Steel Tariff Talk and Unintended Consequences

The President declared last week as “Buy America” week, making a number of speeches underscoring his campaign promise to defend American jobs from foreign imports. Steel imports, particularly from China, was a focus, and candidate Trump promised to stop steel dumping in America. This is a big deal because steel is used to make everything from automobiles, oil and gas pipelines, cans for food, ships as well as products like steel wool, and domestic suppliers just don’t make enough of it, according to U.S. industries that rely on the metal. In fact, there are clearly many more jobs that could be impacted in the industries that utilize steel in their manufacturing than those in the domestic steel industry. The U.S. is the largest steel importer in the world, importing 30.1 million metric tons of steel in 2016. Between 2009 and 2016, imports grew 104 percent while exports largely stagnated, increasing the trade deficit by 269 percent.

The first actions that President Trump took on keeping this promise was issuing an Executive Order on April 18th and a Presidential Memorandum on April 20th urging the Department of Commerce to launch an investigation, under Section 232 of the Trade Expansion Act of 1962, to investigate and potentially impose duties and tariffs on steel, for national security reasons. Under the statute, the Commerce Department has 270 days to conclude the investigation before making recommendations to the President. President Trump, however, asked Ross to deliver results within two months of initiating the probe. Trump’s 50-day time frame from the April 19 start date expired on June 8th.

Prior Section 232 investigations have taken the entire 270 days allowed under the statute, with some saying the Trump administration’s approach to the issue has been rushed and not designed to take into account input from outsiders.

The Administration is still debating whether new Section 232 tariffs will be applied broadly (e.g., on steel from all countries) or more narrowly (e.g., only on imports from specific countries). Last week, with more than 20 top officials present, including Trump and Vice President Pence, the President and a small group of advisors made it clear they’re imposing tariffs — potentially in the 20% range — on steel. The penalties could eventually extend to other imports. Among those that may be considered: aluminum, semiconductors, paper, and appliances like washing machines.

More specifically, the recommendations from Commerce in the draft report are likely to impose broad tariffs on products from all countries, except Canada and Mexico. Additionally, the report would likely put in place an exception process. Therefore, companies or industries that want an exception from the import tariffs would have to apply to an office that the Commerce Department would set up to review those requests. This was confirmed publicly by US Trade Representative Robert Lighthizer at a hearing recently. Lighthizer noted that this would allow companies that need a steel or aluminum product not made domestically to request that it be excluded from any tariffs or quota restrictions. The former attorney for U.S. Steel Corp went on to say that the failure of conventional trade remedy tools, such as anti-dumping and countervailing duties to deal with the threat posed by China’s steel and aluminum excess capacity, has prompted the Administration to look at other options.

Commerce is likely to recommend imposing a “tariff rate quota” plan, which means that a quota will be set that will allow a certain amount of steel imports to come into the country without a tariff, but anything above that quota will be subject to the tariff. The quota might be set at 75% of the average of the level of imports for the past 4 years. The tariff imposed on imports over the quota will be in the 25% – 35% range. It is not clear whether a tariff rate quota system will result in two-tier pricing in the market, or whether the pricing will be averaged. That remains to be seen.

So, the question seems to be the scope of new tariffs, not if new tariffs will be applied. Industry groups are focusing their efforts on Congress, where there is Republican opposition to broad new tariffs. The thinking is that if the Administration acts with broad tariffs, Congress may be compelled to counter this by potentially changing the statute that gives the President these Section 232 authorities. Ways and Means Chairman Brady urged President Donald Trump to avoid restricting steel imports in a way that will hurt allied nations that are not unfairly trading the product. “Our advice to the President has been pretty public: Take your time, get it right,” Brady said.” “We want to make sure that however the White House frames their ultimate action, that it doesn’t punish our allies who are trading fairly,” Brady said. “And we want to make sure it doesn’t give a green light to those trading unfairly to do more of it. And it’s important, too, that whatever that ultimate decision is that it actually works for America and doesn’t backfire.” Brady acknowledged that overcapacity in the global steel market was causing problems for domestic producers. But he called for a “balanced” solution that takes into account other interests as well.

While the President did not announce trade restrictions on imports of steel and aluminum for national security reasons before he attended the G-20 summit, he tweeted that he didn’t like steel and aluminum dumping. Also, North Korea’s missile launch may give the President some pause on going ahead on a major trade action that targets China if he feels Beijing can keep its neighbor in check on the nuclear front. On June 20, Trump sent out a tweet that all but declaring that China had failed to help on the North Korea situation. But following news of the launch, Trump tweeted that “perhaps China will put a heavy move on North Korea and end this nonsense once and for all!” We know that he had substantive talks with the Chinese at the summit.

The European Union and Japan also have raised the stakes on global trade, when they announced an agreement on a new bilateral free trade deal. The agreement, which Brussels pursued post-haste after the U.S. withdrawal from the Trans-Pacific Partnership, threatens to snatch away market gains the U.S. might have made in Japan, particularly with agricultural exports, if it would have remained a party to the TPP.

The European Union has also said it would retaliate if such tariffs are imposed and has already begun looking at a list of U.S. products it could hit with retaliatory tariffs, if President Donald Trump slaps duties on EU steel exports to the United States. The list of possible targets include U.S. steel exports to EU, as well as consumer products such as orange juice, whiskey, rum, potatoes and tomatoes, many of which have been on previous EU retaliation lists against the United States in now-resolved trade disputes.

Steel tariffs appear to be coming; the key will be whether the approach is tailored to prevent unintended consequences that are adverse to the U.S. economy.















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                    FROM THE CHART ROOM

                    Air Conditioning and Programmed Thermostat Use in America


                    Programmable thermostats are designed to help manage energy use, but most of the U.S. households with these controls do not choose to program their thermostats. Based on information collected through EIA’s Residential Energy Consumption Survey (RECS) for 2015, only 12% of the nation’s 118 million households had a central air-conditioning unit that is actually controlled using the programmed thermostat. About one in three households using central air conditioning do not have a programmable thermostat. But even for those households that use central air conditioning and have a programmable thermostat, more than two-thirds of those households control temperatures without actually programming the thermostat.

                    Programmable thermostats were certified as an ENERGY STAR product beginning in 1995. However, just the presence of a programmable thermostat does not save energy without the appropriate programming. Programmable thermostats were thus removed from the program in 2009 given concerns about realized energy savings. ENERGY STAR still maintains guidelines for the proper use of programmable thermostats.  In EIA’s 2015 RECS, respondents were asked how they set indoor temperatures during the summer. Almost half (45%) of households using central air-conditioning units said they set the thermostat at one temperature and left it there most of the time. The second most common approach was to manually adjust the temperature at night or when no one was at home (26%). Using a programmable thermostat to automatically adjust indoor temperatures was the third most common approach (18%), and it was more common than manually turning equipment on or off as needed (11%).  For households using individual window, wall, or portable air conditioners, close to half (45%) chose to turn the equipment on or off as needed. Programmable thermostats are relatively less common on individual units, as only 5% of households with that equipment reported using a programmable thermostat.



                    Michael Best Strategies’ Energy Team

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