U.S., EU to lower tariffs on steel, aluminum

WASHINGTON—The U.S. and the European Union have reached an interim agreement to amend the tariff structures on U.S. aluminum and steel imports from the EU, a move that many in the industry see as relief for domestic manufacturers and a platform from which carbon emissions can be addressed.

While the 10-percent aluminum and 25-percent steel tariffs remain in place under Section 232 of the 1962 Trade Expansion Act, each will revert to a tariff-rate quota based on historical amounts of aluminum and steel that entered the U.S. from the EU in recent years (the historical periods are different for steel and aluminum).

The agreement with the EU follows more than a year of skyrocketing materials and shipping costs resulting from the global COVID-19 pandemic, and offers relief and support for American companies, according to Gina Raimondo, U.S. Department of Commerce secretary.

The measures take effect Jan. 1, 2022.

"In the past year, the cost of steel used by America's auto and appliance manufacturers has more than tripled, creating increased costs for consumers," Raimondo said in an Oct. 31 statement. "Today's news will provide much-needed relief for those workers and industries, the workers and businesses ... and American consumers, who are worried about increasing prices."

While the Biden administration is touting the tariff restructuring as a long-awaited panacea for domestic manufacturers, others say the amended tariff enforcement is "not a game-changer."

"The tariff adjustments help, but the net tonnage (in the agreement for steel) is about 3.3 million metric tons," said John Anton, price and purchasing director for London-based IHS Markit, a market consultant with offices in Washington. "The U.S. market (domestic plus imports, less exports) is well over 100 million tons, so this is 3 percent or less additional supply.

"(This is) helpful, but not a game-changer."

Under the agreement reached Oct. 30, the U.S. will allow a basic overall level of steel and aluminum imports, which will measure up to an historical average of product coming from the EU. Above this level, steel imports still will be subject to the 25-percent tariff, and aluminum imports still will face the 10-percent tariff.

In addition, the agreement eliminates any such threat of retaliatory tariffs by the EU (up to 50 percent was threatened in some cases) in response to the tariffs implemented under the umbrella of national security by the Trump administration in 2018.

"The Trump administration stretched what it considered national security grounds in imposing the tariffs back in 2018," said John Mothersole, also a price and purchasing director at IHS Markit.

U.S. Trade Representative Katherine Tai said Oct. 31 that the agreements help "repair relationships."

"In addition to the EU eliminating the retaliatory tariffs against the United States, we have agreed to suspend the (World Trade Organization) disputes against each other related to the 232 disputes," she said. "With this dispute behind us, we are in a stronger position to addresses global overcapacity from China with an enhanced enforcement mechanism to prevent leakage of Chinese steel and aluminum into the U.S. market."

According to the agreement, the aggregate annual import volume of steel under the tariff-rate quota is set at 3.3 million tons under 54 product categories and allocated on an EU member-state basis, and in line with the 2015-17 historical period.

The aggregate annual import volume of aluminum under the TRQ is set at 18,000 metric tons for un-wrought aluminum under two product categories, and 366,000 tons for semi-finished (wrought) aluminum under 14 product categories. The import volumes will be allocated on an EU member-state basis in line with the 2018-19 historical period.

There are exceptions for derivative products for both materials that are not subject to tariffs.

The 232 tariffs apply to all aluminum and steel imports from the EU, except for a selection of countries where exceptions were initially negotiated (for aluminum, these were Argentina, Australia and subsequently Mexico and Canada under the USMCA).

"Our understanding is that negotiations with Japan and South Korea are ongoing," Mothersole said.

Anton said details on these ongoing negotiations are scant, but could mimic the tariff negotiations recently concluded with 27 member-states of the EU.

"Much Japanese steel is covered by anti-dumping (and) countervailing duties that are completely independent of Section 232," Anton said. "Some rates are prohibitively high, so relief on Section 232 is unlikely to lead to a surge in Japanese steel to the United States."

At first blush, the tariff changes appear to be good news for many of those in the stamping and metal-forming sectors, but not all of them, said Cara Walton, a director at the Southfield, Mich.-based Harbour Results Inc., a business management consultant for small- to mid-sized companies.

"The changes to the tariffs on steel and aluminum will definitely alleviate some of the challenges stampers and other metal formers who rely on steel for production—but not all of them," she said. "We will likely see some mild alleviation of availability first before pricing begins to come down because there are many other forces affecting price including inflation, supply chain challenges and labor issues, to name a few."

From a tooling and mold-making perspective, the change to the tariffs will have a minimal affect, Walton said, as most North American tool suppliers do not rely heavily on European steel for their tool steel.

"Prototype tool suppliers may see a bit more relief as they rely more heavily on aluminum for their tooling," she said. "That being said, it will likely still have a net positive effect on the industry as a whole as more steel will be available throughout the market."

Walton noted that the EU and U.S. collaborating on tariff relief does put pressure on China, even though tool suppliers rely on a lot of North American steel, which will not be affected in the short term by the changes to tariffs on steel and aluminum coming out the of the EU.

