Section 232 tariff threats could undermine Nafta talks

On Monday March 5, President Donald Trump signaled to Canada and Mexico that he would use his planned imposition of import tariffs of 25% on steel and 10% on aluminium as a bargaining chip to wring concessions in the ongoing North American Free Trade Agreement renegotiation.

In a tweet written in the president’s customary direct and grammatically unorthodox style, he said: “We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.”

But if the proposed blanket tariffs are implemented, Trump might struggle to make exceptions for Nafta members - due to complications under US law, not to mention World Trade Organization (WTO) commitments.

On February 16, the US Department of Commerce released its stricter-than-anticipated trade action recommendations.

Section 232 of the Trade Expansion Act of 1962 gives the president authority to place restrictions on the importation of vital materials if such imports “threaten to impair the national security.” Commerce’s recommendations were designed to raise US steel and aluminium production to “a level that would provide the industry with long-term viability.”

But those options did not identify either Canada or Mexico as special cases. So, any attempt to exempt them from such a duty - even on the grounds that their exports do not threaten national security - maybe a tough call legally.

Canada, WTO response

The Canadian government has yet to respond to the latest tweet, but it will likely be discussed during the Nafta negotiations now being staged in Mexico City. Canadian foreign affairs minister Chrystia Freeland was scheduled to face media questions on the issue on Monday.

She has already voiced the Canadian government’s reaction to the potential metal duties.

“As a key [North American Aerospace Defense Command] and [North Atlantic Treaty Organization] ally, and as the number one customer of American steel, Canada would view any trade restrictions on Canadian steel and aluminium as absolutely unacceptable. Canada is a safe and secure supplier of steel and aluminium for US defense and security,” Freeland said. “Canada is recognized in US law as a part of the US National Technology and Industrial Base related to national defense. It is entirely inappropriate to view any trade with Canada as a national security threat to the United States. Should restrictions be imposed on Canadian steel and aluminium products, Canada will take responsive measures to defend its trade interests and workers.”

Trump’s salvo also has upset the WTO, with its director-general Roberto Azevêdo making an almost unprecedented attack on a member state’s trade policy.

“The WTO is clearly concerned at the announcement of US plans for tariffs on steel and aluminium,” Azevêdo declared. “The potential for escalation is real, as we have seen from the initial responses of others. A trade war is in no one’s interests. The WTO will be watching the situation very closely.”

Azevêdo’s concern is almost certainly sharpened by the fact that, in theory, WTO member countries are allowed under global trade laws to impose tariffs to protect their own national security.

“These duties are WTO-legal, which in this case effectively means they’re also Nafta-legal. The US are using a national security justification here, and that’s largely ‘self-judging’ - meaning that countries get a lot of discretion in deciding what constitutes national security for them,” Krzysztof J. Pelc, associate professor at McGill University in Montréal, Canada, told Metal Bulletin.

“That’s also the reason why countries have been reticent to use that exception, out of fear that it might lead others to do the same. Because the main thing keeping countries from using this measure is self-restraint,” he said. The real consequences, according to Pelc, are political: “This obviously sours the Nafta talks, because it shows a lack of good faith, to say the least.”

Canada could ask to be excluded from the duties, arguing that its steel trade does not pose a national security threat to the US. However, “that will take time, the outcome is uncertain, and Trump himself recently vowed to an audience of steel workers that no country would be excluded,” Pelc noted.

The importance of this trade to the Canadian metal sector is shown by the fact that Canada in 2017 exported $8.54-billion worth of aluminium and aluminium articles to the US, which was overwhelmingly the Canadian industry’s largest export market.

Canada’s total aluminium exports to all other countries in 2017 were valued at $1.26 billion, according to statistics collected by Innovation, Science and Economic Development Canada, a federal government ministry. Its database shows that Canada imported $2.74-billion worth of aluminium from the US in 2017.

That is about one-tenth of the US’s overall exports of aluminium and aluminium articles, which were worth $12.2 billion in 2016, according to international trade data.

As for iron and steel, Canada exported $5.52-billion worth of material to the US last year. Total Canadian iron and steel exports to all other countries in 2017 were worth $1.12 billion. Canada imported $4.33-billion worth of iron and steel from the US in 2017, an important trade partner for American iron and steel makers, who exported $12.8 billion’s worth of iron and steel to all countries in 2016, according to international trade data.

Meanwhile, at the annual Prospectors & Developers Association of Canada convention - held in Toronto, Canada, March 4-7 - the reaction to Trump’s tariff threat was muted within the Canadian metal sector. Those firms in attendance that manufacture steel products for the mining industry rely on either Canada-made steel or material imported from the US, and export very little south of the border, so do not yet feel significant concern about Trump’s threats.

Similarly, those in the bauxite industry had not voiced great worries that any aluminium tariffs would undercut their business.

As one bauxite industry observer stated, “We can’t begin worrying about something that may not happen. We know that in the past [Trump] has said one thing one day and something else the next. Or it just goes away. So right now - today - we can only deal with certainties, not uncertainties.”

Still, several other delegates did voice concerns that the tariff threats could be a precursor to a much bigger issue: the demise of Nafta.
Aside from facing a new barrier to the US market, Canada and Mexico would be confronted with another potential impact of the 25% tariff. If that measure is formally approved, other exporters may seek alternative destinations for their steel and send tonnages to the other North American countries.

In addition to aiming reciprocal measures directly at the United States, Mexican steel association Canacero said new actions would be needed domestically to thwart a “potential wave of unfair imports” if overseas steel shipments bound for the United States were diverted to Mexico.

A Canadian steel mill source said his country may have no choice but to erect its own trade barriers.

“Now our government had better get its [stuff] together to protect its industry. Because if we don’t, all that steel that’s being kept out of the US is going to come into Canada now,” the mill source said. “It’s just going to trash our market. We don’t have the measures in place right now to stop that. We need to fast-track something through.”

Keith Nuthall, Ottawa; Daniel Sekulich, Toronto; and Dom Yanchunas, New York, contributed to this report.

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