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Section 232: One year later, hits and misses

Mar 22, 2019 | 02:53 PM | New York | Yvonne Li

As of March 23, it has been a full year since President Donald Trump’s administration imposed tariffs against imported steel and aluminium under Section 232 of the Trade Expansion Act of 1962, which allows the president to place restrictions on imports.

Trump’s trade measures have drawn criticism from several US trading partners who argue that these actions violate existing US commitments under multilateral and bilateral or regional trade agreements. Those countries have imposed tariffs on US exports in retaliation.

Meanwhile, Congress continues to actively examine and debate the tariffs, and several bills have been introduced that aim to restrict or revise Section 232.

On the first anniversary of the Section 232 duties, Fastmarkets AMM takes a look at the results of the program, its impact on the US and global economy, and its legal implications.

What has transpired in the past 12 months

The price of hot-rolled coil, a leading pricing indicator for the steel market, reached a nearly 10-year peak in July last year.

From October 2017 to July 2018, Fastmarkets AMM’s daily US Midwest HRC index soared by 56.3%, climbing to $45.84 per hundredweight ($916.80 per short ton) from $29.33 per cwt. The index has since retreated, however, standing at $34.78 per cwt as of March 21.

The US Department of Commerce’s two goals under Section 232 - to reduce imports and boost domestic production - have been reached, somewhat.

US steel mill product imports stood at 30,573,528 tonnes for the full year 2018, down by 11.3% from 34,472,507 tonnes in 2017, according to data from Commerce’s Enforcement and Compliance division.

And the domestic steel industry appears to be in a better shape now than 12 months ago. US mills produced 95,063,000 net tons of crude steel through December 29, 2018, at an average capacity utilization rate of 78.3%, up by 6.2% from 89,483,000 tons at an average capacity utilization rate of 74% in the same 2017 period, data from the American Iron and Steel Institute shows.

Steel mills in the US also reaped record profits, restarted idled capacity - including U.S. Steel’s two blast furnaces at Granite City Works, Illinois - and announced new expansion projects. According to Morgan Stanley Research, total US steel capacity additions and restarts from 2017 to 2022 will likely exceed 15 million tons, and could potentially reach 18 million tons.

At the same time, the blanket Section 232 tariffs have resulted in rising supply chain costs across various sectors.

US importers have been forced to pay additional taxes on roughly $23 billion in steel imports and $17 billion in aluminium imports, according to the recently introduced Bicameral Congressional Trade Authority Act of 2019. Domestic prices for these products have also increased, hurting downstream consumers.

In the face of rising costs, US companies that use imported steel and aluminium are allowed to file a request for certain products to be excluded from the 232 duties. Those requests are then subject to rebuttals and surrebuttals, however. Amid a prolonged backlog, most requests are still pending review.

As of December 20, 2018, 44,389 requests had been filed seeking exemption from the steel tariffs, and 6,013 had been filed seeking exemption from the aluminium tariffs, according to data produced by researchers with the Trade and Immigration Project of the Mercatus Center. Commerce's Bureau of Industry and Security (BIS), which processes the requests, has reached a decision on 42.9% of those requests, approving 14,301 and denying 4,723. At the same time, the BIS had reached a decision on 19.1% of the aluminium exclusion requests, with 917 approved and 229 denied.

Global excess capacity crisis

The Trump administration’s Section 232 program also reportedly was intended to address global excess capacity crises in both steel and aluminium, a systemic problem that is exacerbated by state subsidies - and one that most countries acknowledge but few are willing to address.

Although China, as one of the world’s largest producers of both steel and aluminium, is widely cited as the main driver of overcapacity, Canada, India and countries across the Middle East also support their own domestic production beyond sustainable levels.

While previous US administrations appeared more willing to sacrifice one industry - and the manufacturing industry in particular - in favor pf cheap and unfairly priced imports, the Trump administration sought a market rebalancing, to allow US manufacturing some breathing space.

