Final Thoughts

February 27, 2019

(Editor’s note: John Packard is traveling.)

Just as it appears steel prices have finally turned the corner the pressure is on to get final approval of the U.S.-Mexico-Canada Agreement. Trade officials in Canada and Mexico have stated in various press reports that they will not pass the new North American free trade agreement with the Trump administration’s Section 232 tariffs still in place. Which raises the question: What happens to steel prices in the U.S. if both the northern and southern borders suddenly open to tariff-free steel imports from Canada and Mexico?

The answer, of course, is unknowable as so many economic and political factors would come into play. Viewed in simple supply-demand terms, one could expect a surge of imports that might drive steel prices downward—or at least undermine the upturn. As one steel executive told SMU this week: “Taking the tariffs off of Canada and Mexico would create much more competition across the three countries and therefore would put a lid on prices, if not outright cause a drop as mills compete for volumes.” Others responding to SMU’s query were less concerned: “I believe most of that [removal of the Canada/Mexico tariffs] is already baked into today’s pricing. There may be a short term backslide, but little effect at this point,” said another service center exec.

Both U.S. Trade Representative Robert Lighthizer and White House National Economic Council Director Larry Kudlow have made public statements suggesting that negotiations have made progress toward removal of the tariffs. In recent testimony before the House Ways and Means Committee, Lighthizer said: “In the context of maintaining the integrity of our steel and aluminum program, we want very much to work out an agreement with Canada and Mexico. And we’re in the process of doing that. Whether we’ll succeed or not, I don’t know, but it certainly is my hope.”

Replacing the tariffs with quotas remains another possibility. In testimony to the House Agriculture Committee this week, Agriculture Secretary Sonny Perdue said he hopes to persuade President Trump that the U.S. steel industry can be adequately protected by tariff rate quotas. Where such quotas would be set is another question, but there’s precedent with South Korea, which agreed to limit its exports to the U.S. to 70 percent of its 2017 volume.

In any event, the wait for some sort of decision may be over soon. Trade negotiators from Canada and Mexico say they are hoping for a deal “in the next few weeks.” Some predict the USMCA could makes its way to Congress for consideration as early as April.

As always, your business is truly appreciated by all of us here at Steel Market Update.

Tim Triplett, Executive Editor