Friday, July 14, 2017

Presidential Investigation of Aluminum and Steel Imports Launch under Section 232 to Protect National Security.

On April 20, 2017, President Trump issued a memorandum, requesting the Commerce Department initiate a section 232 investigation on steel imports. A week later, April 27, 2017, the President issued another memorandum to investigate aluminum imports. The preliminary hearing for the steel investigation was held on May 24, 2017 and the preliminary hearing for the aluminum investigation was held on June 22, 2017.
A 232 investigation refers to section 232 of the 1962 Trade Act. It is encoded in law under 19 U.S.C. 1862. It allows the executive branch to place column 1 rate of duty on imports, or apply other trade remedies, on imported products to protect national security interests. The stated goal is to guarantee that the U.S. domestic production remains sound enough to meet the needs of the military. The law allows control of imports when the national security is at stake.
The procedure, for creating a section 232 remedy, starts with a request to investigate. After the Commerce Department receives a request, to initiate an investigation under section 232, the Commerce Department will notify the Defense Department of the investigation. Then Defense Department with communicate with the Commerce Department the supply needs of the Defense Department of those subject imports  Originally the Treasury Department was assigned these investigations, but since 1979 it has been handled by the Commerce Department.
The Commerce Department investigates and determines the current needs of the military compared with the current domestic production. The Commerce Department is required to issue a report detailing its finding as to whether imports are damaging national security within 270 days of receiving the request. Commerce presents the report to the President. The President, based on the report, then decides, if there is a threat, what action to take.

History of Section 232 Investigations.

Section 232 was passed, in 1962, during the cold war. When the law was passed there was a fear that United States industries might become too reliant on foreign producers. If those industries were weakened, the United States might not to be able to provide defense in case of an attack. Since the law was passed, there have only been 26, Section 232 Investigations in 55 years.
Of those 26, Section 232 Investigations, Commerce or the Treasury Department, determined that there was no threat to national security in 15 investigations. After four other investigations, the President determined that there was no action required to protect national security. Seventy-three percent of the Section 232 Investigations have ended with no action.
Of the remaining cases, there were four cases that had to do with oil. Two of the oil cases were country specific, and lead to total embargoes against Libya and Iran. These definitely were more geopolitically motivated. They had little to do with maintaining supplies of domestic resources for the purpose of national security. The other two petroleum investigations, also achieved very little to affect trade. One actually eliminated petroleum quotas, and imposed a fee system, that was later overturned by court order. The result was the Section 232 Investigations removed restrictions on importing oil for national security.
The final two Section 232 Investigations, also had minimal effects on trade. One case lead to a voluntary restraint agreement (VRA). Japan and Taiwan, both agreed to restrict exports of machine tools for five years. The other merely resulted in a plan, for the Defense Department, to stockpile certain ferroalloys, for a ten year period. The farthest a Section 232 Investigation has ever gone, was the imposition of VRAs, on certain machine tools, from two countries.

Why are Steel and Aluminum Being Targeted?

Steel making is extremely capital intensive. Turning raw iron ore into steel is a process that requires coke production, and basic oxygen furnaces. Coke production is expensive to stop once started. Coke is made by heating coal up to very high temperatures for 14 to 36 hours in ovens that are stacked side by side to transfer heat between the ovens. Once a set of ovens is started, it is more cost effective to keep them running continuously.
In the words of economists, the supply curve of steel is inelastic. It is very difficult to either increase supply, or decrease supply. Typically in market economics when the price of a good goes up, the ability to supply that good increases, causing the price to stabilize. The contrary is also the case when the price of good goes down, the market should cause players to leave the market, and lower the production.
The extreme capital intensive costs of steel production, combined with plants that cannot be turned on and off efficiently, means players cannot easily exit the market. When that happens there is an inelastic supply curve. The price of steel, is therefore, highly dependent on demand. When there is high demand the prices soar quickly. When demands tapers even a little, this leads to a precipitous fall in prices. Steel and aluminum production both have very high barriers to exit.
Plates steel world export FOB price for example ran up to a price of $1200 back in April 2008. By December 2015 (seven years later) the world F.O.B. price for steel had dropped to $375.00. If we were to imagine paying $6.00 for a loaf of bread one year and $1.85 seven years later, that is how inflexible steel production is. The key to steel price and profitability is demand. Aluminum is very similar. Demand creates large swings in prices.
Despite all the evidence to the contrary, people really believe that these price swings are a result of foreign supply and not demand. In testimony before the Steel 232 investigation hearing, Congresswoman, Marcy Kaptur, Democrat from Ohio stated, “America today faces a national steel crisis. Rising, unprecedented global overproduction coupled with unfair dumping threaten the viability of our United States' steel industry like few times before.”
She pointed to Duke University study in 2016 that China produces 2,300 million metric tons of steel while the global is only 1,500 million metric tons. She focuses on countries China, South Korea, Russia, and Vietnam. She points out that these countries are state run and the nations are subsidizing their steel industries. In the case of South Korea the state is subsidizing the electrical cost. The study was funded by the Alliance for American Manufacturing a Washington DC based lobbying group.

