Canada: Updated: Steeling For A Fight — U.S. President Trump Announces Tariffs On Imported Steel And Aluminum

U.S. President Donald Trump signed a proclamation this afternoon, formally implementing the 25 per cent tariffs on steel imports and 10 per cent tariffs on aluminum imports as discussed below. They are expected to take effect within 15 days.

Of major significance is that Canada and Mexico are, at least initially, exempt from the new blanket tariffs. These are the only exemptions provided under President Trump's proclamation. However, in his speech prior to signing, and in the backgrounder released by the White House, the president made clear that maintaining these exemptions are subject to ongoing progress in the NAFTA negotiations, and that failure to make meaningful progress in those negotiations will lead to their revocation. This puts the spotlight on the ongoing NAFTA negotiations, scheduled to conclude at the end of the month, and potentially puts direct pressure on Canada and Mexico to offer other concessions. The president did invite other countries to negotiate with U.S. Trade Representative Robert Lighthizer to address American concerns and potentially win complete or partial exemptions.

While the exemptions for Canada and Mexico are good news for steel and aluminum businesses, as well as businesses with cross-NAFTA-border integrated supply chains in those countries, Canadian and Mexican businesses are still likely to be impacted by the new tariffs. There are real concerns about foreign steel and aluminum, which are effectively tariff-barred from the U.S., flooding the Canadian and Mexican markets. This may be good news for some Canadian and Mexican businesses, but bad news for the Canadian and Mexican steel and aluminum industries – although the news would be much worse if they were subject to tariffs on exports to the U.S.

BLG's International Trade Group will continue to monitor developments as they happen, and is pleased to answer any questions that may arise.


March 7, 2018

U.S. President Donald Trump announced plans to unilaterally impose blanket 25 per cent tariffs on steel imports and 10 per cent tariffs on aluminum imports from all exporting countries. This has significant impacts for Canada's steel, aluminum and related industries.

The Trump administration claims the ability to levy these blanket tariffs through a seldom-used 1962 U.S. law that allows the president to implement safeguard tariffs without congressional approval based on "national security." President Trump — predisposed to the use of executive orders — would apply tariffs notwithstanding congressional powers to impose tariffs under the U.S. Constitution. Safeguard tariffs are emergency tariffs that are put in place to stop a sudden, unforeseen and damaging import that could seriously damage a particular industry. President Trump has stressed the need for the tariffs in order to protect U.S. national security on the basis that the military needs a domestic supply of aluminum and steel for its tanks and ships. He tweeted on March 5 that "To protect our Country we must protect American Steel!"

Impacts to Global Trade

The Trump administration's actions threaten to have major implications for trade and the global economy as a whole, including significant impacts on the future of NAFTA, which President Trump has already targeted for overhaul dating back to his campaign for the Presidency.

The action undertaken by the U.S. can be technically considered legal under Article XXI of the General Agreements on Tariffs and Trade 1994 ("GATT"), which allows WTO members to impose measures, "which it considers necessary for the protection of its essential security interests," and the functionally equivalent national security defence set out in Article 2102 of NAFTA. The determination of what is necessary is left to the individual country. The Trump administration's determination, whether reasonable or not, is therefore a theoretically adequate basis for the imposition of the tariffs.

However, it is clear that these provisions were intended to be reserved for "worst-case scenarios," and to be used sparingly to deal with only the most compelling of national security concerns. To date, these provisions have been used in extremely rare cases. Their only use by the U.S. has been to justify a trade embargo of Nicaragua in 1985, and various measures against Cuba in 1996. The only other known use of safeguard tariffs in these circumstances was in 1975, when Sweden imposed quotas on certain footwear imports for national security purposes, claiming that its army's need for shoes made the protection of the domestic industry critical.

The international community has responded to President Trump's announcement with near-universal condemnation, strongly disagreeing with his characterization of the blanket tariffs as a measure to protect national security. In particular, Canada, Mexico and the European Union have been outspoken, pointing out that if the tariffs were tailored to apply to only China and certain other countries which can reasonably be argued to be engaging in unfair trade practices respecting exports to the U.S., the national security claim might be defensible. Instead, these critics see the blanket application as revealing the true character of the tariffs — protectionism.

In rejecting the Trump administration's classification of the tariffs as "national security" measures, trading partners led by the EU have indicated that they will consider them to be "safeguard" actions, governed under the WTO's Agreement on Safeguards ("SG Agreement"). Under the SG Agreement, safeguard measures are legal, but other member states may immediately implement proportional countermeasures if they do not receive compensation for the new trade restrictions within 90 days. Such reprisals would require a ruling of a WTO dispute resolution panel if the tariffs were true national security measures, which would likely take at least 18 months to resolve, plus potential further delays for an appeal to the backlogged WTO Appellate Body. Therefore, this characterization of the tariffs as safeguards, which is unlikely to be susceptible to successful challenge by the U.S. (and even if it was, it could only be through the same dispute resolution procedure described above), will allow near-immediate reprisals in compliance with global trading rules, quite possibly facilitating a trade war.

