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Nail Maker News Issue No. 17

In Deal With EU, Biden Substitutes TRQs for Tariffs The Biden Administration and the European Union struck a deal in Rome on Oct. 30 to change the Section 232 tariff regime put in place by President Trump nearly four years ago. Instead of a strict 25% tariff on steel, EU countries starting on Jan. 1, 2022, will face a tariff-rate quota (TRQ) of 3.3 million metric tons of steel. Any steel products exported to the U.S. that exceed that quota will be subject to the original 25% tariff. Derivative products, such as steel nails, will not be subject to Section 232 tariffs at all, or TRQs. (See below for more on nails.) The decision could prove a risky one politically, with Biden appearing to bow to European pressure and abandoning tough import limits set by his predecessor, thus jeopardizing the steel industry and workers that Trump wanted to protect for national security purposes. A deal only with the EU, if it is strictly enforced, may not have serious effects on U.S. production of steel and even nails, but if the deal goes beyond Europe, it could have serious economic consequences, particularly in Midwestern industrial states where steelmaking is concentrated, such as Ohio and Pennsylvania.

‘Melted and Poured’ To be exempt from Section 232 tariffs, EU steel must be “melted and poured” in an EU country, and Commerce Secretary Gina Raimondo was confident that the new deal had safeguards that would prevent Chinese circumvention. “For far too long,” Raimondo said, “China was routing its cheap steel into the U.S. via Europe and other markets, which drove down prices and made it essentially impossible for America's steel and aluminum industry to compete and, of course, in so doing, hurting the industry and hurting our workers.” No doubt that is true, but the U.S. will have to prove it can strictly enforce the agreement to prevent just this practice. The U.S. imported 2.5 million tons of steel from the EU during 2020, when COVID-19 had a major impact on production and consumption, and 3.9 million tons in 2019. The 2019 figure was a substantial decrease from the pre-tariff year of 2017, when 5 million tons were imported by the U.S. from the European Union. Because the deal has limits that are well below pre-Section 232 levels, the Administration expected it to be embraced by the U.S. steel industry – and it was, perhaps because U.S. steelmakers may have expected something worse. “We appreciate the Biden administration’s continued recognition that the American steel industry is critical to our national and economic security," said Kevin Dempsey, president and CEO of the American Iron and Steel Institute in a statement. The protections, according to the New York Times, are also “a nod to metalworking unions that supported President Biden.” Thomas M. Conway, president of the United Steelworkers International, said the arrangement would “ensure U.S. domestic industries remain competitive and able to meet our security and infrastructure needs.”

Deal Raises Political and Enforcement Questions Still, the decision raises big questions:

  • Will lifting Section 232 tariffs on the EU have political fallout in the 2022 congressional races if Republicans argue that, in contrast to the Trump Administration, Democrats are failing to protect manufacturing jobs through aggressive duties?

  • Does the EU deal signal similar changes in trade policies toward other steel-producing countries?

  • How can the U.S. assure domestic steel manufacturers that steel is “melted and poured” in the EU – and that derivative products imported from the EU, like nails, are made only from such steel?

  • Will the U.S. be able to prevent China from using the deal to circumvent U.S. restrictions on Chinese steel exports to the United States, including nails?

The Biden Administration is running a risk. Critical Senate seats are on the line next year in Ohio and Pennsylvania, states that produce a lot of steel and steel derivatives, and Republicans will almost certainly take the President and his Congressional supporters to task for weakening Section 232. Democratic candidates could be hurt – or join the Republicans in criticism. The victory of a Republican candidate for governor in Virginia, a state that Donald Trump lost by 10 percentage points, and the near-defeat of a Democratic governor in New Jersey, as well as other results of Tuesday’s elections, put the Biden Administration in a difficult political position. Can Democrats afford to take steps that could be construed as removing protections from domestic manufacturing? Tariffs were set on steel and aluminum products through President Trump’s Proclamation 9705 on March 18, 2018, which was justified under Section 232 of the Trade Expansion Act of 1962 because, said the President, steel and aluminum were “being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.” The imposition of Section 232 tariffs had few exemptions. The tariffs were lifted in 2019 against Mexico and Canada in part to facilitate Congressional passage of the USMCA, the free-trade agreement that superseded NAFTA. Four countries were exempt from Section 232 tariffs from the start. Three of them (South Korea, Argentina, and Brazil) negotiated Section 232 quotas with the United States instead. Now that TRQs are being provided to the 27 countries of the EU, other nations are already asking for similar treatment. Japan is in talks with the U.S., and there is a report that South Korea may want to revise its current quota of 70% of the average volume of steel it exported to the U.S. between 2015 and 2017. (Brazil is attempting a similar revision.) The day after the EU deal was announced, the U.S. Commerce Department issued a statement that it was having consultations with the U.K. (which left the EU last year). A press release said: The United States and the United Kingdom are consulting closely on bilateral and multilateral issues related to steel and aluminum, with a focus on the impacts of overcapacity on the global steel and aluminum markets; the need for like-minded countries to take collective action to address the root causes of the problem; and the climate impacts of the sectors.