What is Likely to Happen.

The nature of these investigation is quite novel. So far there have only been two investigations initiated by the President himself. One resulted in the commerce department finding no threat to national security. The other resulted in Sanctions against Libyan Oil only. Clearly the President has some power to steer these investigations, to get the results he wants.
The auto market for in the US is expected to decline. New auto sales are one of the major uses of new steel. If United States auto demand drops, this could lead further to the loss of steel jobs and lower of steel prices. Lower prices will create more pressure on the industry to close plants and more belief that the national security in steel is at stake.
In 2001, there was a similar Section 232 Investigation on steel. Commerce determined steel imports did not threaten the U.S. national security. No action was taken. The demand for steel for the National Defense was 325,000 tons per year. Today the US produces around 1,750,000 ton per week. At present and or the foreseeable future, there is plenty of domestic production to meet the requirements of national defense.   
Increased demand will save steel profits. There is already some evidence of both increasing prices and increasing demand in emerging markets. If the largely expected infrastructure spending is passed along, with strong buy America provision, it will likely to shore up demand and increase prices for steel and aluminum.
For the past ten years, the United States imported on average 25 billion dollars in steel products. In that same period, the US exported on average 18 billion dollars. The only year the US had a trade surplus of steel products was when the price dropped, after the 2008 housing market crash. There was a precipitous drop in steel prices that year, and ironically enough an export surplus of steel products.
Furthermore, there are other facts making it hard to argue that sanctions are necessary for national defense. China has actually been cutting production, while raising consumption, of their own steel. Imports of steel from China have dropped over the past two years. The drop started after antidumping and countervailing duties were placed on steel products. These trade remedies seem perfectly apt to protect the United States Steel producers.
It is difficult, to make the argument, additional sanctions are necessary for national security. Compounding the problem for the administration is that the political appointee, who could steer the investigations toward a more political outcome, the Undersecretary for Industry and Security, has yet to be nominated. Acting Undersecretary, Daniel Hill, is currently running the investigations. The Secretary of Commerce, Wilbert Ross, is the only Trump appointee who could be involved in politicizing the investigation.
Even if nominated tomorrow, the average confirmation period is 45 days, the investigation will be halfway over, before the nominee takes office. The administration is left with, Daniel Hill, a Bush appointee, and longtime civil servant. It is doubtful career civil servants would steer the investigation to an incorrect, but expedient political, result. The Commerce Department has until January 2018, to issue it’s report. However, in public hearings, Commerce Secretary Ross claimed the they had no intention of using all 270 days to finish the report and claimed he thought they should be done before the end June.  It is now July.

Judicial Review.

One largely uncharted territory with the Section 232 Investigations, is whether or not, and to what degree, could any 232 sanctions be challenged legally. Prior to now there has never been any need for judicial review. It is clear, separation of powers should guarantee, some kind of judicial review. Based on the above information, there are serious questions as to whether any 232 sanctions are actually needed for national security.    
Typically, when a law allows the executive branch the ability to investigate and issue a rule the executive branch is afforded “Chevron” deference. Meaning the Court, will uphold the administration's rule, so long as it is not ‘arbitrary or capricious.’ Section 232 sanctions under these circumstances, could very well fail arbitrary and capricious standard.
However, the nature of a 232 sanction, is national security. The standard of review of the President's National Security decisions might be based on “facially legitimate and bona fide” justification of protecting national security. That might be more difficult to challenge. The administration just has to show a legitimate justification. Without looking too deep, into whether or not, the justification is real.  
If the court somehow upholds section 232 sanctions, or remedies, the last option would be for affected nations to file with the World Trade Organization’s Dispute Resolution Body. Any sanctions created under Section 232, would not likely be in accordance with the United States World Trade Organization obligations. However, it would  take years of dispute resolution, before any retaliatory sanctions could be placed on the United States, which would prompt the United States to drop the section 232 remedies.


Section 232 of the trade act of 1962, has rarely been used, and for the most part, has had no effect on trade. It is striking how quickly the new administration pushed the Section 232 Investigations. There is evidence of a severe threat to domestic production which would threaten the United States national security. These investigations appear to be politically motivated. The outcome is unpredictable. Judicial review is limited. World Trade Organization disputes will take many years to resolve any ill conceived sanctions. It is possible, no matter how unlikely, that these investigations might result in serious challenges to trade.

