The Section 232 tariffs and quotas have fulfilled their purpose - and now it’s time to drop them before they harm the US steel supply chain further, trade lawyers, academics and industry experts claimed during this year’s Steel-Con, hosted by the American Institute for International Steel (AIIS) in Houston.
“Section 232 [tariffs] on steel and aluminum is a policy that ended up helping a few at the expense of the many,” John Foster, president of Kurt Orban Partners LLC, said during his opening remark at the event on Thursday March 5.
Steel traders and workers at ports no doubt have been hit by Section 232 first and most, according to Foster.
But beyond that, the domestic steel producers, which have been the primary beneficiaries of these tariff protections, have also been hurt by Section 232 recently, Foster said, citing annual income losses for some major domestic steelmakers, as well as growing weakness in the domestic manufacturing sector.
Indeed, Steel Dynamics reported net income of $671.1 million in 2019, down 46.7% from $1.26 billion in 2018 and down by 17.4% from $812.7 million in 2017 – the year before the 232 duties took effect.
The Institute for Supply Management’s purchasing manager’s index (PMI) dropped to 50.1% in February from January’s 50.9%. The had fallen to 47.2% in December 2019 – its lowest since June 2009, the Tempe, Arizona-based group said.
Fastmarkets’ daily steel hot-rolled coil index, fob mill US was calculated at $30.33 per hundredweight ($606.60 per short ton) on March 5, down by 13.4% from $35.01 per cwt one year earlier and down by 24.2% from $40.03 per cwt two years earlier, days before President Donald Trump first signed the duties into law.
Shortly after the tariffs were imposed against Canada, Mexico and the European Union, the index hit a nearly 10-year peak of $45.84 per cwt in July 2018.
"So I guess all that I'm suggesting is that in more than a few cases, one point that we can glean from all of this is that after two years of Section 232, a significant part of the domestic industry is less better off than it was before Section 232,” Foster concluded.
Challengers to Section 232
Notably, the AIIS, a lobbying group representing steel traders, has again asked the US Supreme Court to hear its challenge Section 232 in late February, arguing that the use of Section 232 was “an unconstitutional delegation of legislative power.”
The Supreme Court denied its first request to hear the challenge in June 2019.
Donald Cameron, partner at Morris, Manning & Martin LLP, also questioned the rationale behind the duties - especially claims that steel imports threaten to impair national security.
Under Section 232 of the Trade Expansion Act of 1962, the president may place restrictions on imports on national security grounds.
“Basically, it’s talking about armed conflict and... nuclear arms,” Cameron said. “None of these was present here.”
Instead, he joked: “When in doubt, blame China.”
The United States and China in January signed a phase-one trade agreement, but market participants’ reaction to that development in the trade war was muted.
“I get it there’s Chinese [steel production] overcapacity, but there was on problem with this theory,” he said. “And that problem was: Where’s steel imports from China that are devastating to US economy? There weren’t any.”
Even before 232, Chinese steel shipments to the US were limited by existing anti-dumping and countervailing duties, Cameron noted.
Navigating trade politics in 2020
Other speakers involved in the AIIS’ challenge said they were “relatively optimistic” about the case, but warned that the steel industry should not bet on any potential changes coming from the 2020 presidential election.
“If a Democrat wins the White House, I do not believe there’s a reason that you should suspect that a reversal of Trump’s trade policies is going to be one of their first highest priorities,” said Joshua Zive, partner at Bracewell LLP. “None of these [Democrat] candidates running for their nomination are running as free traders. They’re running as protectionists [with] different variations of it.”
And a second term for Trump would also not be marked by free trade, given what the administration has done so far, Zive said, pointing to the likelihood of increasing trade disputes between the US and the European Union.
Moreover, no one should expect that Congress would push any free trade pacts, according to Zive. He noted increasing difficulties in passing trade agreements such as the United States-Mexico-Canada Agreement (USMCA), which was designed to replace the North American Free Trade Agreement.
The US Senate voted to pass the USMCA on January 16, more than one year after the three countries first announced and signed a preliminary deal in October and November 2018.
“Look at USMCA, this is a primary driver of this administration’s economic message and their free policy message,” Zive said. “It was really tough to cut the deals to get it through Congress... They almost couldn’t get it done.”
“This is the reality we are dealing with in Washington, DC, right now, a fundamental misunderstanding of how trade policy operates and deep fears about being on the wrong sides of the politics of it,” Zive continued.
Resolutions to an open trading system?
Diplomacy, courage and trade policies that keep in mind their domestic impact are the three main steps to restore an open trading system in the US, according to Timothy Meyer, a professor at Vanderbilt University Law School.
By isolating the US from the rest of the world, the current administration’s policies are only forcing traditional allies such as the European Union to turn to China, Meyer explained.
“I think that the cornerstone of any future global trading system has to be a solid relationship between the United States and the European Union,” Meyer said. “We’ve had our fights, but those fights have always existed within the context of a relationship that was fundamentally constructive. I think we need to find our way back to that.”
Further, courage from the business community that’s being affected by the changing status quo, the courts and Congress is essential to bring a change to the trade policies.
“Without people and businesses that are willing to stand up and say, ‘Enough is enough,’ and ‘We’ve gone too far,’ the forces that are trying to take this cold war architecture and use it for other purposes have free rein domestically,” Meyer said.
He argues that Trump has been using Section 232 as a tool to reward political allies and to honor certain campaign promises, but it has been overused.
Finally, the human costs of Section 232 on places like Michigan, Ohio and Pennsylvania - where economic growth has been limited by the current trade policies - need to be emphasized.
“We need a trade policy that doesn’t involve sort of indiscriminate trade barriers, but that speaks to people in places like Michigan, Ohio [and] Pennsylvania,” Meyer said later in an interview with Fastmarkets. “And there are policies we can think about implementing without [creating] these trade barriers.”