Trade Cases

Pearson: Section 232 Would Hurt the Economy

Written by Tim Triplett

Editor’s note: In this letter to the editor, former International Trade Commission Chairman Daniel Pearson comments on the Commerce Department’s Section 232 recommendations released on Friday.

Thanks to Steel Market Update for sharing the DOC’s distressing recommendations. All of them look to me as if they would tighten supplies and raise prices significantly. The United States already has steel prices that are substantially higher than most other countries. Would I be correct to assume that these 232 measures would lead to the United States having by far the highest steel prices of any major country in the world?

My view is that each of these alternatives would lead to substantial job losses in U.S. manufacturing firms that use steel as an input. Perhaps a few hundred additional people would be added to the 140,000 who currently work in steel mills, but hundreds of thousands of downstream jobs likely will be lost over the several-year period in which the restrictions would be in effect. A high percentage of the 6.5 million people who work in downstream industries produce goods that compete directly with imported items. Their employers would basically be paying the highest steel prices in the world. That makes it difficult for them to compete successfully against overseas firms whose governments don’t impose artificially high costs on them.

There might be a slight steel-related uptick in the U.S. inflation rate. I think that’s likely to be modest, though, because imported manufactured goods will be available at current price levels, and customers likely will be glad enough to buy them.

My guess is that most of the U.S. business community will see the situation more or less as I’ve described it. If so, we may see a noticeable dip in investment in manufacturing plants and equipment in this country. The foreseeable future for import-competing steel users doesn’t look very cheery.

Will there be enough of a contraction in U.S. steel consumption so that sales by U.S. steel mills actually decline? This gets to be a bit speculative on my part; it may take longer than the period in which these restrictions would be in effect to erode U.S. consumption that much. After all, some additional steel might be used for infrastructure at some point. The exception, of course, would be if these restrictions trigger a ‘Ross Recession,’ which may not be entirely unlikely. This business cycle is getting to be quite old, and not everything the U.S. government has done recently has helped to build business and consumer confidence.

How will other countries respond? There may be dispute settlement under WTO procedures. However, previous decisions on use of the WTO national security exemption indicate that countries basically have been allowed to define what is in their own national security interest. Unless that precedent is overturned, countries dealing with these restrictions likely could find no relief at the WTO.

The more likely approach would be for other nations to take the view that the United States is abusing WTO rules, so they will do the same and impose immediate retaliation. If Canada and Mexico are included among countries facing restrictions, U.S. steel exports to those nations could be curtailed quite quickly.

Since the U.S. steel industry is not a very large exporter, retaliation likely would fall most heavily on sectors that are. For instance, the United States exports a lot of military equipment. Since this action is being justified on the basis of national security, perhaps other nations would retaliate against U.S. military exports. After all, military equipment can be bought from a number of countries.

Even more likely to face retaliation is agriculture – a very large export sector that has a history of dealing with retaliatory actions by other countries. Part of the reason that agriculture is a convenient retaliatory target is that there are farmers in every state, totaling two to three million. (Rather more people, I would note, than are employed in steel mills.) So, if foreign governments want to get the attention of U.S. policymakers, taking a whack at agricultural exports is a sure way to do it. Farming is in its fourth year of low income due to global oversupplies of major commodities and correspondingly reduced prices. Folks in the hinterlands won’t be amused by being caught up in a trade dispute over steel, an industry that’s now relatively more profitable than farming.

Should I take it as a slight consolation prize that DOC included my submission for the 232 process in the “public comments” section (Appendix G? The materials available via link at #52 offer my analysis of the merits of the 232 investigation, as well as comments on DOC’s decision to exclude a former USITC chairman from testifying at the public hearing. It’s not clear to me whether anyone at DOC ever read my materials. Certainly, they had no effect on the recommendations presented to the White House.

These recommendations make it look like we may be on the verge of major trade confrontations/dislocations that would have a meaningful and negative effect on the U.S. and global economies. I hope I’m wrong.

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