Measures likely to confound producers worldwide.

Tariff Saga

Canada hit United States steel imports with a 25% tariff at the beginning of this month, in retaliation for similar measures imposed by the Trump administration on imports from its North American neighbor. That’s when President Donald Trump lifted the exemptions granted to Canada and Mexico from the 25% tariff on steel imports and a 10% tariff on aluminum imports he imposed on the rest of the world beginning on March 23. The European Union, South Korea, Argentina, Australia, and Brazil were at first granted temporary exemptions, but those too have been lifted, expect for exemptions on aluminum imports from Argentina and Australia.

More recently it’s been reported that Canada plans on taking yet another step, by starting a global safeguard inquiry to protect the Canadian steel industry. Experts note that as long as Canada abides by World Trade Organization Agreement on Safeguards, it is permitted to assist domestic producers that are threatened by serious injury from increased levels of fairly traded imports. It’s not necessary for imports to have been dumped or subsidized for Canada to implement safeguards.

According to a report released by the Ottawa law firm of Tereposky & DeRose, the Canadian International Trade Tribunal (CITT) could conduct an inquiry to determine if increased imports of goods into Canada are causing or are threatening to cause serious injury to domestic producers of competitive goods. If the CITT makes an affirmative finding, the Canadian government can apply safeguard measures.

That’s just the latest in the continuing saga of the unfolding trade war began by Trump, a conflagration which promises to wreak havoc on global supply chains for steel and aluminum.

Business Forward, a national business organization, created the index to track how steel tariffs are impacting U.S. manufacturers competing with manufacturers in countries like the UK, Italy, China, Germany, and Japan. The study shows that U.S. steel prices are on the rise, and have been for some months.

“Steel prices in the U.S. began rising when Trump started talking about tariffs eleven months ago, and they took off last quarter when he announced them,” explained Jim Doyle, president of Business Forward. Since February, U.S. steel prices have increased 19%.

“If steel represented 20% of your cost of production in February, and your profit margin was 10%, these price increases wiped out more than a third of your profit,” explained Doyle. “You’re left absorbing the loss, raising prices, or laying-off employees.”

Rising prices are particularly hard on manufacturers that export. “Price increases in the U.S. are just half the story,” explained Doyle. “Tariffs here cause surplus steel to flow to Europe, Asia, Canada, and Mexico, which drives their prices down.” Predictably, steel prices in the UK, Italy, China, Germany, and Japan dropped three percent on average since February.

In June, U.S. manufacturers’ price disadvantage on steel grew to an average of 22.2%. The difference between prices here and in the other markets studied has more than doubled since February.

The tariffs are likely to hit U.S. manufacturers hard, given that imports made up 60% of aluminum and one-third of the steel used by American businesses in 2017. “U.S. automakers tend to buy much of their raw steel and aluminum domestically, but they import certain components from other countries,” noted Rick Schreiber, a manufacturing and distribution expert at BDO, an accounting and advisory firm. “Beer manufacturers, rely on imported thin aluminum to make cans for their products. Tariffs would make much-needed foreign materials more expensive.”

While U.S. steel and aluminum makers may see a short-term boost to their production, “there are structural limits to the increase,” Schreiber added. “Steel mills may not be able to easily or cheaply convert their facilities to produce different kinds of components previously made abroad. They may also not be able to meet the demand for products formerly imported from other countries.”

Energy Companies & Steel

Energy companies have lobbied against the tariffs because there just isn’t enough domestic steel available to make pipeline materials. U.S pipelines are currently made with only about 30% domestic steel components, according to data from IHS Global Insight. “Requiring pipelines to be made entirely of U.S. steel,” said Schreiber, “would make their production prohibitively expensive to American companies and hamstring efforts to support the energy industry.”

It shouldn’t be surprising that Canada is trying to hit back hard on the Trump tariffs, in light of research from the Brookings Institution that shows that Canada “is by far the hardest-hit by the tariffs” as compared to the EU and even China. Trump’s tariffs are also hitting other U.S. allies. (See sidebar.)

A Canadian CITT safeguard inquiry is likely to take 180 to 270 days from when the agency gives notice of the inquiry. According to Tereposky & DeRose, once the notice is issued, interested parties will file notices of participation and the CITT will issue written questionnaires to domestic and foreign producers and to importers and Canadian purchasers. A tribunal will prepare and distribute an investigation report, after which interested parties can file briefs in support of or in opposition to specific findings. After an oral hearing, the CITT will issue a written report determining whether the imports investigated represent a principal cause of serious injury, or threat of injury, to domestic producers.

Safeguard measures applied by the Canadian government, if it comes to that, would likely take the form of an import surtax which would have the effect of limiting imports of the goods found to be injuring Canadian producers. The government could, under exigent circumstances, also impose provisional safeguards under a preliminary determination even before the CITT investigates.

At a policy level, the Brookings report argues that Trump is targeting allies such as Canada and the EU with tariffs “as a means of rupturing their mindset—convincing them that they are no longer deserving of American coddling just because of their geopolitical status.” Those allies are now faced with big question, the paper concludes, “whether Trump is an unfortunate temporary anomaly, or merely the first in a coming succession of America First presidents.”