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Nail Maker News Issue No.15

Updated: Aug 2, 2021

From Tariffs on Steel to Tariffs on Nails

On Jan. 24, 2020, President Trump issued Proclamation 9980, extending the 25% tariffs on imports of steel and aluminum to “derivative articles,” including steel nails, that are made from those metals.

The reason can be described in one word: “circumvention.” Foreign steel companies realized that, by producing finished products at home and then sending them to the U.S., they could sell their steel – in different form – and evade the tariffs that were enacted two years earlier.

Those original tariffs were put in place with Trump’s Proclamation 9705 on March 8, 2018. They were justified under Section 232 of the Trade Expansion Act of 1962 because, said the President, steel was “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.”

Foreign nail makers and U.S. distributors quickly went to court to stop the extension of Section 232 to nails. They succeeded in Round One. Now, the case has gone to the U.S. Circuit Court of Appeals, and the parties – including the American Steel Nail Coalition and President Biden’s Justice Department -- will submit briefs defending Proclamation 9980 next month.


The Toll of Circumvention

How bad has the circumvention been? According to a report last year on National Public Radio, economist Katheryn Russ, a former senior economist at the Council of Economic Advisers who is now a professor of economics at the University of California at Davis, says that, “by putting American manufacturers at a competitive disadvantage, the original tariffs likely cost the economy some 75,000 factory jobs.”

In that same broadcast, NPR’s Scott Horsley interviewed Chris Pratt, general manager of Mid Continent Steel and Wire, the largest domestic nail manufacturer, based in Poplar Bluff, Mo.

Pratt, said Horsley,

suddenly found himself on a very unlevel playing field two years ago when the administration imposed a 25% tariff on imported steel. Pratt's cost for raw materials shot up, but his foreign competitors could still sell finished nails in the U.S. tariff-free. Pratt lost business and about 200 workers. Almost a year later, his company was finally granted an exemption from the steel tariffs, but Pratt says business hasn't nearly recovered.

The reason is circumvention – foreign steel companies getting around the original tariffs by using their steel to make finished products like nails.

Said Pratt: “The unfortunate part about that is losing customers and losing employees. There are a certain percentage and will never come back to you…. All we're looking for is a level playing field. If everything's even and square, we can compete and we can grow.”


Capacity Utilization Continues to Lag

What deeply concerned the Trump Administration – and now the Biden Administration as well -- is summed up in the introduction to Proclamation 9980, when Trump says that the Secretary of Commerce….

….has informed me that domestic steel producers’ capacity utilization has not stabilized for an extended period of time at or above the 80 percent capacity utilization level identified in his report as necessary to remove the threatened impairment of the national security. Stabilizing at that level is important to provide the industry with a reasonable expectation that market conditions will prevail long enough to justify the investment necessary to ramp up production to a sustainable and profitable level.

In short, the U.S. needs a strong basic steel industry for national security, but that industry cannot achieve stability without more capacity utilization. In the period following the imposition of Section 232 tariffs (and, in the cases of some countries like South Korea, quotas), the proportion of steel capacity in use rose, but not by much. It has still averaged less than 80%, and, even in the first seven months of 2021, despite the bounce-back from COVID 19, utilization is under that key figure.

And no wonder. “Imports of certain derivatives of steel articles have significantly increased since the imposition of the tariffs and quotas,” as Presidential Proclamation 9980 put it, adding,

“The net effect of the increase of imports of these derivatives has been to erode the customer base for U.S. producers of aluminum and steel and undermine the purpose of the proclamations adjusting imports of aluminum and steel articles to remove the threatened impairment of the national security.”

Thus, the proposed solution was to extend the original tariffs. But, as typically happens with trade measures, the companies affected by the finished-goods tariffs went to court to stop the duties.


Going to Court

Industry groups and individual companies challenged the 2018 steel tariffs as well – on statutory and constitutional grounds. But, according to a “Legal Sidebar” produced for legislators by the Congressional Research Service, “Federal courts have almost uniformly rejected these challenges.”

Then came a case involving a U.S. company that sought a refund for steel imports from Turkey. The company, Transpacific Steel, claimed that, when President Trump increased steel tariffs on Turkey from 25% to 50% five months after the original proclamation establishing Section 232 duties, he was exceeding his authority by not adhering to procedural requirements of the law.