Climate Change and China “Overcapacity” and “root causes” are words associated with China, and, of course, climate change is a preoccupation of the Biden Administration. The agreement “addresses both Chinese overproduction and carbon intensity in the steel and aluminum sector," White House National Security Adviser Jake Sullivan told reporters. It remains unclear, however, just how China will be affected. In fact, if the deal is not stringently enforced, China, by transshipping through EU countries, could be the beneficiary. The agreement on TRQs, which was accompanied by a promise by the EU not to retaliate against other U.S. imports (such as Harley Davidson motorcycles and Kentucky bourbon), was “not the part of the deal U.S. officials really wanted to highlight,” according to Politico. That part was the agreement by the “longtime allies…to develop a plan for confronting China over both its excess steel capacity and its production of carbon-intensive steel.” Biden said in announcing the EU deal, “These arrangements will … restrict access to our markets for dirty steel from countries like China and counter countries that dump steel on our markets.” The President wants to build a global front of “like-minded” nations against China and seems to want to use changes to Section 232 as a way to achieve that end. Still, the level of commitment by Europeans to pushing back hard against China is unclear. For example, a press release on the deal, issued by the EU on Oct. 31, quotes both European Commission President Ursula von der Leyden and Commissioner for Trade Valdis Dombrovskis. Neither mentions China. Instead, von der Leyden calls the agreement “a powerful new tool in our quest for sustainability, achieving climate neutrality.” Dombrovskis says the deal will provide “breathing space to work on a comprehensive solution to tackle global overcapacity” – hardly an expression of urgency.

Office Opening Highlights U.S.-Mexico Solidarity Against Flood of Chinese Imports In coordination with its parent company, Deacero, Mid Continent Steel and Wire, the largest steel nail producer in the U.S., opened an office in Washington, D.C., on Tuesday. The office is a first for a Mexican company, and Mexico’s ambassador to the United States was on hand for the festivities. Fernando Villanueva, Mid Continent’s CEO, explained the reasons behind the company’s decision to open an office in Washington, saying, “Many companies in many different sectors decided it was better to produce abroad and bring the finished products to the U.S. because that was best for their business. For us, it has always been clear that manufacturing in the U.S. is essential to bring prosperity to our communities and our country.” He added, “Our office in Washington is now an important part of our commitment to U.S. manufacturing. By having a full-time presence in D.C., we will not only be better informed about the legal, regulatory and policy-making process in Washington, but will also be better positioned to support those policies that help our company, our customers, workers and communities.” At the event, Raúl Gutiérrez, president of Deacero’s board, highlighted the importance of Mexico and the U.S. working together: “Deacero and Mexico are honored to maintain a strong partnership with the U.S. that can meet the threat of China and other nations that do not trade fairly. We stand in solidarity with the U.S. on behalf of fair and open trade, which sometimes means maintaining appropriate tariffs to enhance national security.” Gutierrez also urged the Biden Administration to “stand strong” against erosion of the Section 232 national security tariffs, “which have been so beneficial to the U.S. steel and nails industries, to manufacturing in general, and to the welfare of all the people of North America.” Ambassador Esteban Moctezuma called the opening of the office “a true business milestone.” He quoted President Biden saying that Mexico and the U.S. are “stronger when we stand together.” The new D.C. office of Deacero and Mid Continent is headed by two veteran Washington attorneys, Irwin Altschuler and Alan Slomowitz.

And What About Nails? As we noted above, under the deal, Section 232 tariffs of any sort – even those that kick in when the TRQ limits are exceeded -- will not apply to any nails exported from the EU to the United States. This decision by the Biden Administration is somewhat puzzling. The President’s Commerce and Justice Departments are working hard to challenge an earlier decision by the U.S. Court of International Trade to overturn Trump’s attempt to extend Section 232 to nails and other derivative products. The Trump Administration was concerned about an anomaly. The original Section 232 on basic steel did not apply to steel nails, so nail makers in foreign countries could use their own steel or that imported from elsewhere (including China) to make their nails at home and bring foreign steel – in the finished form of nails and other derivative products – into the United States without Section 232 duties, thereby evading the clear intention of the original 2018 presidential proclamation implementing Section 232 tariffs and quotas. As a result, President Trump in January 2020 issued Proclamation 9980, which extended the 25% tariffs on imports of steel and aluminum to derivative articles, including steel nails. China is by far the largest nail exporter in the world, but also significant are such EU countries as Germany, Poland, Austria, the Netherlands, and Denmark. According to the Observatory of Economic Complexity, more than one-fourth of nail exports in 2019 came from EU nations. The United States is the world’s largest importer of nails, purchasing 29% of the export supply in 2019. Currently, about 80% of nails consumed by Americans are foreign-made. In our last issue we quoted Cliff Mentrup, CEO of KYOCERA SENCO Industrial Tools, Inc., a Cincinnati-based global manufacturer of nails, other fasteners, compressors and tools, founded in 1948, as saying, “Foreign companies are circumventing Section 232. They are using steel produced abroad to make their nails and selling them in the U.S. in an unfair work-around.” Nails imported by the U.S. in August were up 42.8% over the same month last year. “As long as 232 is in place,” said Mentrup, whose company is a member of the American Steel Nail Coalition, last month, “steel derivative products like nails and staples also must be covered or, as we have seen, imports will devastate those markets.” For the European countries affected by the Oct. 30 deal, the key is preventing circumvention. The U.S. nail industry will be destroyed if steel melted and poured outside the EU (from China, for example) is used to make nails that EU companies then export to the United States. Vigilance is clearly required. The other threat is that the Rome agreement will be extended far and wide, and nearly every country that wants to, will be able to export nails to the U.S. without 25% tariffs. This would only worsen the threat that imports pose to the U.S. steel nails industry and its workers. The extension of Section 232 to nails and other derivative products has been challenged in the courts. As we previously reported, a July decision by the Federal Circuit Court of Appeals in another case, Transpacific Steel v. United States, involving increased tariffs on Turkish steel, indicates that the U.S. Government may prevail – that is, tariffs will continue to be applied to nails and other derivatives. But prevailing in court will constitute a hollow victory for the steel nails industry if the Biden Administration grants to other nations the same 232 deal it granted to the EU.

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