Korea Steel Deal Means More US Steel Barriers Lie Ahead

March 28, 2018 11:15 AM
Photo Credit: 
REUTERS/Aaron Josefczyk

The Trump administration’s plan to curb steel imports reached another significant turning point in late March with South Korea’s reported agreement to reduce steel exports to the United States. In return, according to press reports, Korea gets a permanent exemption from the administration’s determination to impose a 25 percent tariff on steel imports.

In the coming weeks, expect more US steel tariffs and quotas. Why? The arbitrary US goal of reducing imports to help boost capacity utilization of the domestic steel industry to 80 percent, which the Trump administration argues is needed to safeguard national security, cannot be met without reductions by exempted countries. Quotas will be the preferred restriction because they both reduce direct steel shipments to the US market and deter transshipments from non-exempted countries seeking to evade the new US trade measures.

The original announcement of the 25 percent tariff on steel imports came under the national security determination of section 232 of the Trade Expansion Act of 1962. Thirty-four countries—Canada, Mexico, the 28 members of the European Union, South Korea, Argentina, Australia, and Brazil—were exempted from the tariffs until May 1. But these countries have been given only a temporary reprieve. They still are being pressured by US trade officials to cap or reduce their steel exports to the US market. The Korea example will no doubt convince US officials that they have leverage to force steel exporters to agree to reduce shipments to the US market under threat of the 25 percent tariff.

The US restrictions already are being challenged in the World Trade Organization (WTO). China has requested WTO consultations on the US tariffs. Other countries are likely to pursue WTO litigation as well. WTO rules afford countries broad authority to impose restrictions that they regard as necessary for their national security, so the United States may prevail in litigation that could take years to adjudicate. But other countries contest the national security rationale for the US steel restrictions and argue instead that they are safeguard measures that first require a finding that the domestic industry has been seriously injured before the protection can be imposed. The European Union and China have threatened to retaliate against the US restrictions if tariffs are imposed against their steel exports to the US market.

Under the current country exemptions, who will be hit most by the 25 percent tariff on steel?

In 2017, the currently excluded trading partners exported 22.4 million tons of steel to the United States, accounting for roughly two-thirds of total US steel imports of 34.6 million tons (table 1). Among these countries, Korea has reportedly gained a permanent exemption by agreeing to a steel quota of 2.68 million tons, which cuts its shipments by 21.2 percent from the 2017 volume.[1]

For non-exempt countries, the top four targets that will be hit most by the 25 percent tariff are Russia, Turkey, Japan, and Taiwan. Collectively, these four trading partners exported 7.7 million tons of steel products to the US market last year, accounting for 22.3 percent of total US steel imports.

Table 1 US steel imports, tons, 2006–17
Partner 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Temporarily exempted partners
Argentina 148,666 91,575 147,181 74,642 127,668 166,860 188,153 217,049 197,986 107,821 60,984 210,012
Australia 1,064,196 788,115 886,741 261,029 510,660 744,483 270,365 139,651 259,447 336,910 238,257 281,879
Brazil 2,631,971 2,081,808 1,558,390 654,365 903,370 2,819,230 3,594,427 3,781,759 4,565,685 4,881,652 2,740,637 4,674,564
Canada 5,465,251 6,166,503 7,467,197 3,917,751 6,079,262 5,513,707 5,294,745 5,064,719 5,562,777 5,355,007 5,496,769 5,780,687
EU 28 6,049,338 4,658,890 4,648,306 2,366,333 3,950,349 3,986,000 5,131,728 4,423,227 6,478,728 5,482,386 4,507,513 4,944,522
Korea 2,532,200 1,819,775 2,105,201 1,202,069 1,852,087 2,571,499 3,335,090 3,451,282 4,971,836 4,417,718 3,014,290 3,401,080
Mexico 3,302,132 2,882,457 3,531,509 1,572,021 2,554,394 2,621,414 2,443,514 2,896,188 3,365,431 2,481,165 2,387,954 3,154,307
Exemption total 21,193,754 18,489,123 20,344,525 10,048,210 15,977,790 18,423,193 20,258,022 19,973,875 25,401,890 23,062,659 18,446,404 22,447,051
Exemption total as a percentage of global imports 51.3% 61.0% 62.1% 68.0% 73.4% 70.9% 66.5% 68.3% 63.1% 65.2% 67.4% 64.9%
 