On July 14, 2020, a three-judge panel of the U.S. Court of International Trade (CIT) agreed with Transpacific, also determining that the government violated equal protection guarantees under the Fifth Amendment’s due process clause.

Meanwhile, as we noted, lawsuits were filed to block the extension of the raw steel tariffs to nails and other finished goods. And, on April 5 of this year, the CIT ruled in a case called PrimeSource Building Products, Inc. v. United States, that Proclamation 9980 was invalid because it went beyond the statutory time limits of Section 232. In other words, a President couldn’t rely on the initial analysis that national security tariffs were needed on steel but had to go through a separate, arduous, time-consuming fact-finding process to extend tariffs to nails. The CIT panel was split, 2-1.

The U.S. Government appealed to a higher court, and the Justice Department has a deadline of Sept. 15 to file its brief. The American Steel Nail Coalition, representing all U.S. manufacturers of nails, is planning to file an amicus brief in support of the government by Sept. 22.

Back to Transpacific Steel v. United States: On July 13, the U.S. Circuit Court of Appeals reversed the CIT’s decision, the one involving tariffs on Turkish steel. According to the CRS summary, the court ruled that “Congress intended for the President to retain at least some authority to modify a tariff action even after the deadline passed. In reaching this result, the court engaged in a lengthy examination of Section 232’s text, purpose, and legislative history.”

What are the implications for Proclamation 9980, the nails directive? It is hard to say. For one thing, the Turkish tariff increases came far more quickly after the original imposition of Section 232 duties than the nails extension. For another, tariff hikes are not the same as tariff extensions. The CRS concludes that, while the courts may “further clarify the scope” of presidential power to extend and modify national security tariffs, “Congress could consider enacting legislation to alter or clarify” White House authority, and, in fact, bills have been introduced to address these concerns.


The Biden Administration and the Nails Crisis

The companies that make nails in the United States, having seen their market share drop to 20% or less, can’t wait for help. They face a crisis right now.

Proclamation 9980 was meant to constrain the immense volume of circumvention, which threatens to destroy the few domestic steel nail producers that are left. Production of raw steel and finished steel are closely linked, and the industry is critical to the U.S. economy.

The Biden Administration’s Build Back Better strategy seeks to “mobilize American manufacturing and innovation to ensure that the future is made in America, and in all of America.” That would indicate embracing the Trump Administration’s policies to protect American-made raw steel and finished steel.

So far, at least, the embrace has held tight. At a White House briefing on April 7, Gina Raimondo, President Biden’s Commerce Secretary, said that tariffs imposed in 2018 have “helped save American jobs in steel and aluminum industries,” adding, “What do we do with tariffs? We have to level the playing field.…. There is a place for tariffs,” Raimondo said.

More explicitly, commenting on Section 232 in an interview with Bloomberg on July 28, Raimondo said, “Those tariffs have been effective at helping American workers in the steel industry…. We cannot say we are going to get rid of the tariffs because we need to protect our streel industry and those workers.” The EU and the U.S. announced a Dec. 31 deadline to resolve steel tariff issues, and Raimondo made it clear that “simply to say ‘no tariffs’ is not the solution.”

In the interview with Bloomberg, Raimondo also talked about China: “If China is not going to play by the rules, then there’s a place for tariffs, and they have been effective if you just look at how steel production has increased.”

One possibility, World Trade Online noted, is to strike separate quota deals with specific countries – as the Trump Administration did with South Korea, Argentina, and Brazil – but leave tariffs in place for China and others.

Raimondo also reminded reporters that President Biden has said that there “will be a whole-of-government review of all of these policies and decide what it makes sense to maintain.”

President Biden signaled early on that he would keep tariffs in place, if necessary, when, back in February, he reversed a Section 232 tariff exemption on aluminum imports from the United Arab Emirates that had been granted by Trump on his last day in office.

But concerns remain that the Biden Administration may “go wobbly” (as the late British Prime Minister Margaret Thatcher once put it in conversation with President George H.W. Bush about Iraq), for America’s nail producers, an industry that is on the brink. If that were to happen, it certainly would undermine President Biden’s commitment to rebuild U.S. manufacturing and U.S. manufacturing jobs. Thus, it is important that the U.S. steel nails industry is on the Biden Administration’s radar, and that continues to receive the strong support of the Biden Administration so it, and its workers, can continue to make the finest steel nails in the U.S.

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