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U.S. Steel Stance Could Sour Trade Relations

If U.S. President Donald Trump protects the steel industry under the banner of national security — a rare move — it could erode global trading relations and push international trade law into new and uncomfortable territory, according to trade experts.

Among worst case scenarios, U.S. trading partners may decide to protect their own industries on the same grounds, creating a domino effect of retaliation.

The possibility of a broader trade conflict has come to the fore after the Trump administration initiated in April what is known as a Section 232 investigation under the 1962 Trade Expansion Act, to assess the national security implications of steel imports, if any. The act gives a U.S. president broad authority to slap tariffs on imports or set quotas. It has been used twice before, both times to block oil imports, trade experts say.

The findings were expected to come in June, according to a recent Politico report, but the release date has since been pushed back to mid-July. When the findings are released, the U.S. Department of Commerce is expected to make recommendations to the president, who would then decide whether to take action.

What he will do is not known, but Trump has long railed against foreign steel as part of an election platform emphasizing the need to revive the U.S. rust belt. Trump has argued that some foreign governments prop up their steel industries, putting the U.S. steel industry at a disadvantage.

Recent reports suggest he is inclined to target steel imports with tariffs on specific countries. The top 10 sources of U.S. steel imports, comprising 81% of incoming steel are Canada, Brazil, South Korea, Mexico, Turkey, Japan, Russia, Germany, Taiwan and Vietnam, ranked in terms of volume from highest to lowest.

Trade experts are watching the outcome of the investigation and any subsequent decisions closely, as they could have major ramifications for global trade relations beyond the steel industry. Countries tend to avoid invoking national security to affect trade because of its potential for abuse, they say.

"It's kind of like breaking the glass to the alarm and then pulling the alarm," said Michael Woods, a partner with Woods, LaFortune LLP who was a trade lawyer and trade negotiator for the Canadian government. "It's mutually assured destruction."

Chart+-+Top+Ten+Sources+of+US+Steel+Account+for+81%25+of+Imports

Uncharted Waters

A core issue is just how hard it is to define national security — a black hole in international trade law.

Raj Bhala, a professor of trade law at the University of Kansas, sees this as one reason the Trump administration may pursue trade restrictions via national security rather than more traditional avenues to restrict trade.

"Why would the administration want to use 232? The answer is because 232 is not subject to the strictures of GATT/WTO disciplines," he said, referring to the General Agreement on Tariffs and Trade, which is a set of rules that help govern trade agreements under the World Trade Organization.

Robert Howse, an international law professor at New York University, makes a similar point about the challenge other countries will face if the U.S. decides to use national security to protect steel.

"They would have no possibility of unilaterally retaliating under WTO rules," Howse said.

These trade law experts note there is clear recourse to push back against better established rules governing imports, such as antidumping measures and countervailing duties. But national security is a far thornier issue.

To contest the U.S. on national security, other countries would have to pursue a WTO complaint. That, Howse and others agree, could push international trade law into uncharted territory and test international trade relations.

"When you bring in antidumping or countervailing duty cases or safeguard cases, it's like a sniper targeting one bad actor," Bhala says. "When you bring 232 you're bombing the whole other side. It's that different."

Unbuttoning Trust

In international trade agreements there are core exceptions for issues of national security, notably under Article 21 of GATT. It specifically states that GATT does not force a country to provide information in the national security interest or "to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests."

It would be hard for the exceptions not to be there. Sovereign nations want to ensure that liberalized trade does not interfere with their national security interests, which include ensuring supplies to the military and the nuclear industry, among other things.

International trade agreements explicitly address these issues as an exception. But their interpretation is up for debate.

It's an issue, trade experts say, that countries like to avoid.

"The big picture here is [that national security] is rarely used because the United States didn't want to put the whole national security question up for debate in a multilateral forum," says Woods.

The worry is that if one country is seen as abusing national security exceptions to promote its own industries, others will follow.

"Countries are going to hit innocent sectors" if the U.S. invokes national security on steel, said Marc Scribner, a senior fellow at the Competitive Enterprise Institute, or CEI. The CEI is a right leaning nonprofit that argues for leaner government.

Bhala, over at Kansas University, recalls an old joke about the lowly button industry and the potential abuse of national security exceptions in international trade law.

"Buttons on the uniform of a soldier are a national security item because a soldier needs a uniform, especially if it's cold, to fight," he says.

Of course it may sound far fetched. But that's the point. It's easy to argue almost any industry is in the national security interest.

As trade experts note, Canada might decide milk is in the national interest and Europe may decide that certain software is in the national interest and then block imports. And so on and so on.

"It's like a terrifying all-encompassing defense that says, 'Look. Don't mess with us. This is our national security at stake.'" Bhala said. "And pun intended, it trumps all other GATT provisions."

Who Says?

Part of the national security argument's power is simply that it is relatively undefined. The WTO has never made a final decision on a case involving the issue, according to trade experts.

As Howse and other trade experts describe it, there are essentially two schools of thought on the issue.

There are those that see national security as self judging. That is, it is up to each country to decide what exactly its national security issues are.

On the other hand, some consider the exceptions more narrowly. In this there's an argument that the WTO could find that a member country interpreted national security provisions too broadly.

Woods sees potential for a panel to decide that way. But Bhala and Howse see the self-judging argument as stronger. Either way, it would take years for the WTO to decide.

But damage to international relations may be more immediate if the Trump administration uses national security to restrict trade in steel and it is seen as a ruse.

"What it does is it hurts the whole idea of having a set of rules that we've had in place since 1947 in which really the Americans were the architects," Woods said.

Bhala agrees. If the U.S. restricts trade based on national security, other countries may reappraise trading priorities.

"And they'll say the 232 investigation is part of a larger dark mosaic where our pattern of trade is not as certain and predictable as what they had hoped," he said.