Trump steel tariffs persist in 2019, but quotas could provide wiggle room

US President Donald Trump's administration rocked the global steel market in 2018, with the introduction of a 25% tariff on steel imports that changed trade flows and set off a chain reaction of retaliatory tariffs and additional safeguard measure from other countries.

With the tariffs still in place, 2019 is looking to be another turbulent year for steel as the US heads into fresh trade negotiations with major markets including Japan and the EU. Meanwhile, the trilateral deal with Mexico and Canada reached in 2018 still has details to be ironed out.

In the first two years of his presidency, Trump has relied heavily on tariffs as leverage to rebalance US trade and negotiate new trade agreements. In December he even referred to himself as a "Tariff Man" on Twitter, a moniker befitting his trade policies.

Since January 2018, the Trump administration has placed tariffs on solar panels, washing machines and tariffs of 10%-25% on $250 billion worth of Chinese goods. The Department of Commerce is also conducting Section 232 investigations into automobile and uranium imports, which could lead to further tariffs should the department find imports of these products are a threat to US national security. That was judged to be the case for steel and aluminum, when Trump in March announced the US would begin collecting a 25% tariff on steel imports and 10% tariff on aluminum imports under Section 232.

As intended, the policy has helped to boost US raw steel production (see chart), although the wider effects are contested. But as much as Trump favored tariffs in 2018, it is likely 2019 could see him shift from being a "Tariff Man," to a "Quota Man," or at least that is the expectation in the US steel market.

Trump’s wall casts shadow over USMCA

Since the Section 232 steel tariffs took effect on steel imports March 23, only four countries have been able to work out agreements with the US for their removal. Argentina, Brazil and South Korea each agreed to quota arrangements in lieu of the tariffs, which cap imports from those countries at a specific level, while Australia is not subject to the tariffs or a quota.

Throughout the back half of 2018 there was a growing expectation in the domestic steel market that the US would continue to reach quota agreements on steel imports, particularly with some of its closest trading partners, however the White House has been mum on where discussions currently stand.

The US in October reached an updated trilateral trade agreement with Canada and Mexico, known as the United States-Mexico-Canada Agreement, which Trump has said would not have been come together without the US applying tariffs on steel and aluminum imports from those countries.

“Without tariffs we would not be talking about a deal,” Trump said announcing the trade agreement in October, though Canadian Prime Minister Justin Trudeau has disputed this claim.

All three countries said they would continue negotiations regarding the metals tariffs, and Trump has signaled the US would be open to their removal, but only in the case that Canada and Mexico agree to a quota. So far those discussions have not resulted in any actions.

Most recently, Canada's foreign affairs minister, Chrystia Freeland, in late December said the US tariffs on steel and aluminum contradict a key component of the USMCA focused on automotive content and will therefore have to be removed before the deal is ratified by each country's legislature.

And while Canada's chances for securing alternative arrangements seem rather favorable, what happens with Mexico could be another story. Trump on December 21 said he would close the US border with Mexico if he does not receive funding for a wall along the US border.

"We build a wall or close the Southern border," Trump said in a December 21 tweet. "Bring our car industry back into the US where it belongs. Go back to pre-NAFTA, before so many of our companies and jobs were so foolishly sent to Mexico. Either we build (finish) the wall or we close the border."

While it seems unlikely that the border will actually close, there is still the chance that Trump’s fight for a wall along the US-Mexico border could further complicate reaching an agreement on the steel tariffs.

Beyond North America, the Trump administration has a number of trade negotiations lined up in 2019, most notably with the EU and Japan. In October the office of the United States Trade Representative announced the administration intends to negotiate three separate trade agreements with Japan, the EU and the UK. Trade negotiations with Japan are scheduled to begin on January 20.

Japan has repeatedly called on the US to remove the tariffs on its steel imports though it’s unclear if these trade negotiations will result in the removal of the Section 232 tariffs. When the US and South Korea reached an updated trade agreement in 2018 it included the removal of the tariffs in favor of a quota on steel imports, however in the case of Canada and Mexico, the issue of the steel tariffs remains unresolved despite reaching a broader agreement on trade.

In addition to larger trade deal discussions, Binoy Kumar, the top official in India's steel ministry at the end of December said India and the US are also in talks regarding exemptions to the Section 232 steel tariffs, which could see India and the US come to an alternative arrangement.

Attention turns to quotas

For its part, the US steel industry has been open to quota agreements between countries, but has stressed that any action taken to remove the tariffs on steel must come with another import restriction, like a quota, in order to preserve the overall benefits of the Section 232 tariffs.

In October, Steel Dynamics Inc. CEO Mark Millett said establishing steel quotas is actually a better option on a long-term basis for US steelmakers.

"The 232 tariffs are a good stopgap, but one has to recognize we are going to have global overcapacity for some time to come," Millett said during SDI's third-quarter conference call with industry analysts in October. "As a country, we're steel short -- one of the few countries that is -- so we need imports. Our manufacturing base needs that product and I think quotas tend to be a better way of controlling that."

And while it remains to be seen what the outcome of all of these discussions will be, it's a safe bet Section 232 will continue to be a dominating force in the global steel industry in 2019.