Leibowitz on Trade: More Managed Trade in Steel – Japan’s Turn

As with all previous Section 232 quota agreements (Argentina, Brazil, European Union, Korea), the steel products covered by the U.S.-Japan deal are divided into 54 separate categories. The 1.25-million-ton overall quota will therefore be divided into 54 separate quotas.

The Japan quotas will be based on 2018-2019 imports into the United States. The category-specific quotas have not yet been announced. Previous quota agreements pegged the quotas to 2015-17 import volumes, which, in Japan’s case, vastly exceeded 2 million metric tons. Japan has sacrificed considerably. What will Japan get in return? That is not clear.

Unlike the European Union deal announced last fall, Japanese steel exclusions will not be extended. Importers and U.S. customers will still need to obtain exclusions, which will exempt those imports from the 25% duties, regardless of the quota limits.

The joint U.S.-Japan announcement on Feb. 7, however, went on at length regarding agreements to consult about “non-market overcapacity,” a clear reference to China. Japan agreed to consider steps, including more antidumping cases against imports of steel into Japan, in an effort to restrict access of imported steel into Japan. No concrete steps have yet been announced (in the past, Japan has almost never had antidumping cases against steel imported into Japan).

In addition, the Joint Statement announced that the two countries would “confer on entering into discussions on global steel and aluminum arrangements to address both global non-market excess capacity as well as the carbon-intensity of the steel and aluminum industries.” That is Washington-speak for agreeing to consider talking about (1) addressing non-market excess capacity and (2) addressing ways to differentiate between imports of “dirty” steel and aluminum and “clean” steel and aluminum. The details were not announced, in all probability because the details do not yet exist.

Another feature of the Japan quota deal that mirrors the European Union agreement is a “melted and poured” provision. In order to come within the tariff exemption, steel must be made in Japan, not a third country. As we have seen before, this concept of “melted and poured” eliminates steel processing from the benefits of the tariff exemption. This could have a serious effect on Japan’s steel companies, many of whom further process steel from outside Japan. A reroller of semifinished slabs into hot rolled steel, for example, would need to purchase slabs from Japanese steel producers rather than using third-country slabs. So far, there is no reaction from Japan’s steel processors about this issue.

Of course, it goes without saying that Japan’s capacity is not “non-market excess capacity” because Japan is not a non-market economy. So far, the U.S. has entered into quota agreements with countries without obligating those countries to cut capacity. This agreement, at least as outlined so far, is not an exception. The “non-market overcapacity” appears to be limited to one, or perhaps a very few countries.

The domestic steel producers have one overriding benchmark for identifying countries with “overcapacity”—producing more steel than they consume domestically. That makes no sense, because that definition would compel non-producing countries to open up their own steel production, further adding global capacity.

The U.S., by far the largest net importer of steel in the world, is at the other end of the scale. Arguing that any country that is a net exporter of steel makes its capacity “excess” would let the U.S. off the hook for cutting capacity; but this is a vast oversimplification. Now that the U.S. has identified “non-market overcapacity” as the problem, the EU and Japan have little or no reason to believe that they will be targeted for reduction of “overcapacity,” even though Japan, at least, is a net exporter of steel.

Perhaps that can be partly explained by the effect of quotas compared with tariffs. While tariffs pad the coffers of the importing country’s treasury, quotas capture that money (and more) in “quota rents” for the exporting country’s steel producers. U.S. steel consumers will not benefit much from this deal. But Japan’s steel exporters will benefit much more.

Japan has now achieved favored status in its relations with the United States. But there is little prospect that the agreement (or any of the quota agreements) will actually reduce global overcapacity (however one might define that) or increase demand for steel worldwide. The domestic steel industry has successfully created an issue that is effectively unsolvable and will justify, in their view, endless trade restrictions.

The long-term domestic dislocations from the U.S.’s current steel policy remain and in fact may be intensifying. The tremendous gap between U.S. steel prices and prices in other global markets is still huge, although it has decreased a bit from the astronomical highs of last year. And, as 157,000 approved steel exclusions demonstrate, the U.S. industry does not make all the products that U.S. steel consumers require.

As long as the disconnects between U.S. steel producers and their domestic customers persist, U.S. steel-using manufacturers will face increased competition in downstream products from overseas. This will force, if U.S. policy does not change, U.S. steel-consuming manufacturers out of the country, either through business closures or relocation of production to more sustainable facilities where steel availability is greater and costs are lower. There is very little that government policymakers can do to change this, other than to reduce barriers to steel trading.

While some in Congress are suggesting higher tariffs on steel-containing products as a solution, there is every reason to believe that this would do more harm than good. The U.S. industry needs to be more competitive in pricing and in making the products that their customers need. The only thing that will fix this problem in the long term is for steel prices to be equivalent (although not necessarily identical) globally, at sustainable levels. Domestic steel producers know this—but for the moment they are focused on protecting the U.S. market. They have certainly had a successful year to support efforts to make more competitive products. But we have a long way to go to match steel production in this country with the needs of steel consumers.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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