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.
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.