Trade Cases

Leibowitz on Trade: Time's Up on Section 232

Written by Lewis Leibowitz

I was pleased to see many of you this past week in Atlanta at the SMU Steel Summit. It is certainly one of the largest (and most significant) steel conferences in the United States. This year was a first – a hybrid conference, with about 800 in-person attendees and 300 virtual. I doubt it will be the last.

There were many important and informative speakers. The opportunity to meet with so many attendees, both before and after my own segment on Tuesday with Kevin Dempsey, president of American Iron and Steel Institute (AISI), gave me insights into what the marketplace is worried about and what it expects. I would like to share my take on the future of Section 232 tariffs (and quotas), based on all the listening I was able to do.

First, the current steel market is in uncharted territory, especially, but not exclusively, in the flat-rolled arena. With prices in the U.S. nearing $2,000 per ton ($100 per cwt) for hot-rolled coil, the U.S. is now a totally non-competitive market for steel. Prices here in the U.S. are the highest in the world by a wide margin. The question from almost everyone I talked to: whether, and when, prices would come down.

The answers were predictable. Producers said the price was set by the market. Consumers said the prices were killing them. And analysts said that prices would surely come down by next year – but that it was hard to predict to what level.

Second, the clear message I got from all three groups was that Section 232 measures are not necessary anymore. Producers are not advocating an immediate end to them. But even they, as the principal beneficiaries of the measures, admitted that Section 232 was no longer necessary to prop up the industry. Consumers want Section 232 measures ended now – better still, yesterday. And analysts were certain that Section 232 did not cause the current (and unexpectedly persistent) price spikes. After all, the measures went into place in March 2018 and prices spiked. But then they retreated after a few months later that year. The cause of the current spike was clearly not Section 232. Rather, the cause was a disconnect between stagnant or declining supply levels in the U.S. and surging domestic demand following the COVID lockdowns.

No one wants demand to slacken, which could bring relief on prices but would not help the industry or its customers. So the only acceptable way to bring prices to more “normal” levels is to increase the supply. And the most effective way to do that is to relax import restrictions.

My conversation with Kevin Dempsey revealed that U.S. producers want to avoid an import “surge” that could devastate the domestic industry. The domestic producers have wanted that for a long time. There is, I admit, logic to that position. 

If policy changes from protection against imports to preventing an import surge, we need to define some terms. For example, how big an increase in imports amounts to a surge? How long does it have to last to meet the definition? How can it be determined whether it is, or is likely to be, sufficiently harmful or sustained to be “devastating” to domestic steel producers? And how can we determine when it ends?

There is certainly no “devastating” surge right now. Quite the contrary: Domestic producers in nearly every segment of the industry – blast furnace, EAF, rerollers, coating mills, and service centers – are making money. Lots of it. Section 232 measures might not contribute much to high prices. The duties on steel are less than 4% of import values – not the 25% that 100% coverage would amount to – because of exemptions, quota deals and exclusions already in place. Still, import restrictions are adding to the financial and logistical burdens on steel consumers.

With all these factors pointing in one direction, the time seems right to try an experiment: End Section 232 measures on steel (and possibly aluminum, although they are two very different situations) and let’s see what happens. Even a suspension of measures for six months or one year would lead to increased imports, which the market needs right now. A devastating “surge” in imports is impossible to foresee any time soon. A deal should be made and soon.

Section 232 tariffs could be replaced by tariff rate quotas (TRQs) that would prevent a surge in imports by setting import quantities – on a global or a country-by-country basis – above which tariffs would be imposed. The trigger should be high enough to prevent a damaging surge without interfering with the healthy and natural competition between imported steel and domestic steel. The exclusion process could be used to permit products that are not available from domestic sources from counting against the quota caps. As domestic capacity to make specialized products increases, the exclusions would no longer be necessary.

This modified regime would not leave the domestic producers unprotected from predatory imports. We already have antidumping and countervailing duty laws that prevent “unfair trade.” And they work well. The steel industry has used these laws for decades, and they alone would keep out most steel products from China, which produces more than half the global supply of steel.

I have long advocated reform of these laws to balance the needs and interests of consumers and producers. The current laws impose duties of unpredictable amounts and indefinite duration. So, one takeaway, for me, is that whatever is done about Section 232, we need to take a fresh look at antidumping and countervailing duties and to make necessary reforms. Case in point: We should advocate for more certainty regarding duties and collect only those duties necessary to alleviate actual injury to domestic mills. Sadly, neither holds true today. While steel producers complain that bringing cases is too expensive, they cannot fairly complain about the results. The odds of filing a case and not obtaining significant duties is very small.

Other laws can also protect the industry. Safeguard measures provide years of potential relief from imports, as does Section 301, which has been used against imports from China. Indeed, China alone is subject to Section 232, Section 301, and antidumping and countervailing duties. Any one of those measures would exclude Chinese steel from the U.S. market.

The current price spike has lasted longer than anyone expected. It is a perfect combination of plant outages (although steel capacity utilization has been above 80 percent since May), surging demand, and import restrictions. Easing import restrictions is the easiest thing to do to fix the market in a hurry.

Based on this confluence of factors, the current negotiations with the EU and Britain to remove their exports from the Section 232 measures (joining Canada, Mexico and Australia) should proceed smoothly and provide at least some relief from price spikes. But that alone might not be enough to bring prices to a more sustainable level.

The situation is risky right now: if major steel users (there are more than 100,000 businesses in this country that use steel in manufacturing, employing more than eight million workers) become convinced that government trade policy will not consider their needs, many are likely to leave and take jobs with them. No one wants that outcome. Everybody is patriotic, but patriotism cannot replace sound business practices. As we’ve seen for the last 30 years, when jobs go offshore, it is very tough to bring them back.

This is a good time for producing and consuming industries to get together and support initiatives, both government and private, that benefit, to a much greater extent than at present, steel producers, processors, distributors, and consumers.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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Lewis Leibowitz, SMU Contributor

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