Trade Cases

Leibowitz: Steel and Aluminum Talks—Overcapacity and Quotas?

Written by Lewis Leibowitz

By Trade Attorney Lewis Leibowitz

U.S. Trade Representative Katherine Tai has been traveling. She has a lot on her plate. In an effort to attract allies to the United States’ plan to rein in China, the U.S. has floated a proposal, according to reports, to replace the 25% steel and 10% aluminum tariffs with a “tariff rate quota” or TRQ. But she has linked concessions on that score with broader agreements, including discussing a multilateral approach to Chinese “overcapacity” to produce steel. I place “overcapacity” in quotations, because it is a term that is thrown around without much thought being given to what it really means.

First, we can discuss the possibilities regarding the replacement of the present tariffs on the EU (and by extension the UK) with TRQs. For those who understand the difference, bear with me while I explain the difference to others who might not know (and might think they know and really don’t).

TRQs impose a low (or zero) duty rate on imports up to a certain point, which is generally the quantity of imports. When that “cap” is reached, a higher tariff is imposed. TRQs are in effect for a wide variety of goods, including sugar, chocolate, dairy products and peanuts. Industrial products generally do not have TRQs under U.S. law, but they can. For example, the steel and aluminum quotas on Argentina, Brazil and South Korea are “absolute” quotas, which mean that no covered imports are admitted into U.S. commerce once the quotas are reached for the year.

Second, there is much speculation regarding how such a TRQ might be administered. The absolute steel quotas have an annual quantitative limit for about 50 categories of steel products. For each calendar quarter, the quantity for each category cannot exceed 30% of the annual quota (this prevents “bunching” of imports). The U.S. has not released any details about its proposal (and has not publicly confirmed that there is a proposal). Will the EU and UK divide their steel imports into 50 or more categories? And what will the “in quota” rates and “out of quota” rates be? The same questions apply to the UK, which is now treated separately from the EU for these programs.

Third, the talks with the EU and the UK are now linked with discussions about Chinese “overcapacity” and how to deal with it. This is even tougher. As I’ve mentioned before, there is no evidence Chinese “overcapacity” has been reduced at all by U.S. tariffs on steel from other countries. Some may speculate that the Chinese cheat at everything, so that only by imposing tariffs on friend and foe alike can we guarantee that Chinese “overcapacity” will not enter the U.S. market. That is a silly argument, because it can enter the U.S. market as products that are not steel but contain steel. The fact that substantive talks with the EU and UK are taking place confirms this point.

Ambassador Tai has not made any statements about how the problem of “overcapacity” in steel and aluminum can be addressed. In that case, the U.S. will have to choose between saying no to reducing import restrictions on the EU and UK, or saying yes to those reductions while continuing to talk about ways to address “overcapacity.”

So, what are the ways to urge (or compel) China to reduce its “overcapacity?” It is necessary first to identify it. Which mills are being supported by government subsidies that, if removed, would force them to shut down permanently? I have not seen a definitive list.

“Overcapacity” means that mills are capable of producing more product than is necessary—but how much is necessary? There is no hint of an agreement on that. It is bound up in domestic economics and politics, and international economics. In addition, measuring “capacity” is necessary to measuring “overcapacity.” How much can a given mill produce? Do we assume three shifts per day, seven days per week? Something less? Is that realistic for an old mill? What has technology done to the number of workers it takes to produce steel? Thus, people interested in how much “overcapacity” is out there in the world can inflate or deflate the number by vast magnitudes.

The “capacity” problem is, in my view, well-nigh intractable; we will never agree on measuring it. A better way to define the problem is appropriate. A more accurate way to measure it may be the difference between supply and demand worldwide. That will be difficult in itself, because much steel and aluminum is produced and distributed for inventories around the world. According to the OECD, the effect of capacity and production on international trade flows is evolving. It can no longer be said with confidence that Chinese “overcapacity” is increasing exports from China to the rest of the world. It might—it might not. But overproduction would be more likely to lead to increased Chinese exports.

Once “overcapacity” or overproduction is defined satisfactorily, it then must be dealt with internationally. Who should close mills? The U.S. steel industry and its allies have steadily maintained that it should be based on domestic demand. Because the U.S. has consumed more steel than it has produced for about 60 years, this would let the U.S. off the hook on chopping capacity. But suppose the modernity of the mills were a factor—how would that impact who should shutter capacity? If saving jobs is a factor, the least efficient mills in terms of productivity might be “saved” but the marketplace would probably not save them for long.

One thing is for sure—the U.S. and EU will not come to an agreement on measuring the problem, let alone solving it, by the end of October, the scheduled date for conclusion of the talks. So far, the pronouncements from both sides (U.S. and EU) have been very general. This could mean a quick agreement on changing from tariffs on steel and aluminum to a tariff rate quota, allowing more European and British imports into the U.S., in exchange for removing the threat of retaliatory tariffs on imports into the EU and UK. There could also be a commitment to engaging on global “overcapacity” discussions into 2022.

Maybe some new ideas will come out. We could certainly use them.

Lewis Leibowitz

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

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