232: A bad idea getting worse

Section 232, as readers may recall, is a formerly little-used trade tool in the United States from 1962.  Crafted for the heat of the Cold War, it was intended to ensure that the US had sufficient materials at hand to fight and win a war.  It allows the Americans to impose tariffs on imported items in the name of national security.

The tool has been in the headlines lately, however, because the Trump administration declared it would impose 25% tariffs on imported steel products and 10% tariffs on imported aluminium.  The original deadline was May 1, although some countries have received an extension through June 1.

Section 232, of course, is supposed to be about national security.  In the case of steel and aluminium, the US Defense Department actually argued there was no particular need for the imposition of tariffs at this time.  Both materials are produced in sufficient quantities to fulfill defense needs domestically and nearly all imports come from key American allies.

This has led to a chaotic two-fold process of granting exemptions to Section 232.  Some countries have aimed for blanket exemptions.  South Korea, as part of the renegotiation of the Korea-US FTA (KORUS), had the 25% tariff on steel replaced with some sort of quota system instead.  Brazil, Argentina and Australia have made separate in-principle quota arrangements.  Canada and Mexico may be granted exemptions as part of the NAFTA talks.  The European Union has until June 1 to work out a possible deal.

If blanket exemptions are not possible, individual firms can apply for specific exemptions.  The process has been a mess.  The Commerce Department apparently has 19 people sifting through more than 8000 requests on steel and another 780 requests on aluminum.  The paperwork requires firms to ask for exemptions for every single type of product from every single supplier. 

The effect on customs will be significant as well, as officials at the border will have to check each shipment against the exemptions list to confirm which individual products have to pay the 25/10% tariffs and which do not.  The exemptions are not by country or even by firm, but by product and by firm. 

As might be expected, the process of granting exemptions has been slow and cumbersome.  Commerce had insufficient staff at the start of the procedure in place and limited experience with granting such requests.  Companies are struggling with disrupted supplies.

In the meantime, the fall-out from the US action has continued to escalate.  It is not surprising that targets of American tariffs have not taken the news well at all.  Many have already begun to retaliate, either directly or through the World Trade Organization (WTO).

China has already put up tariffs on a variety of products—mostly agricultural items—in response.  It has also joined with the European Union, India, and Japan in making complaints about US behavior at the WTO.  Japan has said it will withdraw concessions equal to the $450 million it says it is losing as a result of the steel and aluminum tariffs.

Despite all these difficulties—with disrupted supply chains, angry firms, an increasingly agitated Congress, growing retaliation from even allies, and mounting challenges in the WTO—US President Donald Trump appears to like Section 232.  He has now asked Commerce Secretary Wilbur Ross to start the whole process again for autos.

Unlike steel and aluminum, where there were at least a few firms agitating for protectionism, the auto sector in the US has not requested import relief. 

The potential use of Section 232 on autos appears to be driven by Trump’s personal irritation that American tariffs on cars is just 2.5%, while tariffs on autos in other markets can be higher.  He and Ross have repeatedly argued that it is profoundly unfair that reciprocity does not work in the international trading system.  By this, they mean that tariffs are not equal, ie 2.5% tariffs are matched by 2.5% tariffs. 

By using Section 232, however, Trump and Ross would be able to raise the tariffs on autos to something considerably higher.  (Note, however, that the US still imposes a 25% tariff on pickup trucks, which represent a substantial portion of the market.)

The global rules do allow national security exceptions and let countries “break” bindings on tariff ceilings.  The US could, in theory, raise auto tariffs above the current rates and get closer to what Trump and Ross seem to want.

But the costs of doing so would be catastrophic.  While there was basically no rationale for raising tariffs on steel and aluminum (particularly not when granting some country exemptions and then some firm exemptions), there is absolutely no reason for granting national security exceptions to autos to the United States during a time of peace.

Ross has said that imports from abroad have “eroded our domestic auto industry” and that these imports may have weakened the internal economy and impair national security. 

Any legitimate investigation by Commerce should show that this argument is nonsense.  Otherwise, imports of any type could show erosion of the domestic economy in some way or another that might, through a complex chain of circumstances, weaken national security. 

In any case, 13 different companies already produce more than 12 million autos domestically in the United States.  More than half of the total 8.27 million imported autos came from Canada and Mexico through NAFTA’s complex supply chains and might reasonably be counted as “domestic” production.

Using the national security exemption clause to help out the domestic auto sector may play well to Trump’s political base, but it will create chaos in Asia.  It will drive home the message that the United States no longer cares about the global trading system that has benefited American companies and consumers for more than 70 years.

Section 232 for autos will take some time.  Commerce will need to develop a report on the topic and make recommendations for the White House to consider.  In the meantime, firms should get prepared.