Tue, Jun 1, 2021

Transatlantic tariffs, national security, and geopolitical priorities

TradeWorld by Barbara C. Matthews

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The United States and the European Union announced this week the initiation of a negotiation process aimed at eliminating US tariffs on steel and aluminum imports from Europe by the end of the year. The move reflects the promised rapprochement between the Biden/Harris administration and European allies, assuaging European irritation at having the metal industry – and thus, by implication the EU itself – been formally designated a national security threat by the United States. Additionally, smoothing over the disputes represents a continued effort to increase geopolitical pressure on China.  

Successfully concluding these talks will require both parties to navigate some difficult issues over the next six-seven months. This post recaps the situation at hand and the key issues that require resolution.

National security tariffs on steel and aluminum

Section 232 of the Trade Expansion Act of 1962 authorizes the president of the United States (and, thus, the US Trade Representative) to impose tariffs on imports if it is found that the imported items in question constitute a threat to US national security. Section 232 tariffs therefore assume a highly globalized economy generates vulnerability for the domestic economy based on factors other than the terms of trade. The factors all seek to ensure that the US Government can acquire necessary materials from domestic sources in the event of a national emergency. When the Trump administration in 2018 imposed tariffs on steel and aluminum imports under Section 232 of the Trade Expansion Act, it triggered widespread fears of a global trade war. The controversy arose over (i) the foundation for the tariffs on national security grounds and (ii) the global scope of the tariffs, which included traditional transatlantic allies in Europe while exempting the United States’ bordering neighbors in Canada and Mexico pursuant to tariff-free commitments under the United States-Canada-Mexico Agreement.1 The USMCA requires that at least 70 percent of aluminum imports from Canada and Mexico for the automobile sector must enter the United States free of tariffs. Global trade war fears escalated further when the European Union threatened retaliatory action.  Fortunately, trade tensions simmered down in 2019 with no further action. The May 17, 2021 joint statement by the US Trade Representative and the EU Commission acknowledged these concerns by highlighting that “as the United States and EU Member States are allies and partners, sharing similar national security interests as democratic, market economies, they can partner to promote high standards, address shared concerns, and hold countries like China that support trade-distorting policies to account.” Even as the announcement of negotiations focused on eliminating tariffs between the US and the EU, the joint statement also indicated that both the United States and the European Union face damage from steel dumping and overcapacity in the global steel market. However, they may find it difficult to eliminate the tariffs despite best intentions.

Metals trade: Key data points

Policymakers on both sides of the Atlantic frequently assert that Chinese steel and aluminum production generate the majority of adverse competitive effects on the global steel market. The actual import data in the United States tells a slightly different story. Department of Commerce data shows that the top 10 sources of steel imports into the United States do not come from China. Steel imports dropped significantly following the imposition of Section 232 tariffs, including even from Canada that had been exempted from the tariffs.

The data also indicate that the dispersion of importers is far from even. The top three steel importers (Canada, Brazil, and Mexico) account for 50 percent of steel imports. Germany only accounts for 4 percent; Italy for even less.

The import structure for aluminum is more concentrated. Canada accounts for over two-thirds of US aluminum imports. The next three largest importers are the United Arab Emirates, Argentina, and Russia. Aluminum imports from China to the United States are limited to a small set of products (such as rods, wire, and bars). European imports to the United States are minimal.

Finally, the imposition of an import tariff does not mean the tariffs remain in place without the possibility of change. The United States permits US firms to request exclusions from the tariffs, and the Congressional Research Service indicates that the Department of Commerce to date has granted roughly 60 percent of all exclusion requests regarding aluminum.  At the end of 2020, the Department of Commerce further announced that 105 steel and fifteen aluminum products would become eligible for a “general exemption.”

European exports of steel and aluminum also are similarly muted. Italy’s exports to the United States are dominated by pharmaceuticals products (17 percent), machinery (12 percent) and aircraft (7 percent). Germany’s exports to the United States follow a similar structure.

In other words: the economic significance of the aluminum and steel tariffs for transatlantic trade is not as large as media headlines might suggest. Similarly, claims that Chinese steel and aluminum distorts import markets are less impactful than asserted. Rather, the symbolic and geopolitical significance of aluminum and steel tariffs is much higher, particularly in the context of global market dynamics.

Two key issues for 2021

The Joint US-EU Statement this week makes clear that policymakers on both sides of the Atlantic seek to join forces to combat a larger, persistent problem in the global market for steel: Chinese over-production. Powered by state subsidies, Chinese steel production alone has increased 418 percent since 2000, making it responsible for nearly 50 percent of all global production by 2019. The success of the Chinese steel market seems to have also inspired many large emerging steel markets (India, South Korea, Russia, Taiwan, Brazil, and Mexico) to scale up rapidly, supported by state subsidies and market intervention.

Transatlantic policymakers must now grapple with two very difficult issues if they are going to successfully eliminate the Section 232 tariffs applied to European producers.

  • State subsidies: On the surface, a joint US-EU effort to address Chinese overcapacity could take the form of challenging state subsidies provided by Beijing to local firms. The challenges could include bilateral initiatives as well as more formal complaints within the World Trade Organization (WTO).

This will not be an easy transatlantic conversation. Certain EU member states currently provide significant subsidies to their domestic steel and aluminum manufacturers. Market intervention also is not uncommon. Pandemic-era industrial policy spending priorities focused on preserving and creating jobs by funding the transition to a green economy mean that traditional manufacturing companies are likely to receive even larger shares of government funding to facilitate changes in their production processes that decrease their carbon emissions.

European efforts to pressure China to decrease state subsidies for steel and aluminum may not be as effective as policymakers might like. If the elimination of Section 232 tariffs for European steel and aluminum becomes contingent on Chinese action, the prospects for a deal by year end dramatically decrease.

  • National security: US policymakers could certainly decide that no national security issues arise from European steel and aluminum imports based solely on the nearly minimal amount of such imports relative to other trading partners. European policymakers certainly will seek to promote the perspective that they should at least be treated on a par with the largest importer of both products (Canada), which already receives a large exemption due to the USMCA’s tariff terms.

Eliminating the Section 232 tariffs would certainly go a long way towards assuaging the diplomatic insult of being deemed a national security threat to the United States. But making this decision based on geopolitical grounds potentially undermines the ability to make progress regarding state subsidies that distort global markets.

Transatlantic policymakers have thus created a potentially problematic framework for discussion. If US officials lift the Section 232 tariffs on EU steel and aluminum imports, they effectively determine that European state subsidies and market intervention in this sector is not as important as geopolitical priorities. In other words, they suggest that the problem with the tariffs were not state subsidies themselves – but who was giving them.

Prioritizing preferential treatment for allied nations makes it far more difficult to persuade China by making arguments about substantive market distortion. Any such move instead could backfire, incentivizing China to call out the various government subsidies being distributed as part of the pandemic-era recovery process. Pursuing all these initiatives outside the WTO umbrella potentially further weakens the global trade body. How Europe and the United States resolve the steel and aluminum tariffs issue will thus tell us a great deal about the shape of global trade policy over the near- to medium-term.

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