For a long while now the Trump administration is expected to impose tariffs on steel imports directed to the United States of America (U.S.). The long expected move of the Trump administration pleases the supporters while drawing the reaction of the international trade partners of the U.S. In fact, it is noted that potential move by the Trump administration would cause a trade war by invoking all possible trade defense instruments between the U.S. and its international trade partners.
The decision of the Trump administration is also very controversial in terms of its timing. The U.S. appears to be in favor of a protectionist approach in international trade, whereas many other countries take steps to maintain and improve free markets and liberalization of international trade. For instance, last week the European Union (EU) and Japan signed an economic partnership agreement in order to facilitate and maintain free trading goods and services. On the other hand considering the developments such as withdrawal of U.S. from the Trans-Pacific Trade Agreement (TPP) in January and other parties' determinant approach of maintaining TPP, it is seen that the U.S. adopts a more protectionist approach than its trade partners.
As for the background of this action by the U.S. on steel imports, President Trump issued an executive order in April requiring the US Department of Commerce of to initiate an investigation on steel imports. The executive order is based on the rarely resorted Section 232 of the Trade Expansion Act of 1962. Most recent investigation that has been initiated based on the Section 232 was on iron ore and semi-finished steel in 2001. As per Section 232, the Department of Commerce first has to decide that the import of the product under investigation constitutes a threat to the national security in order to adopt measures. Based on the evaluation of the Department of Commerce, Trump administration would be able to impose measures restricting the steel imports or to apply tariffs. Even though the measure which will be imposed to the imports of steel has not yet been announced, the Trump administration seems to have no hesitations to impose severe measures and may apply both tariffs and one of other restrictive measures (e.g. import quota) on steel imports. On the other hand, leading steel producers are expecting the Trump administration to restrict foreign steel producers' market share which are active in the U.S. market in order to remove the national threat regardless of the type of the measure1.
Advisors to the Trump administration who give priority to global policies and those who are in favor of protectionism disagree on the recent steel move. The recommendation which will be announced by the Department of Commerce on whether steel imports harm the U.S. economy or not, is at the focal point of certain groups including lawyers, domestic and international producers and U.S. congressmen. Expected decision will show whether the Trump administration will keep its promise about protecting the domestic industry and use tariffs as leverage for the domestic producers.
The U.S. economists - including former Chairman of the Federal Reserve Ben Bernanke and Nobel Laureate Joseph Stiglitz - are cautious about the expected move on steel and emphasize that such decision may cause great harm to the economy via referring to the past experience. For instance, Stephen Moore from Heritage Foundation, who also worked as the economic policy adviser to Donald Trump during the presidential campaign says, "If he actually pulls the trigger, it could be highly disruptive to world trade. It's not even going to really work in terms of helping American workers"2.
The US is considered as the biggest steel importer in the world with an import volume of 30.1 million metric tons of steel. The countries which have the largest shares in steel imports to the U.S. are Canada, Brazil, South Korea and Turkey. Therefore it is obvious that the expected measure on steel imports would pave the way of a glut on steel trade and injure the global supply chain of steel. Indeed, if the US steel market - which is of an enormous volume - is closed to international producers, the exporters would shift their sales to other markets. On the other hand, it is noted that Trump administration and the U.S. would be negatively affected due to the mentioned measure in the event of retaliation by China and the EU. In such case, job cuts would increase in various industries as the exporters from the U.S. would be precluded from the Chinese and European markets and Trump administration would lose face since the pledges given during the electoral campaign could not be kept.
The EU Commissioner for Trade, Cecilia Malmström made the following remarks on the relevant issue: "As we haven't seen the proposal yet, we will first have to check whether the measure is in compliance with W.T.O. rules. If global trade rules are not upheld, the E.U. will retaliate, but I cannot say now exactly how and when"3. It can thus be presumed that the EU is cautious for a potential measure and ready to challenge it before the Dispute Settlement Body of World Trade Organization (WTO) after its imposition. In the event that the expected U.S. measure is found inconsistent with WTO rules, countries that are affected by the relevant measure will be able to retaliate against imports from the U.S.
