Leibowitz on Trade: Section 232 Exclusions and Their Future

The request for public comments did not originate from the Commerce Department out of thin air. In late December, the president issued a proclamation that instructs the secretary of commerce to issue, within 45 days after the proclamation’s date, a notice: “Seeking comments from interested parties on the exclusion process as set forth in Supplement No. 1 to part 705 of title 15 of the Code of Federal Regulations. Issues to be included for comment should include the responsiveness of the exclusion process to market demand and enhanced consultation with United States firms and labor organizations.”

It is most unusual for a presidential proclamation to command the issuance of a notice seeking public comment. That practice is quite within the authority of an agency regulating economic activity.

The proclamation has more specific instructions, also unusual for a presidential proclamation. Within 60 days after the comment period closes, the Commerce secretary must issue a proposed regulation “revising the exclusion process as deemed appropriate following consideration of such comments.” The review of the exclusion process must include analysis of “whether the criteria for review of exclusion requests…continues to be the appropriate criterion for making determinations” that steel or aluminum is determined “not to be produced in a sufficient and reasonably available amount or of a satisfactory quality.” Then, there will be a comment period on the proposed regulation and a final rule “shall issue” within 60 days after the comment period is over.

For readers who have experience with the exclusion process, it is no surprise that it is bound up in controversy. Exclusions are a key feature of the Section 232 tariffs. Originally, Commerce ran the exclusions process through the regulations.gov website. Then, in June 2019, the department changed the platform to the “232 Exclusions Portal.” There were about 200,000 requests submitted under regulations.gov, and the new Exclusions Portal has had close to 300,000 more requests. About 70% of the filed requests are approved. The half million requests exceed by quite a bit the estimated 4,000 per year that Commerce thought would be filed.

The only plausible explanation for the intense presidential interest in steel and aluminum exclusions is the importance of the program for trade and economic policy. The collection of duties under Section 232 is well below 25% for steel and 10% for aluminum, as I have mentioned in previous columns. Country exemptions are partly responsible—Canada and Mexico are exempt, as is Australia. And Brazil, Argentina and Korea are subject to quotas rather than tariffs. Effective Jan. 1, the EU countries also became exempt, and Japan’s imports will be exempt effective April 1. The other explanation for the lower than expected tariff collections is exclusions.

The European Union was very clear that exclusions should be less cumbersome—as part of the EU quota agreement, steel exclusions previously approved for EU exporters are automatically extended until the end of 2023.

The implication of the presidential direction to reevaluate criteria for exclusions is that reform is likely. This reform will depend greatly on the comments that are provided by March 28.

As one who has done quite a few exclusions, I know that the system could work more smoothly and provide results that are more useful than the current system. Most controversies, in my experience, relate to whether domestic producers object to exclusion requests because they have the ability to produce a certain product but are unwilling to go through the difficult and time-consuming process of qualifying to make everything that they could make. The current market, featuring high prices for products that are relatively easy to make, does not provide much hope that domestic producers will change their business models.

Another area of dispute may well be semifinished steel. Domestic producers are generally loath to sell slabs or other semifinished products to rerollers whose end products compete with vertically integrated production by companies such as U.S. Steel, Nucor and Cleveland-Cliffs. There has been significant litigation about the denial of exclusion requests for semifinished steel by rerollers. This could be one of the areas of reform that Commerce hears about. Domestic producers will no doubt be against opening a new avenue for exclusions.

If Section 232 remedies are going to stay in place for a while, a new look at exclusions will be an important part of balancing the interests of steel producers, rerollers, processors and downstream manufacturers. The longer protective tariffs are in place, the more a safety valve will be needed. Otherwise, downstream industries will need to move out of the U.S. to remain globally competitive in the future.

Lewis Leibowitz

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