"Longer term, the lack of tariffs on imports will alleviate some of the pricing challenges in North America for production metal formers, but this will likely take a few months," Walton said. "Tool steel is slightly more insulated from the standard ebbs and flows that production steel feels, so mold and die suppliers will feel some material price alleviation—but tool steel is only a portion of the total material costs on a tool."

Hot runner systems, lifters, slides and other parts crucial to the tooling industry will not be affected by the tariff changes, so tool suppliers likely will continue to face material price challenges and logistics challenges like the rest of the industry, according to industry observers. But overall, lower cost of supply should force lower prices throughout the supply chain, beginning with primary aluminum ingot (an oblong block of typically pure metal) and further downstream for the range of mill products and castings that are covered.

"While the replacement of the 10-percent aluminum tariff with a duty-free quota is not as beneficial to downstream users as simply removing the tariffs, it will help improve the flow of metal between the two regions and therefore provide some additional 'flexibility' to the supply side of the market," Mothersole said. "Most revealingly, aluminum premiums in both the U.S. and EU have started to come down in the wake of the announcement, a clear verdict from the market that this action does help."

Anton added that U.S. steel producers "are not thrilled, but again tonnage is relatively low." As such, the impact of the tariff changes on the steel cord industry for tire manufacturers remains uncertain.

"It is more a loss of dominant bargaining power than actual tonnage. I have not seen a breakout of wire tonnage, however I think it will be low," Anton said. "Over (the 2015-17) period, imports were not particularly strong from wire rod countries of Southern Europe."

According to Commerce, the tariff agreement creates a framework through which the U.S. and EU can take on carbon intensity in future negotiations.

There is an imbalance in the regulatory costs, and by extension infrastructure costs, between the EU/U.S. and China, which serves to make Chinese products cheaper.

"The U.S. and the EU both produce steel and aluminum that is 'cleaner' than what is produced in much of the world, and the lack of environmental standards in places like China is part of what drives down their costs—and it's a major contributor to climate change," Raimondo said. "This deal begins to address those challenges."

Anton noted that Chinese mills do not have the same pollution-scrubbing processes. "But tariffs not only serve to account for pollution, they may also serve to keep domestic prices elevated. In the original imposition of Section 232 tariffs, pollution was only a secondary concern," he said.

According to Mothersole, the 232 tariffs, because they do not specifically target emissions, do not put any pressure on producers to improve their carbon footprint.

A carbon tax would do so, he said, as will the EU's carbon border tax when it goes into effect in a few years.

"These tariffs will be levied specially, based on a product's carbon footprint," he said. "In anticipation of the EU carbon border tax scheme, aluminum producers are already validating product based on their carbon emissions."

For instance, RUDSAL, an enormous Russian producer of aluminum, is splitting itself into two companies, AL+ and a separate company that will contain all its older, "dirtier" facilities. It plans to then brand AL+ products as "green," charging premium prices.

Tai said the first-ever carbon-based arrangement on steel and aluminum trade contemplated by the agreements does create greater incentives for reducing carbon intensity across modes of production of steel and aluminum by American and European companies.

"We know our allies and trading partners agree, so we will encourage like-minded economies that share our collective commitment to market-based principles and addressing the carbon intensity of these industries to join our global arrangement," she said.

And there is disagreement among experts as to whether the tariffs will affect Chinese overcapacity—or whether overcapacity of steel and aluminum even exists any longer in China.

"Modifying the 232 tariffs does not address the problem of Chinese overcapacity," Mothersole said. "Interestingly, China's 'Dual Control' policy of limiting energy-intensive industries and electricity use (the dual control) may do more than any single non-Chinese initiative to address overcapacity in a number of Chinese heavy industries."

Anton said steel production has grown "far more" in recent years than has capacity.

"We are not sure overcapacity is still an accurate description of China," Anton said. "China is nearing capacity constraints (and) is actively working to discourage exports in order to make less steel and have less internal pollution.

"This is a far bigger influence on Chinese behavior than tariffs."

USW International President Tom Conway said it is crucial to rein in global overcapacity, "stemming largely from Chinese Communist Party's state-led trade practices."

"Engaging with our allies is a necessary step in this process, and this arrangement offers a path forward toward working together to address this larger concern," Conway said Oct. 31. "Combating climate change will also require coordinating with our partners. Both the U.S. and European industries have demonstrated a commitment to reducing the carbon intensity of their products, and working together will ultimately provide results for workers and our environment."

The deal creates certainty both for domestic producers of steel and aluminum, and users who are unable to find domestic supplies, Conway said.

"Steel and aluminum are the backbone of our nation's defense and critical infrastructure, but for too long, global overcapacity and targeted predatory practices have undermined domestic production and employment," Conway said. "This arrangement ... also closed a gaping loophole through which steel imports that are often carbon-intensive and from countries still subject to the original 232 measures reach the United States."

Currently, semi-finished steel products such as slabs and other products from China, Russia, Ukraine and other areas are shipped to the EU, subjected to minimum transformation and then validated as being of EU origin.

"Under the interim arrangement, steel imports from the EU must entirely be produced in the European Union, commonly known as 'melted-and-poured,' " Conway said. "This will help ensure European and U.S. steelworkers are not losing jobs to countries outside this agreement."