Friday, August 18, 2017

Can the U.S. Protect National Security without Special Steel Tariffs?

Even if we assume that steel imports do threaten national security, do we really need the national security exception to protect the U.S. steel industry?

The national security exception is an extraordinary remedy that has been used only a few times in its history, and never in the WTO era. That’s because it could trigger a worldwide trade war with no established ground rules if countries start throwing up trade barriers on vague and unverifiable grounds of “national security.” 

But there are other trade remedies that are commonplace, WTO-approved, and don’t run the same risk of blowing up the consensus underlying the multilateral trading system. Could those conventional trade remedies protect the steel industry without having to open Pandora’s box by invoking the national security exception?

Section 232 as Part of the Trade Remedies Toolkit

Under Section 232 of the Trade Expansion Act of 1962, Secretary of Commerce Wilbur Ross only has to determine whether steel “is being imported to the United States in such quantities or under such circumstances as to threaten to impair the national security.”

If he finds it is and President Trump agrees, the President need only “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”

Nothing there about invoking the exception only as a last resort when other trade remedies fail, at least not on the surface. Maybe there’s a bit of a limiter in requiring the President to determine the action that “must be taken” to adjust imports. Can it be argued that special Section 232 tariffs must be invoked if antidumping or countervailing duties or changes in Commerce calculations for nonmarket economies would do the trick?

In Commerce’s Section 232 investigation and elsewhere, steel producers have claimed several types of harm to its segment of the steel industry that result from imports. Can those harms be remedied without Section 232?

Harms Alleged and Possible Remedies

Harm: Other countries, especially China, are selling steel products in the U.S. at less than the cost of production or are illegally subsidizing their steel industries.

Remedy: Commerce has already placed anti-dumping tariffs or countervailing duties on specific Chinese steel products where the Department of Commerce has found that those products were sold in the U.S. below the cost of production or were illegally subsidized. According to the Department of Commerce website, there were 152 anti-dumping and countervailing duty orders  in place on steel from 32 countries as of April 19, 2017. 

Harm: Chinese producers are evading anti-dumping and countervailing duties.

In September, several steel producers filed a petition with Commerce alleging that Chinese hot and cold rolled steel producers have been sending their products through Vietnam to avoid the U.S. tariffs.

Remedy: Commerce opened an investigation of the matter in November. U.S. law allows Commerce to place anti-circumvention duties on products that are passed through a third country to avoid tariffs.  Section 781(b) of the Tariff Act of 1930 (as amended in 1988) allows Commerce to extend the tariffs to the passed-through articles if the processing or assembly in the third country is “minor or insignificant” and if the value of the merchandise produced in the original country (in this case, China) is “a significant portion of the total value of the merchandise exported to the United States.”

If Chinese producers subject to anti-dumping and countervailing duties are passing their products through Vietnam with no real value added just to avoid the trade remedies, Commerce has the power to extend the duties to include those products.

Harm: Massive global overcapacity in the steel industry, especially in China, exceeds the scope of harms that can be addressed though specific anti-dumping and countervailing duties, which can only be placed on specific products from specific countries.

Remedy: In 2002, President Bush imposed sweeping safeguards on most types of steel imports, on top of anti-dumping duties, under the authority of Section 201 of the Trade Act of 1974. Under the WTO Agreement on Safeguards and U.S. law, safeguards are exceptions to WTO obligations in cases where a recent flood of imports has threatened the domestic industry.

The 2002 steel safeguards ran into trouble with the WTO because they were imposed even on products where there had been no recent increase in imports, and because a few trading partners (Canada, Mexico, Israel and Jordan) were excepted.

The remedies permitted under Section 232 are not limited by thestatute, and national security measures are excepted from the GATT by Article XXI, although no one knows the scope of that exception.

Escalating the Steel Trade War

Would Section 232 tariffs start a trade war? Commerce Secretary Wilbur Ross told CNBC in March, “We are in a trade war. We have been for decades. The only difference is that our troops are finally coming to the rampart. We didn’t end up with a trade deficit accidentally.”

Well, the existence of 152 anti-dumping and countervailing duty orders on steel alone says the U.S. hasn’t exactly been sleeping on the issue. From a trade law standpoint, using Section 232 is more like an intercontinental ballistic missile launch.

Other countries will see it that way and respond with a firestorm of retaliatory duties, WTO challenges to the remedies or to Section 232 on its face, and measures to protect their own industries from U.S. competition on the basis of their own “national security.”

Although Section 232 does not specify any specific remedy, possibilities include raising tariffs on countries like China but not friendlier trade partners; raising worldwide tariffs above GATT schedule commitment levels; establishing hard import quotas; or pressuring China (using vulnerabilities like China’s tolerance of IP piracy) into signing a voluntary export restraint agreement.

Each of these remedies raises a host of thorny WTO compliance problems and potentially exposes U.S. industries outside of steel or even manufacturing to WTO retaliation sanctions by impacted countries.

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