The Peninsula

Will Korea Face Higher Tariffs on Steel to Protect U.S. National Security?

By Phil Eskeland

After much pressure, the U.S. Department of Commerce just released the study on the effect of imports of steel on U.S. national security that will form the basis of President Donald Trump’s upcoming decision to impose higher tariffs.  The President has until April 11, 2018, to choose among several options outlined in the report.

This report is in contrast to a similar report prepared by the Commerce Department in 2001 that found no rationale for imposing higher tariffs on steel to protect U.S. national security.  As a result, the 2018 report spends a significant amount of time explaining the difference between the two reports.  Fundamentally, the 2018 report vastly expands the definition of “national security” to an all-encompassing general economic welfare interpretation that goes well beyond what most observers would truly consider items needed for national defense.  As a result, this report sets a bad precedent for other nations of the world to claim a “national security” exemption to World Trade Organization (WTO) and free trade agreement (FTA) rules as a rationale to raise tariffs in order to protect key industry sectors.  This would significantly reduce opportunities for U.S. exporters to sell their goods and services abroad.

The report provides one of three broad alternatives in the effort to boost U.S. steel production from its present 73 percent capacity to 80 percent:

• Raise tariffs on all steel importers to at least 24 percent;
• Raise tariffs on 12 countries, including South Korea, to at least 53 percent and freeze steel imports from all other countries at the 2017 levels; or
• Impose a quota on all countries to equal 63 percent of each country’s 2017 exports to the United States.

These restrictions would be above and beyond the existing anti-dumping (AD) and countervailing duties (CVD) already in place.  Part of the rationale for enacting these tariff measures is to assist domestic steel producers avoid the costly process of filing AD and CVD cases.  However, that means this industrial sector does not have to prove material injury in an open and transparent process in order to receive a trade remedy.

The report also recommends putting an administrative process in place to allow the Secretary of Commerce to provide exemptions to these tariffs on a case-by-case basis if there is insufficient capacity among domestic steel producers to provide the product to customers or for national security reasons.  As a result, manufacturers that use steel in their products will be spending an exorbitant amount of time and money filing petitions to receive relief from these tariffs.

These recommendations ignore recent economic history when in 2002, President George W. Bush imposed tariffs, ranging from 8 to 30 percent, on steel as part of a Section 201 “safeguard” investigation.  As a result, the cost of this safeguard measure outweighed their supposed benefits, both in terms of jobs and GDP, not including the rebuke the WTO gave to the U.S. when President Bush had to prematurely remove the tariffs to avoid trade penalties on other U.S. industry sectors.

The grouping of these 12 countries as part of Alternative #2 makes little sense.  Most of these countries increased their steel exports to the United States between 2016 and 2017.  However, South Korea, along with China, Turkey, and Vietnam experienced a decrease in steel exports to the United States, while the imports from the rest of the world increased by 15 percent.  In addition, several countries with dramatic increases in steel exports to the United States during the past year were not included in the list, including Portugal (528% increase), Serbia (327% increase), the Philippines (272% increase); and Argentina (161% increase).  Plus, a nation that is not on friendly terms with the U.S. – Belarus – is omitted from this list, even though its steel exports to the U.S. grew by 26 percent.  If the purpose of a Section 232 investigation is to limit imports of a certain product critical to U.S. national security from a potential adversary, excluding Belarus is a major oversight.

Finally, several countries are excluded from Alternative #2 even though exports from their country have increased between 2016 and 2017.[1]  Top steel exporters to the U.S. include Canada (increased 11%); Mexico (increase 16%), Germany (24% increase), and Taiwan (15% increase).  Only Japan experienced a decrease (11%) in its steel exports to the United States.   Thus, it is unclear why these major steel exporting countries were not included even though South Korea and Costa Rica (another one of the 12 countries listed in Alternative #2) also have a free trade agreement with the United States.

 

South Korea is a strong ally of the United States.  Historically, 83 percent of South Korea’s imports of military hardware have come from the United States.  South Korea has sacrificed over 5,100 of its military service personnel standing side-by-side with the U.S. in all of its major military conflicts since the Korean War.  The bilateral merchandise trade deficit between the U.S. and South Korea dropped by 17 percent during the past year (while the deficit with the rest of the world grew 12 percent), and its steel exports to the U.S. declined as well.  South Korea has committed to purchase $57.5 billion in U.S. products in the coming years.  South Korea is an ally both in national security and in trade.  South Korea should not have been included on the list of targeted countries.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from  SparkFun Electronics’ photostream on flickr Creative Commons.

[1] The 2017 statistics included in the January 11, 2018, report were estimates, because the 2017 goods trade data was not finalized until February 6, 2018.  Thus, Figure 2 on Page 28 of the 232 report containing the “annualized” 2017 data, does not have the final 2017 numbers.  To obtain the most recent information, reference should be made to the Steel Import Monitor on the website of the Commerce Department.