Major non-exempted trading partners
Costa Rica 2,957 5,302 2,239 580 703 983 2,030 2,264 3,905 1,973 7,369 41,011
China 4,905,656 4,195,047 3,882,721 1,329,601 790,722 1,132,516 1,510,207 1,745,323 2,911,849 2,183,544 684,084 767,267
India 1,072,354 762,347 1,427,348 528,692 699,270 738,292 726,593 666,855 1,020,021 772,571 282,214 753,464
Japan 1,908,794 1,551,063 1,765,323 1,112,009 1,343,214 1,824,835 2,362,496 2,266,671 2,433,308 2,405,506 2,035,620 1,729,549
Malaysia 614,357 289,789 54,656 49,710 14,970 39,020 50,953 15,408 7,970 35,918 27,803 96,243
Russia 3,438,763 1,121,244 1,366,991 506,390 1,254,053 1,277,409 2,174,090 1,697,876 4,243,598 1,925,832 1,494,991 2,866,701
South Africa 425,866 131,377 66,792 29,842 109,452 123,003 86,328 69,429 148,616 167,918 180,439 331,046
Taiwan 1,700,184 999,629 631,661 336,636 487,210 587,826 757,730 692,882 1,078,407 1,094,539 958,001 1,130,329
Thailand 515,246 325,555 244,728 50,922 40,788 72,184 172,822 96,332 86,335 101,406 103,233 410,274
Turkey 2,174,661 520,778 807,639 445,923 527,564 664,655 1,221,684 1,091,835 1,986,877 2,568,537 1,859,156 1,987,634
United Arab Emirates 15,033 3,278 23,907 18,735 34,192 63,316 41,170 59,271 98,303 155,946 129,339 273,620
Vietnam 3,794 3,882 32,968 23,965 39,524 120,133 269,677 249,611 139,358 223,266 734,051 695,014
Non-exemption subtotal 16,777,665 9,909,291 10,306,973 4,433,005 5,341,662 6,644,172 9,375,780 8,653,757 14,158,547 11,636,956 8,496,300 11,082,152
Non-exemption subtotal as a percentage of global imports 40.6% 32.7% 31.4% 30.0% 24.5% 25.6% 30.8% 29.6% 35.1% 32.9% 31.1% 32.1%
 
Rest of the world (ROW) 3,322,729 1,918,055 2,129,711 287,176 446,588 915,371 824,438 618,805 725,657 675,879 417,374 1,045,922
ROW as a percentage of global imports 8.0% 6.3% 6.5% 1.9% 2.1% 3.5% 2.7% 2.1% 1.8% 1.9% 1.5% 3.0%
 
Global imports 41,294,148 30,316,469 32,781,209 14,768,391 21,766,040 25,982,736 30,458,240 29,246,437 40,286,094 35,375,494 27,360,078 34,575,125

Note: Steel imports defined at the HS 6-digit level as the definition given by the Presidential Proclamation on Adjusting Imports of Steel into the United States.
Source: UN Comtrade via www.trademap.org.

Note that total US steel imports from non-exempt partners only amounted to 12.2 million tons in 2017. The section 232 report released by the Department of Commerce argues that US steel imports must be reduced by 13.3 million tons to achieve a capacity utilization rate of 80 percent. However, even if the 25 percent tariff completely blocks—or the United States further raises the tariff to a level that completely blocks—all steel imports from non-exempt trading partners, the goal still could not be achieved: At least an additional 1.1 million tons of steel imports would still need to be cut from currently exempted regions. Hence, the 25 percent tariff on steel imports in its current implementation will not mitigate the claimed “threatened impairment to national security” argued by the administration.

What happens next?

First, US officials will ask their strategic allies to reduce steel shipments to the US market. Otherwise, they will lose their exemption from steel tariffs on some or all of currently exempted trade. Basically, US officials want to replicate the deal with Korea and will seek quotas to limit and reduce steel trade. Otherwise, the 80 percent capacity utilization goal cannot be achieved.

Second, the United States will demand commitments to deter transshipments of steel through exempted countries into the US market. One way to address transshipment is to set a quota on imports from exempted regions. Alternatively, if no cap is put in place, the administration may monitor imports from exempted trading partners to alert customs authorities about potential import surges that could be evidence of transshipment. The White House statement on March 22 indicates a combination of both: Steel imports from exempted countries will be closely monitored, and quotas, taking into account all steel imports since January 1, 2018, may be implemented if needed.

Third, US steel restrictions will prompt WTO litigation. Non-exempted trading partners and those that fail to obtain permanent exclusions may challenge US national security tariffs at the WTO on the grounds that the US restrictions are “economic safeguard measure(s) in disguise.” The European Union threatened to take “firm and resolute, but proportionate” actions to rebalance benefits they granted to the United States. China’s Ministry of Commerce said that it may follow a similar path under WTO rules.

WTO litigation could also be triggered by steel quotas like those just agreed between Korea and the United States. If the exporter administers the quota, it is a voluntary export restraint prohibited by WTO rules, and other steel exporters—probably China, India, and Brazil—could challenge the restriction imposed by the United States’ trading partner. If US customs implements the quota, US officials would argue that it is covered by the national security exception under the WTO’s rule book, which would be rebutted by other members as a safeguard measure.

Will other major steel suppliers follow Korea’s example? Canada and Mexico will likely get an extended exemption pending conclusion of the renegotiations of the North American Free Trade Agreement (NAFTA), which could continue throughout the year. The European Council called for the EU exemption to be permanent in a meeting on March 22. But whether the European Union, Japan, and Brazil, together accounting for almost a third of US steel imports, would accept a similar deal or propose other solutions is unclear.

Note

1. The 21.2 percent reduction is based on imports data reported by the United States (see table 1). Based on the Korean official statement, Korea agreed to a quota that amounts to 74 percent of its 2017 steel exports to the United States, or 70 percent of the average export volume (3.83 million tons) over 2015–17.

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