Furthermore, other WTO members may choose to "fight fire with fire," and use the seemingly unfounded U.S. determination of national security concerns to justify, at least implicitly, their own ad hoc determinations of the need for tariffs in the interest of national security. While ideally these would be limited to retaliating against the U.S., countries may find it difficult to justify such a limitation, which could lead to borders closing or excess costs being imposed on imports from the rest of the world — a potentially disastrous result for global trade.

In that situation, the best hope for WTO system would be for the veracity of the American national security claims to be formally challenged before a WTO dispute resolution panel. This would be a precedent-setting case, as the use of national security exemptions in this manner has never been considered by a WTO panel or the Appellate Body. This case would, assuming WTO members abide by the decision, hopefully outline clear criteria as to the nature of national security concerns that can legitimately be addressed under GATT Article XXI and other similar provisions in global trade agreements. However, as noted above, this decision could be years away, potentially allowing serious economic damage to be done in the interim.

Unique Canadian Impacts

Although many Canadians held out hope that Canada would be exempt from any proposed steel or aluminum tariffs, it is clear that President Trump wants to use them as an incentive to gain other concessions from Canada and Mexico in the ongoing NAFTA renegotiations. Therefore, he has been clear to date that he will not provide exemptions for the U.S.'s NAFTA partners. Canadian Finance Minister Bill Morneau characterized this strategy on March 5 as President Trump "chang[ing] the terms of the discussion" in the middle of the negotiations, while other Canadian officials have strongly objected to the suggestion that imports of steel and/or aluminum from Canada could adversely affect U.S. national security, given the countries' longstanding close military collaboration.

If the proposed tariffs are imposed against Canada, it could gravely effect Canadian businesses which depend on exporting steel and aluminum to the U.S. The export of steel and aluminum to the U.S. comprises an over $15 billion per year industry for Canada, with almost 90 per cent of Canadian steel exports going directly to the U.S. in 2017. In 2017, the U.S. imported 26.9 million tonnes of steel, and more than four million, or 16 per cent of this total, came from Canada, making Canada the U.S.'s biggest supplier of steel.

The supply chains of numerous major industries are integrated across Canada and the U.S., and in many cases Mexico as well, with steel and aluminum parts often crossing borders multiple times during the process of manufacturing a final product, such as a car. The proposed tariffs threaten to wholly disrupt this process, which in addition to leading to dead-weight loss by distorting steel and aluminum firms' competitiveness for various contracts based on which side of the border they are on, would likely impose further such losses by forcing the whole-scale remaking of supply chains to remain on one side of the border.

Canadian Responses

On March 2, Canadian Foreign Affairs Minister Chrystia Freeland raised concerns about President Trump's decision, noting that Canada buys more than half of U.S. steel exports, providing a US$2 billion surplus to the U.S. This veiled threat of retaliation by Canada's imposing similar tariffs on imports of U.S. steel, combined with various other statements from Canadian officials, suggests that retaliation is being strongly considered.

Although Canadian retaliation through NAFTA channels is possible, this is not certain, as NAFTA does allow for exceptions for tariffs enacted in protection of national security. Despite this, there is a possibility that Canada could utilize the special dispute resolution mechanisms set out in NAFTA to remedy the situation. This process is, notably, currently in a state of flux, as the current NAFTA negotiations centre prominently on the future of Chapter 19, with the Trump administration wanting this chapter removed.

Canada is more likely to seek redress outside of NAFTA through the WTO, joining what is likely to be many other complainants, including the EU. This path is not unique, as demonstrated by Canada's WTO challenge launched in January 2018 to American administration of its trade remedy laws, particularly its practice of treating export restrictions as a countervailable subsidy. This would permit Canada to follow the same procedure likely to be followed by the EU and others to impose countermeasures under the SG Agreement, while also pursuing a challenge through the WTO dispute resolution procedure. Recent reports from the Washington-based Peterson Institute for International Economics noted that Canada could be entitled to trade retaliation measures worth in the neighbourhood of US$3.2 billion as a result of the proposed tariffs.  

Overall, the implications of these tariffs risk are severe, starting with the fact that they may spark a global trade war. Furthermore, the tariffs are certain to factor into the continuing NAFTA renegotiations (and already have) which could fundamentally alter the nature of North American trade. North American businesses will also have to grapple with the changes likely to be forced on their supply chains and customer bases, including for Canadian and Mexican businesses, a potential for steel and aluminum from non-U.S. exporters suddenly foreclosed from the U.S. market.

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