Tuesday, February 16, 2016

Get Ready for FDA's New Foreign Supplier Verification Program.

Foreign Supplier Verification Program.
            In 18 months, June 2017,  the Foreign Supplier Verification Program will be mandatory for importers. Importers or their US Agents will have to have documentation on hand at the ready, that they have developed a Foreign Shipper Verification Program, for each they product import.  These programs will most require a number of enumerated documents, 1) Hazard Analysis, 2) Foreign Supplier Evaluation,  3) Verification of Activities, and 4) Corrective Actions. There are different rules for foods from very small importers from very small  suppliers, and dietary supplements.  There are also several exemptions and consequences of non compliance.
1.    Hazard Analysis.
            The importer or the US agent must identify and list all the hazards reasonable likely to cause illness or injury. There are three types of hazards to identify:  1) biological, chemical, and physical. Then the importer or agent must analyse how they could occur, either naturally, unintentional or intentional for economic gain. In order to do this analysis an importer must employ or outsource a qualified individual. A person with adequate, experience, education or training to conduct such analysis.
Finally the importer must evaluate these hazards, list the controls in place to prevent hazards, and evaluate the likelihood and severity of illness if these controls were not in place. The following factors must be considered for each hazard evaluation. The formulation of the food,  the equipment used to process the food,  raw materials used, transportation practices, harvesting s, raising processing, the packaging, labeling, storage, distribution intended use, foreseeable use, sanitation, hygiene, and any other factors. 
An importer may have a third party perform this analysis, or rely on the customer doing their own analysis, but they must independently review the analysis for themselves. then they must document that they reviewed it. However, imports of raw agricultural goods, fruits and vegetables, needs to follow extensive rules for fruits and vegetables.
With the exception of fruits and vegetables, if there are no hazards requiring control, importers do not need conduct a foreign supplier evaluation for approval or verification of activities. Nonetheless, they must document conducting the hazard analysis described.  
2.    Foreign Supplier Evaluation for Approval
After completing the hazard analysis every imported of food, the importer must evaluate the foreign supplier, and approve or refuse the foreign supplier. Everything that hazard analysis identified as requiring controls must be addressed. The importer must review the foreign supplier’s procedures process and practices compare those with current FDA safety regulations. They must also review the foreign supplier safety history. all of this again must be documented.  
This review may also consider regulations and safety procedures of the country from which the manufacture is located, if FDA recognizes the exporting country as comparable or equivalent to the U.S. FDA standards. The importer will be required to have information about these plus and testing results, audits, and the foreign supplier responsiveness in correcting problems. Again, all of this evaluation must be documented. 
3.    Verification of Activities.
            After identifying hazards controls, process and procedures of foreign suppliers, the importer will then be responsible for verifying these results. This maybe in the way of quality testings, on site visits, review of safety records, and any other ways, to verify the foods safety and hazards are minimized. The risks, and severity of illness or injury, must be evaluated to determine the frequency of each review. The default will require at least annual reviews, on site audits, and lab tests. Less frequent audits may be warranted only if the results of the Foreign Supplier Evaluation indicate it would be appropriate. 
            Importers may use the services of qualified third party providers to run these test. Importers may rely on outside audits, conducted by authorized parties, other that the foreign supplier. However, importer must document their review and assessment of appropriateness of the the third parties verification activities. Included in that review must also determine the party conducting the review was a qualified individual.
4.    Correction Actions.
            Finally if any hazards are found, or if there is a chance of persisting to cause illness or injury, the importer must also document all corrective actions that are taken to prevent risks. Importers must review, verify, and update the Foreign Supplier Verification Program if a new corrective action is taken.
If it is determined, through the verification activities, that a supplier does not produce food in compliance with safety standards the importer must take steps to discontinue accepting food from that supplier, or if it possess a risk conduct a recall. Importers also must have a documented recall plan.
            The consequences for not documenting a Foreign Supplier Verification Program include refusal of admission of those foods items from being imported into the US. Another consequence may also be a mandatory recall of that food item. All the records may be kept electronic form or in physical form but they must be available to be produced to the FDA upon request within a reasonable time. Failure to produce these records in a timely manner may result in refusal of admission of imported food.
Disclaimer and Exceptions
There are many exceptions and other inter threading rules. Each particular food item may have specific regulation addressing it. An Importer will need to examine each food item to address the regulations for that item. Such exceptions are seafood, alcoholic beverages, small importers, food not consumed without further processing, shell eggs, etc. It is likely every importer will need some more consultation.