EU would start preparations for a World Trade Organization (WTO) dispute settlement consultation, in order to commence a formal challenge at the WTO Dispute Settlement Body against the proposed tariff measures.

The Secretary of Commerce has issued procedures for requests for exemptions from the tariff measures, and the EU has already indicated that it will seek such relief. 

Essential security interests exception

It is expected that, in any future dispute (as may be initiated by the EU and/or other WTO members), the US is likely to attempt to justify its tariff measures as necessary for the protection of its essential security interests under Article XXI of the General Agreement on Tariffs and Trade 1994 (GATT).

Article XXI of the GATT contains an exception, which allows a WTO member 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 Article XXI exception focuses on military products or emergency circumstances in international relations. Accordingly, a national security justification in the context of the US measures on steel and aluminum is subject to attack, in particular since, as pointed out by the European Commission, the US Secretary of Defense has stated publicly that US military requirements represent no more than 3% of US production and that the Department of Defense is able to acquire the steel and aluminum it needs for US national defense requirements.

At the same time, the scope of the Article XXI exception has never been properly tested in a dispute settlement. In 1985, the US relied upon Article XXI (iii) to justify measures prohibiting all imports of goods of Nicaraguan origin. The US argued that Article XXI left it to each contracting party to judge what action it considered “necessary” for the protection of its own essential security interests. In response, Nicaragua initiated a complaint at the (then) GATT Panel. The Panel report (which was not officially adopted) was critical of actions taken by the US and stated that a party relying on the exception must balance its essential security interests with international trade obligations. However, it also stated that it was not for the Panel to examine or judge the validity of, or the motivation for, the invocation of Article XXI (iii) by the US.

As such, it remains to be seen if a WTO member’s reliance on Article XXI of the GATT to justify increased import tariffs is likely to go unchallenged.

Safeguard measures

Alternatively, the US might attempt to justify the imposition of tariffs on steel and aluminum products by relying on the WTO Agreement on Safeguards.

Under WTO rules, safeguard measures may be applied to products only if the products are imported in such increased quantities and under such conditions so as to cause or threaten to cause serious injury to the domestic industry. 
Safeguard measures can take the form of a quantitative restriction (such as set quotas on imports of products) or an increase in the tariff rate applicable to imported products. With respect to quotas, the minimum limit is defined with reference to the average imports of that product over the previous three years. With respect to an increase in the tariff rate, no maximum rate is specified. However, the general rule is that safeguard measures can only be applied to the extent necessary to remedy or prevent a serious injury to the domestic industry.
Safeguard measures are “fair” trade remedies; they do not depend upon “unfair” trade actions (as is the case, e.g., with anti-dumping or countervailing measures). As such, safeguard measures are generally viewed as actions that can only be taken in extraordinary circumstances. The WTO Appellate Body previously concluded that safeguard measures were “intended by the drafters of the GATT to be matters out of the ordinary and to be matters of urgency, to be short, ‘emergency actions’” (Korea – Dairy, DS98, 1999).

In determining whether the increased imports have caused or threaten to cause serious injury to a domestic market, consideration must be given to all relevant factors that are objective and quantifiable in nature, in particular:

• the rate and amount of the increase in imports of the product concerned in absolute and relative terms;
• the share of the domestic market taken by increased imports; and
• changes in the level of sales production, productivity, capacity, profits and losses, as well as employment.

The WTO Dispute Settlement Body has previously described “serious injury” as a “very high standard of injury,” and explained that this is an even higher threshold than the one required to justify anti-dumping duties. An increase in competitive pressures on domestic products would not normally, in itself, be sufficient to cause serious injury to the domestic industry.

In terms of procedure for the implementation of safeguard measures, an investigation must be carried out by US authorities, involving a consultation with interested importers, exporters and other third parties. If the US purported to justify its increased tariffs on steel and aluminum as safeguard measures, it would need to be assessed whether the Section 232 investigations conducted by the US Department of Commerce would satisfy the relevant criteria. In any event, given their indefinite scope, it is unlikely that the tariff measures would be justifiable under the WTO Agreement on Safeguards.

Conclusion

Steel and aluminum exporters have been awaiting the release of procedures for exclusion from the tariff measures, which were published today in the Federal Register. The steel and aluminum proclamations state that the exclusion procedures will permit a directly affected party located in the US to apply for a tariff exemption for a steel or aluminum article on one of three grounds: (1) the article is not produced in the United States in sufficient quantities; (2) the US product is not of a satisfactory quality; or (3) based on specific national security considerations. President Trump’s explanation for excluding imports from Canada and Mexico from the tariff measures has been rather ambiguous. The Presidential Proclamations state that Canada and Mexico “present a special case,” given the “shared commitment to supporting each other in addressing national security concerns” and to “addressing global excess capacity for producing” steel and aluminum. It remains to be seen whether the EU (including the UK) will be able to secure a similar exemption from the increased duties. It is particularly relevant that the proclamations recognize that the US has important security relationships with certain countries and invites such countries to discuss alternative means to address the impairment of US national security caused by imports from that country. For example, this language could provide a mechanism for the UK to seek relief from application of the tariffs.

The purported use of the national security exemption has stirred controversy around the world and may lead to disputes at the WTO level. If the EU is unable to obtain an exemption from the tariff measures by March 23 (the date from which the increased duties are due to apply), it is expected to adopt countermeasures which may lead to a trade war (in particular, if President Trump delivers on his threat to retaliate further against any tariffs that the EU may impose on US imports).

[View source.]