By William Reinsch
In cranking out last week’s column about the steel section 232 investigation I left out two points that are important, largely because there was no room for them. Since the issue lingers on — and I continue to believe it will take longer to come up with a plan than observers think — I want to come back to steel this week and make the points I left out.
First, we all need to keep in mind that while the steel industry has been successful in obtaining trade relief over the years because it has been able to convince people that it is both essential to our economy and the victim of unfair trade practices no matter how you define them, it has never been a smooth process. Steel is not generally an end product. It usually ends up being incorporated into something else — a car, a plane, a pump, a building (rebar), and so on. That means there are plenty of downstream users that are going to be affected by whatever happens to the price of steel whether it increases because of tariffs or because of limits on foreign supply that pump up demand for domestic products.
Historically, those downstream users have been well-organized, often by Caterpillar, and vigorous in opposing steel import relief. While they have not often succeeded in blocking relief entirely, their efforts have had a mitigating effect on the outcome. There have been some signs of that opposition this time around, but it does not appear to have reached the critical noisy mass necessary to have a significant effect on the outcome. That might still change, particularly after the Commerce Department’s recommendations become public, and there is something specific to oppose, but usually the opposition is well underway by this point. I’m not sure why this time is different. It may be because steel users are distracted with other problems of their own, or it may be because they are reluctant to get into a debate over national security, which is harder for companies to address than economic impact. The result may well end up being less opposition to further industry relief than usual and thus a freer hand politically for the administration.
The second issue that has already begun to arise is the foreign reaction. Last week I mentioned that besides China the other major steel exporters are our friends and allies, including countries that participate in joint defense projects with the U.S. They will not pass up the opportunity to express their views, particularly to the Defense Department.
There is also, however, the foreign legal reaction. In the 1986 machine tools 232 case, this was avoided through the use of “voluntary restraints” in which the other government — in that case Japan and Taiwan — voluntarily agreed to limit their exports (one can debate how voluntary that decision was with the threat of import restrictions dangling over their heads, but the fact remains it was their decision not ours). That meant no retaliation and no resort to the WTO. This time around that is unlikely. There are many more producers that could be affected, and it is hard to believe that at least one of them, most likely China, would not either litigate our action or retaliate or both.
Retaliation could have a broad effect on our economy depending on its depth and breadth, but there is no point speculating on that right now beyond noting that it is a real possibility that the administration should keep in mind as it makes its decisions.
Litigation would mean a complaint in the WTO about our action, and the common expectation is that if that occurred, the United States would invoke the Article XXI national security exception. There is some speculation that no one would bring such a case because the scope of the exception has never been defined, and everyone prefers to leave it that way. I think that is wrong. Just as there has been an uptick in WTO litigation generally, led in part by the U.S., by the way, there has also been an increased willingness on the part of others to take us on — look at the many cases involving our antidumping and countervailing duty rules. The fact that the Trump administration’s trade policy is not making many friends only makes litigation more likely.
The salient part of Article XXI reads, “Nothing in this Agreement shall be construed…(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” That is pretty broad, and it is easy to see how the administration would prevail if it invoked the exception.
Of course, if there is one thing you should know about trade, it is that everything is linked. If we invoke Article XXI, we open the door to others doing the same thing, most likely against U.S. goods. Keep in mind, for example, the number of members of Congress who have argued recently that food is a national security matter. If that is true here, it is true elsewhere, which means our farmers could be major victims as other countries begin to use Article XXI as an excuse for protection. In other words, what goes around, comes around. As I said last week, that is not a reason by itself not to act, but it is clearly something the administration needs to think about and prepare for before it does act.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.