The implementation of tariffs and quotas against US steel and aluminium imports has been heralded and criticized as an unusual trade remedy, with President Donald Trump's administration applying blanket duties rather than anti-dumping and countervailing margins.
Section 232 of the Trade Expansion Act of 1962, a cold-war era law, allows the president to place restrictions on imports on national security grounds. That approach arguably has not been taken since 1986, according to the Congressional Research Service. Notably, however, some sources told Fastmarkets AMM that former President Barack Obama considered using 232 to prop up the aluminium market in 2015.
As of March 23, it has been a full year since the tariffs were first implemented. On the first anniversary of the 232 duties, Fastmarkets AMM takes a look at legal challenges at the World Trade Organization (WTO) and in the US court system, as well as legislation that has been introduced to restrict or revise Section 232.
Nine countries and regions - including China, India, the European Union, Canada, Mexico, Norway, Russia, Switzerland and Turkey - have gone to the WTO to challenge the national security justification for the 232 tariffs and quotas, alleging that the US actions are inconsistent with WTO rules.
Meanwhile, the United States has filed its own complaints over the retaliatory tariffs imposed against US exports by Canada, China, the European Union, Mexico and Turkey. As of the end of January 2019, all of the disputes are in the panel phase, according to the Congressional Research Service.
WTO Appellate Body
With those challenges in place, the WTO faces a dilemma. On one hand, the US could pull out of the organization if the WTO rules against the national security rationale behind Section 232. On the other, if the WTO ruled in the United States' favor, other countries could likewise impose tariffs or quotas on a wide range of products by citing national security concerns.
WTO disputes are brought before the organization's dispute settlement body for resolution, and the dispute settlement body's decision can be appealed to the appellate body. If the appellate body cannot render a decision, there is no final result, one legal expert explained.
At present, there are only three judges on the WTO’s appellate body – one each from China, India and the US – according to the organization’s website. The appellate body typically is composed of seven members who, by rule, operate in panels of three. If there are fewer than three members, the appellate body cannot operate, the legal expert said.
If the dispute settlement process cannot satisfactorily resolve the Section 232 conflict, it could lead to further unilateral trade actions and tit-for-tat tariffs.
Market of last resort
A second legal expert noted that, under the Bretton Woods Agreement of 1944, the US effectively became the so-called "market of last resort." As such, the US would accept certain amounts of excess capacity and production into its markets, in order to help its allies develop, with the understanding that US trade remedies laws would be used when there were imbalances and things became unfair.
However, WTO members agree that the dispute settlement system is not functioning the way it is supposed to and that it needs to be reformed, that source continued. The challenge is getting countries to take on that reform in a way that is constructive. The countries that have been the most frequent users of the WTO system, including China and South Korea, have no interest in fixing it, the expert noted.
“Because the way the system works - it works through consensus - you really have an impasse,” he told Fastmarkets.
Legal challenge, legislation
Apart from suits at the WTO, the American Institute for International Steel (AIIS), a lobbying group that represents steel traders, has disputed the constitutionality of Section 232. The US Court of International Trade accepted the AIIS’ request for a three-judge panel in that lawsuit, and heard oral arguments in that case in mid-December 2018.
The AIIS case centers on two issues: improper delegation of Congress’ constitutional power to the president to regulate international trade, and the absence of a provision for judicial review of presidential orders.
The elastic definition of national security under Section 232 allows the US Department of Commerce and the president to consider any aspect of the US economy that might be affected by imports – and there is no limit on the actions the president may take to remedy security threats under Section 232, according to the oral arguments.
Since last year, US lawmakers also have introduced a variety of bills aimed at revising 232, with more than one aiming to limit the president's powers under that statute.
The proposed Trade Security Act would require the US Department of Defense to justify the national security basis for new tariffs under Section 232 and increase congressional oversight of that process.
The Bicameral Congressional Trade Authority Act of 2019 would require approval from Congress before the president could take any trade action, including implementing tariffs and quotas under Section 232 of the Trade Expansion Act of 1962. The act also would call for a clear definition of national security, and Section 232 investigations would be restricted to goods with applications in military equipment, energy resources and/or critical infrastructure.
And a June 2018 bill would require the president to get approval from Congress before levying tariffs; if passed, that would apply retroactively to all Section 232 tariffs levied over the past two years.
Legal experts who spoke with Fastmarkets indicated that such legislation, which is unlikely to be passed, is intended to put pressure on the Trump administration with regard to the existing trade remedies. Even if the bills were to pass, Trump would be expected to veto them, the sources added.
Since the Section 232 investigations were first announced, industry participants have wondered what the trade measures would look like, how long they would remain in place, and how the Trump administration's trade strategy would affect the market.
Legal experts shared differing views of the duties, with some arguing that 232 was meant to support US trade deals while others suggested it was meant to change the global trade environment entirely.
Some indicated that the 232 functions as leverage in trade policy negotiations. Trump may change the nature of the trade remedy or modify it, but cannot abolish it, for political reasons, they argued.
Others said the 232 is a means of offsetting global steel and aluminium overcapacity, indicating that the duties will remain in place until major metals-producing countries actively address that problem - and the subsidizing programs that promote excess capacity in the first place.
“[Section 232's goal is to] scramble the egg so badly that it cannot be unscrambled,” one source said, referring to the rules-based global trading system that the US helped to establish following the World War II.
Indeed, Claudia Schmucker, head of the globalization and world economy program at the German Council on Foreign Relations, previously said the 232 tariffs and quotas “have the potential to blow up the multi-lateral… rules-based trading system.”
With the blanket 232 duties, the United States applied a simplified approach to sweeping international trade concerns. That action's impacts on global supply chains have been complex and far-reaching, driving traditional trading partners apart even as it highlighted connections across various trade industries - and prompting both caution and optimism for the next 12 months in this altered market environment.
Michael Cowden in Chicago contributed to this report.