Additionally statements by the President of the EU Commission, Jean-Claude Junker has to be taken into account while considering the potential measures which would be imposed on the U.S. exports by EU Member States. Junker underlined that the EU was ready to impose countermeasures within days in case the U.S. administration would take action to protect the US steel industry and added that the EU was in an "elevated battle mood"4. Potential countermeasures by the EU are expected to target bourbon whiskey exports from the U.S. which would make the domestic distilled spirit industry of Kentucky and Tennessee suffer financially. Export volume of the bourbon whiskey originating from the U.S. is estimated to be 1.5 billion USD and Kentucky distilleries are assumed to invest in expansion and new facilities over the next six years at an amount exceeding 1 billion USD. Retaliation on bourbon exports would harm the U.S. economy to a great extent via blocking the investments and causing discharges in the domestic industry.
The advisors who are against the action on steel point out the similar measures adopted in the past and note that expected measure will also be detrimental for the U.S. economy. The most frequently given example within the context is the measures adopted by George W. Bush in order to protect the U.S. industry against the surge of steel imports. Within the scope, the U.S. administration decided to impose tariffs up to 30% on steel originating from Europe, Asia and South America underlining that local industry needs to be stabilized. Relevant decision has been challenged before the Dispute Settlement Body of WTO and EU was allowed to impose measures5 on products originating from U.S. amounting to 2 billion USD as retaliation to the measures inconsistent with WTO rules. The EU implied that it would impose similar measures against the products originating from Michigan and Florida - two of the most significant states for U.S. elections - and as a result, President Bush had to rescind the measures after levying them for 21 months. Bush administration's retreat due to the international pressure caused unrest among the domestic steel producers which cost President Bush his political popularity.
The measure planned to be imposed on steel import is also expected to affect the industries in which steel products are used as an input. For instance in late May, the Truck and Engine Producers Association warned in a letter to the Department of Commerce that steel tariffs would result to higher prices for their customers. Therefore, while steel industry in U.S. is expected to revive as a result of the potential measure, leading players in the real estate and construction industries are concerned that they will be affected negatively.
The nature of the measure on steel which is planned to be adopted by Trump administration is still uncertain. Although President Trump states that he is in favor of adopting a generally applicable measure, sometimes he signals that more specific ones will be imposed. For instance, President Trump gave a clue concerning his opinion tweeting, "Don't like steel & aluminum dumping!". Therefore it is more likely for the Trump administration to adopt an anti-dumping measure that will aim the steel imported from certain countries instead of a generally applied measure.
On the other hand, it is seen that the investigation initiated pursuant to Section 232 yielded its results in the G-20 Summit that was recently held in Hamburg. Indeed, in the Leaders' Declaration, it has been underlined that member and participant states will fight against protectionism in international trade while taking constructive steps towards solving the problem of excess capacities in the steel industry and actively cooperate on the relevant matter. Moreover, it is important to note that the Leaders have also emphasized that member and participant states are free to resort to the trade defense instruments only in cases where there are legitimate grounds. Given the state of play, the exact approach that will be adopted by U.S. on imports of steel still remains to be seen.
Lastly leading players of the Turkish steel industry state that domestic industry would face great harm if the Trump administration decides to impose measures against steel imports on the basis of the national security ground. Veysel Yayan - Chairman of the Turkish Steel Producers Association – takes the view that the U.S. market covers 13,6% of the steel exported from Turkey according to 2016 data6. Mr. Yayan also indicated that domestic industry will definitely take actions in order to seek remedy if the EU and other countries decide to adopt countermeasures against the steel move by Trump administration. To recap, potential measures to be taken by Trump administration to protect the US steel industry are likely to have great impact on steel producers all over the world and expected to trigger greater international conflict.
1. John Ferriola, CEO of Nucor Corp which is the largest steel manufacturing company in U.S. states on an interview that the opinion of the steel producers on the ongoing investigation has been consulted by the Trump administration. Although Ferriola does not show a solid standing on their approach concerning the type of measure, he emphasizes that the investigation could not achieve its aim if it fails to decrease the market share of the imported steel in the U.S. market.
3. Please see, http://www.reuters.com/article/trade-usa-steel-eu-idUSL8N1JN2VT.
5. For detailed information please see, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds248_e.htm.
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