American Institute of International Steel Examines Steel Tariff Implications
As an international trade lawyer, I am perhaps more aware than most of how often my colleagues and I use legal shorthand, frequently in ways that are less than enlightening.
One example of legal shorthand that has dominated discussion about steel trade policy over the course of the last year is “Section 232.” If you Google “Section 232 steel investigation,” you will get about 47.6 million hits. It’s clearly a hot issue. But you could easily spend several hours reading the top selections churned up by Google’s algorithms, and still not know exactly what Section 232 is, why so many people are talking about it, and why it matters so much.
With that in mind, and because the issues are so consequential for the oil and gas industries in Texas, as well as for the men and women who work in our ports, I thought it might be useful to review some key facts and offer some thoughts about where current developments might lead.
The Trade Expansion Act of 1962 (the Act), which contains Section 232, was signed into law by President Kennedy on October 11, 1962. Its overall aim was to promote trade, primarily by empowering the president to engage in market-opening trade negotiations.
However, as a legislative compromise to get final approval for the bill, members of Congress agreed to language contained in Section 232 of the Act which allows for trade protection in certain circumstances. Under Section 232, the president may initiate an investigation into whether our national security is threatened by imports. This authority has been sparingly used. As the Congressional Research Service has noted, of the 26 investigations that have been initiated over the last 55 years (prior to 2017), only two found a threat to national security; both of these investigations, one from 1979 and the other from 1983, involved crude oil.
Despite its negligible prior use, the proponents of additional restrictions on imported steel (already a highly protected commodity) have long sought to employ Section 232 for this purpose, largely for four reasons.
First, compared with pursuing antidumping and countervailing duty orders, employing Section 232 is far less expensive and time-consuming for petitioners. A petitioner’s legal fees in an antidumping case can easily exceed $1million in short order.
Second, the statute does not define “national security.” This invites a blurring of the lines between the longstanding, traditional understanding of this term and a broader application to non-defense-related economic concerns.
Third, unlike the constraints of other “trade remedy” measures, the imposition of trade measures under Section 232 is not time-limited. Theoretically, import restrictions under Section 232 could stay in place for as long as the president wants, until he or his successor rescinds them.
Finally, the statute affords the president an exceptionally broad scope of discretion in terms of the products and countries affected by a Section 232 trade measure.
In April 2017, largely in response to concerns about China’s market-distorting trade practices resulting in vast amounts of excess steel production, the president directed the Department of Commerce to conduct a Section 232 investigation of the national security impact of imported steel. This inquiry culminated in the February 2018 announcement that the U.S. would impose tariffs of 25% on nearly all steel imports.
Since that announcement, a number of countries have appealed to Washington for exemptions, and a number of temporary exemptions have been granted. The administration’s strategy seems to be that it will grant full, permanent exemptions as a way of motivating the countries that receive them to unite in a focused effort to encourage China to act as a more responsible international stakeholder, and sharply curtail its prolific use of trade-distorting, state-owned enterprises.
An example of this bargaining is the exemption that has been negotiated with South Korea. It is similar to the so-called “voluntary export restraint” agreements, which then-Deputy United States Trade Representative (and current USTR) Robert Lighthizer negotiated in the 1980s with Japan in a bid to encourage Japan to limit sales of Japanese autos to the U.S. (A 1986 study by the nonpartisan Congressional Budget Office concluded that these trade measures “…failed to achieve their primary objective…”).
Under the current agreement, South Korea apparently agreed (no text has been released) to limit certain steel exports to the United States. It is widely expected that other country exemptions will be granted in the near future.
The overall tariff strategy contains a number of obvious risks. One is the assumption that China will “blink first.” It shows no immediate signs of doing so, despite recent conciliatory-sounding remarks by China’s President Xi. On April 10, China announced that it has challenged the tariffs in the World Trade Organization.
The second major risk is retaliation. In response to the U.S. measure, China swiftly imposed its own tariffs on $3 billion worth of U.S. farm goods and other products. Following these developments, the United States and China engaged in what might be called “tariff shadow boxing.” The United States announced plans to slap additional tariffs on about 1,300 Chinese imports. Responding quickly, China jabbed back and said it would impose 25% duties on U.S. soybean imports. China is by far our largest soybean market, accounting for about 56% of $22 billion worth of U.S. soybean exports in 2017.
While no additional tariffs have been enacted yet, there is little certainty or clarity with regard to how this market risk can be effectively managed or resolved.
How might our great steel-handling American ports, like the port of Houston, be affected, and the related oil and gas sectors of our economy? A pair of new studies offers a clue.
A 2017 study prepared for the American Institute for International Steel (AIIS) by Martin Associates, a highly regarded economics consulting firm, assessed the impact of steel trade restrictions on the nation’s marine transportation system. The Martin study noted that in 2016 the nation’s seaports handled 34.4 million tons of imported iron and steel products, supporting 84,000 direct, induced, and indirect jobs, as well as $239.8 billion of total economic activity. The study concludes that steel import restrictions put all of this economic activity at risk.
A quick look at the major types of steel products that are imported through the port of Houston reveals how our local, state, regional, and national economies might be affected, particularly in the related energy sector.
Pipe and tubing are the major basic steel products imported through the port of Houston, principally line pipe, the approved material used in the transportation of hydrocarbon products from one point to the other, and oil country tubular goods, which are used exclusively in the exploration and extraction of oil and gas from below ground level.
A May 2016 study by the economics consulting firm ICF documented that in recent years approximately 77% of the steel used in line pipe was imported in the form of finished line pipe and cut-to-length plate and plate coil, and that approximately 42% of the market value for finished steel pipeline fittings came from imports.
Proponents of the steel tariffs contend that domestic sources can readily supply these products.
However, the ICF report noted that because line pipe and other materials used to build new pipelines and to expand and repair existing pipelines must comply with rigorous product standards established by industry groups and government agencies and require high-level technical skill and sophisticated manufacturing processes and equipment, there is limited ability to substitute other products for imported goods and materials.
According to ICF, trade measures limiting access to imported line pipe products would mean that “…most oil and gas pipeline construction projects would be delayed or stalled.” In addition, the study noted that another adverse economic impact of new trade measures on steel imports would be “…the loss of American jobs as some 75% of current pipeline construction expenditures are U.S. value-added, meaning that these expenditures end up in the pockets of American workers and business owners.”
Tariff proponents also contend that any adverse effects could be mitigated by a gradual compliance period, coupled with specific product exemptions for hard-to-obtain materials. The ICF analysis counters that any transition period would require a rearranging of international and domestic supply chains for line pipe, fittings, and valves resulting in “scarcity pricing,” raising, for example, the total cost of a new 36-inch diameter oil or gas pipeline project as much as 13.6% in the initial transition period.
In a similar manner, import restrictions on other key steel products handled by the port of Houston, like wire rod, flat rolled coil, hot rolled coil, and concrete reinforcing bar (rebar), would result in higher end-user costs, as well as a sharp reduction of port steel-handling jobs and related economic activity.
For more information on these and related developments, please visit: www.aiis.org or contact me directly. AIIS is always ready to assist our colleagues in any way that we can.
The below chart provides additional input on Houston’s 2017 top imports. The chart was published in the article, “Waterborne Foreign Trade Statistics: 2017” by Christine Schlenker, in the March 2018 issue of our magazine. To read the whole report, visit: https://txgulf.org/archives/port-bureau-news/trade-update-waterborne-foreign-trade-statistics-2017.
- Date June 6, 2018
- Tags 2018 May