Trump’s 232 Choice: Tariffs or Quotas?

In March, the president exercised his authority under Section 232 of the Trade Expansion Act of 1962 to impose 25% tariffs on steel imports and 10% tariffs on aluminum imports, based on findings that the imports threatened the national security. The tariffs apply to imports from all countries, except those given temporary exemptions. The price for making the exemptions permanent appears to be the imposition of quotas or other restrictions on imports. Those are the terms of a permanent agreement with Korea and agreements in principle with Argentina and Brazil. The United States is engaged in discussions with Canada, Mexico and the European Union, which were given temporary extensions until June 1. This post reviews the administration’s aggressive application of Section 232, its first use in more than 15 years, and its potential application to other imports.

In January 2018, the Department of Commerce submitted reports to the president on the results of its self-initiated investigations into the effects of steel and aluminum imports on the national security of the U.S. under Section 232. It found that imports of both steel and aluminum threaten to impair the nation’s security and recommended global tariffs of 24% on steel imports and 7.7% on aluminum imports. It determined that those tariff levels would enable domestic steel and aluminum producers, respectively, to use approximately 80% of existing domestic production capacity and that the increased production would enable them to attain long-term economic viability.

Responding to the 232 reports, the president rounded up the recommended tariff levels and imposed a 25% tariff on steel imports and 10% tariff on aluminum imports on all countries, except Canada and Mexico. On March 22 – the day before the tariffs went into effect, the president temporarily suspended the tariffs on steel and aluminum imports from Argentina, Australia, Brazil, Canada, Mexico, the member countries of the European Union and South Korea, citing important security relationships with those countries. He noted that the U.S. was in discussions with them, seeking “satisfactory alternative means to address the threatened impairment to the national security”.

Before the end of March, the U.S. reached an agreement in principle with Korea on revisions of their bilateral trade pact (KORUS FTA). That agreement included a permanent exemption for Korea from the steel imports, in exchange for Korea’s implementation of a product-specific quota equivalent to 70% of its average annual exports over a three-year period. The quota will reduce Korea’s steel exports to the U.S. by 30%. Korea accepted the 10% tariff on aluminum.

The president issued a proclamation on April 30 providing for an absolute quota for steel mill products from Korea, beginning on May 1. Under it, Korean imports for any quarter may not exceed 30% of the total aggregate quantity provided for a calendar year. When the quota limit is reached, no entry for the quota period will be allowed. The order also listed the quota categories that have already been filled for Korea for 2018.

As for the other countries that received temporary exemptions from the tariffs, the White House on April 30 announced that it had reached agreements in principle with Argentina, Australia and Brazil and that it was extending its negotiations with Canada, Mexico and the EU “for a final 30 days” (until June 1). Its focus in these negotiations is “on quotas that will restrain imports, prevent transshipment, and protect the national security”.

Inside U.S. Trade reported that Argentina agreed to quotas that cap its steel exports at 135% and aluminum exports at 100% of its average exports to the U.S over the last three years. Brazil has accepted the 10% aluminum tariff, but appears to have begrudgingly acquiesced to what it terms “unilateral restrictive quotas“ on its steel exports to the U.S., as less restrictive than the 25% tariff. It reportedly agreed to a quota of 70% of its average finished steel exports to the U.S over the last three years and a 100% quota on semi-finished steel exports.

With regard to Canada and Mexico, the president has tied a permanent exclusion from the tariffs to the outcome of the renegotiations of the North American Free Trade Agreement (NAFTA), although both countries have rejected the linkage. The NAFTA negotiations resumed this week, with the aim of completing them before the end of May. However, it is unclear whether that is achievable.

In addition to the administration’s negotiations over country exclusions, the Commerce Department has established a process for exclusions of steel or aluminum products for which there is insufficient U.S. production capacity or there are national security-based considerations. The Commerce process has prompted strong criticism from the business community and Congress as moving too slowly and being too burdensome. As of May 4, the Department had posted more than 1572 steel and 129 aluminum applications for exclusions.

Other potential 232 investigations are in the wings. In January, two U.S. uranium producers submitted a petition to the Department of Commerce requesting an investigation to determine whether imports of uranium products threaten the U.S. national security. Commerce has not yet indicated whether it will initiate an investigation. Other potential 232 cases could be generated from the Department of Interior’s publication in February of a draft list of critical minerals, in response to a presidential directive. A concern of this list is the U.S. dependency on foreign sources for key minerals.

Jean Heilman Grier

May 8, 2018

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