Canadian Exemption to Section 232 Tariffs a Major Question

Following President Trump's signaling of across the board tariffs on imported steel and aluminum (see 1803010029), exactly how Canadian steel fits in is among the major unanswered questions. Canada said in a March 1 statement that "as the number one customer of American steel, Canada would view any trade restrictions on Canadian steel and aluminum as absolutely unacceptable." The Defense Department has also said Canadian steel should not face Section 232 tariffs (see 1802230018).

U.S. law says that Canada's mills, smelters and factories are part of the U.S. defense industrial base and protecting that base is the purported reason for a 25 percent global tariff on imported steel and a 10 percent tariff on aluminum Trump promised will be coming. So, will Canada be exempted? "Hopefully the answer to this is yes," said Jennifer Hillman, a former U.S. International Trade Commission member and a former member of the World Trade Organization's appellate body. "Clearly the government of Canada is saying don’t put it on Canada," she said. "Bob Lighthizer and others that are otherwise for steel or aluminum tariffs" are also asking for a Canadian exemption, because without it, NAFTA renegotiations will be compromised.

Many aluminum companies and some steel companies say Canada should be spared. So does the United Steelworkers union, which said: "Canada is not the problem. The United States and Canada have integrated manufacturing markets and our union represents trade-impacted workers in both nations. In addition, the defense and intelligence relationship between the countries is unique and integral to our security. Any solution must exempt Canadian production." Hillman said, "I have to believe the president’s listening to at least some combination of that."

The argument for global tariffs is that you can't be sure that any import didn't begin in China. All agree China unfairly subsidizes metal production, and overproduces, which drives down prices for other mills and smelters. Canada is the largest exporter of aluminum and steel to the U.S. However, Canada buys more steel from the United States than it sends across the border. "I’m not going to say it’s never a problem, transshipment is always a problem," Hillman said, but Canada is not a bad actor. "Canada has pretty good controls themselves. If that’s the only reason not to exempt Canada, I have a hard time seeing why you don’t exempt them." Imposing the tariff on all countries except Canada does violate the most-favored-nation provision of the World Trade Organization, Hillman said, but added: "This whole thing is a violation of the World Trade Organization... . This is a 'screw you, WTO' action right now."

The WTO system does allow for exceptions to tariff policy for national security. "I assume they’re going to invoke a defense under Article 21 of the [General Agreement on Tariffs and Trade (GATT)]. I’m pretty well versed in Article 21 of the GATT, I don’t think it’s going to turn out to be a pretty good defense for us," said Hillman, who now teaches trade law at Georgetown University. She said Article 21 makes exceptions for arms, ammunition and fissionable materials, and specifies the actions were taken "in time of war or other emergency in national relations."

"I don’t see how you shoehorn this action into any one of those things," she said. "This is a straight-up violation of the WTO, the WTO says you can’t put your tariffs above your bound rate. The tariff rate on steel is zero."

WTO Director-General Roberto Azevêdo said the body is concerned about the proposed tariffs. "The potential for escalation is real, as we have seen from the initial responses of others," he said. "A trade war is in no-one’s interests." But Trump, tweeting on March 2, said: "When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!" Hillman said she does not read Trump's Twitter feed. When a reporter read her the tweet, she blurted: "Oh my God," and then sighed. "No one wins trade wars. Let’s just be very clear about it."

If China blocks U.S. soybean exports -- China consumes 60 percent of U.S. soybean exports -- the price for that commodity will drop, and farmers will have to find other markets, where duties to protect domestic farmers may be applied. "And it keeps cascading on and on," Hillman said. "Nobody wins. It will harm the United States more than it will harm everybody else. Everybody in the world will be hurt. That presumes we can make every single thing that will be kept out of the market, and we can make it more competitively than the rest of the world. Neither is true."