Price: Which countries get a 'zonk' in Trump's primetime 'Let's Make a (Trade) Deal' show?

So, let’s tick off the known and unknown results of the various negotiations. The list of countries for the recent set of deals includes economies that all depend heavily on exporting manufactured products to the United States. These countries also reflect the administration’s priority for cementing relationships in the Indo-Pacific as an economic counterweight to China.

Vietnam

On July 2, the White House announced an agreement with Vietnam. The agreement lowered Vietnam’s general tariff rate from the originally announced 46% to 20%, although no one has seen the terms, perhaps not even the government of Vietnam.

The agreement implicitly acknowledges that Vietnam’s ascendant trade relationship with the United States is largely built on Chinese circumvention and duty evasion. For this reason, the agreement appears to feature an elevated 40% duty rate on products with a significant amount of Chinese content. The Vietnamese government has agreed to ramp up its country-of-origin monitoring and enforcement, though the details of this process are not yet clear. As the details are hammered out, the administration can use this opportunity to prevent duty evasion where steel inputs from China are incorporated into downstream products or kits in Vietnam.

Critically for US industry, the US-Vietnam agreement did not recognize Vietnam as a market-based economy, despite Vietnam’s renewed requests. The US government considers Vietnam’s economy to be based on non-market principles due to widespread government interference in currency rates, labor markets, foreign investment, the means of production, and pricing. This designation means that Vietnamese anti-dumping duties are calculated based on imputed “surrogate” data, which typically leads to higher duty liability. During the Biden administration, the Vietnamese government staged a massive campaign for market economy recognition that was ultimately unsuccessful. As long as a Communist Vietnam continues to be a transshipment point for Chinese producers and continues its non-market structure, it is unlikely that any US administration will recognize Vietnam as a market economy.

Japan

The topline news from the Japan-US agreement is that the effective rate for Japan’s exports to the United States will be reduced to 15%. The agreement also secures $550 billion in Japanese foreign direct investment in the energy, semiconductor, critical minerals, pharmaceutical, and shipbuilding sectors, and, according to the president, 90% of the profits will remain in the United States. US automakers will also have greater access to the Japanese market (for what this is worth), but the Japanese get a serious advantage over other car exporters – only a 15% duty. No one knows how the $550 billion investment figure will be calculated or whether already-completed deals—like Nippon Steel’s takeover of U.S. Steel—will be counted in the $550 billion. Those profits, of course, will all flow to Japan. The limited information released on the US-Japan deal is silent on the issue of steel Section 232 tariffs. Multiple press reports, including those from NHK in Japan, indicate that Japanese steel and aluminum will continue to pay 50% S232 duties. 

Indonesia

In Indonesia, the administration reached an agreement that would lower Indonesia’s duty rate to 19% (down from the previously announced 32%). The US-Indonesia agreement also gets US exports around long-standing Indonesian trade barriers—such as local content requirements and burdensome certification and inspection regimes. And, like in other agreements, the deal highlights enhanced country-of-origin enforcement and limitations on the ability to exploit the deal with Chinese content containing goods.

Global steel excess capacity makes an appearance in the Indonesia deal. Indonesia has committed to joining the OECD’s Global Forum on Steel Excess Capacity and taking action to address excess capacity in the Indonesian steel industry. Immediate action is necessary in Indonesia to prevent excess capacity from spreading. As a recent OECD report noted, Chinese investment and Indonesian state-owned companies—relying on government support—have driven recent and announced BOF capacity expansions in Indonesia. That capacity is far in excess of domestic needs.  Reining in excess capacity is not only good for the United States, but it’s also good for the global steel industry as a whole.

The Philippines

The Philippines also signed a deal setting a general 19% duty rate for its imports, imposing a 40% rate for “transshipped” merchandise, and establishing country-of-origin monitoring programs. Curbing excess steel capacity in the Philippines should also be a priority. The Philippines was also identified in the OECD’s report as having forthcoming Chinese investment in new BOF capacity—including $2 billion in new capacity from China’s state-owned Baowu Steel.

Final thoughts on potential deals

The trade deals announced thus far show a focus on trade in the Indo-Pacific. While negotiations with India and South Korea have gone in fits and starts, it would not be surprising to see an initial framework agreement sometime before the administration’s August 1 deadline for at least one of these countries. Of course, if the Japanese deal is any indication, requests to exempt steel and aluminum from tariffs or for tariff-rate quotas (TRQs) will fall on deaf ears, as they should, given the damage these exemptions previously caused. Additionally, unlike other sectors, the domestic steel industry has ample capacity, and foreign producers should not be allowed exemptions to finance the construction of domestic capacity and destroy US-owned companies by transferring the global overcapacity problem to the United States.

Finally, turning to the EU, there is a considerable push by the EU to wrap up an agreement. The EU itself has massive excess steelmaking capacity, and it would rather export that capacity, much of which is subsidized, rather than downsize it. The EU wants TRQs for steel and aluminum, but those requests should be rejected. Virtually all EU steel products can be produced in the United States, and TRQs just undermine the US industry. Further, there should be no exemptions for steel companies to build new, EU-controlled capacity in the United States, given the substantial amounts of global excess capacity. Why transfer the excess capacity to the United States? More plants do not always yield a healthier industry or more jobs in the United States. Sometimes it’s just the opposite, destabilizing the facilities that are already here.

So, as the Let’s Make a Deal process moves forward, remember that, unlike the game show, this is not mindless entertainment. If you can’t make a deal, you might get zonked.

Editor’s note

This is an opinion column. The views in this article are those of experienced trade attorneys on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.