Whether or not the steel industry has taken full advantage of the altered trade situation is now in question, market participants and legal experts noted. For example, in addition to the new crude steel capacity being added in this country, inefficient operations - such as U.S. Steel’s Granite City works - are being revived as well.

US agriculture loses twice

After the 232 duties took effect, many countries retaliated against US exports, with agriculture and food products among the hardest hit, with an estimated $25 billion of US annual exports potentially affected by trade partner retaliations, according to the Congressional Research Service. 

The steel and aluminium duties affect the agriculture industry in two ways. First, farmers' products become more expensive to the extent that they use aluminium and steel to move and process their goods. Second, when farmers try to export their products, they are hit by retaliatory tariffs from other countries.

For example, China, the largest export market for US soybean farmers, hiked its tariff on US soybeans in early July 2018. Since then, US exports to China essentially stopped; January-October 2018 shipments fell 63% lower than in the same 2017 period, a report from the Congressional Research Service showed. 

And US soybean prices have declined by about 20% since China’s retaliatory tariffs took effect, according to the American Soybean Association. And US soybean producers that are unable to make up their lost market share in China through increased sales to the European Union and other countries must sell their crops at lower prices or, in some cases, may be unable to sell their crops at all.

US, global economy

Revenue garnered from the Section 232 tariffs stood at nearly $4.3 billion for steel and $1.38 billion for aluminium as of February 21, 2019, according to data from US Customs and Border Protection, which assesses and collects duties on imports.

At the same time, the US posted an $891.3-billion trade deficit in merchandise last year, an all-time high, according to the US Census Bureau and the US Bureau of Economic Analysis.

On a macro level, the US economy appears to have held up well so far, on the heels of eight years of economic recovery and steady private-sector job growth. The inflation and unemployment rates, the US Federal Reserve’s dual mandates, have remained within the central bank’s targets.

However, at its latest meeting, concluded on March 20, the Fed signaled it is unlikely to raise interest rates this year in the face of fading economic momentum in the US and overseas, possibly ending the series of rate hikes that began more than three years ago.

Slowing US economic growth will be met with new steel and aluminium capacity coming online, potentially putting a damper on metal prices.

The HRC price is expected to average $690 per ton in 2019 after peaking in the second quarter, according to Morgan Stanley analyst Piyush Sood; the firm’s price forecasts for HRC in 2020 and 2021 stand at $660 per ton and $640 per ton, respectively, he said.

To be sure, the US has not had a long-term experience of the Section 232 duties. Prior to last year's announcement, a president arguably last acted under Section 232 in 1986, when Commerce determined that imports of metal-cutting and metal-forming machine tools threatened to impair national security, the Congressional Research service reported. And tariffs against Canada, Mexico and the European Union – all major steel and aluminium suppliers to the US – were only imposed last June.

Still, some global trade experts said the trade measures and their economic consequences will be much worse for consumers and downstream users - the automotive and construction sectors, in particular - than they are beneficial for the steel and aluminium producers in the long run.

Challenge of navigating 232 tariffs and quotas

Uncertainties surrounding the scope and duration of the Section 232 have posed challenges to companies attempting to navigate the tariffs and quotas.

Companies and trade groups across a variety of industries have argued against tariffs for the United States' neighboring countries, with some seeking no tariffs or quotas for shipments from Mexico and Canada. Indeed, politicians from all three countries have urged Trump to support ratification of the US-Mexico-Canada Agreement (USMCA) without the 232 tariffs. 

Trade lawyers in Washington have suggested the Trump administration would likely replace the tariffs against Canada and Mexico with “generous” quotas, with the thresholds sufficiently that both countries would not be expected to exceed their respective volumes. 

Quotas for Canada and Mexico, calculated based on previous year's shipments to the US, could be more than 100% of each country's three-year trailing average, KeyBanc Capital Markets analyst Phil Gibbs noted in a research report on March 13.

The USMCA, the proposed replacement of the North American Free Trade Agreement, was signed by the three North American trading partners on November 30, 2018, but ultimately requires approval from each countries' legislatures in order to take effect.