US Steel Investigation: The Challenge to World Trade

US Steel Investigation: The Challenge to World Trade




US Steel Investigation: The Challenge to World Trade

by Marc Chandler

US Commerce Secretary Ross promised to conclude the special investigation into US steel imports in the name of US national security by the end of the month. The outcome of the investigation is largely a foregone conclusion. Even before the investigation began, Ross said he would need less than a third of the allowable time.

The real issue is how will the US steel industry be protected by the Trump Administration. It is already a highly protected sector, and the price of steel is high in the US than world prices. There are two general approaches. The first is a board tariff on all imports. The second is a combination of a quota and a tariff on imports about the threshold. The former is recognized as a tougher than the latter, with more collateral damage.

Judging from the rhetoric, China is the significant target. However, China accounts for around 2% of US steel imports, and these imports have fallen for two years. Part of the reason for the decline in steel imports from China is that it has been subject to around 200 anti-dumping and countervailing measures that remain in place. More broadly, US steel imports have fallen for two years. Last year the US imported 30.1 mln metric tons, down from a near-record in 2014 of 40.3 mln metric tons. Steel imports account for around 1% of total US goods imports.

The US International Trade Commission report on global steel trade showed this graphic of the top suppliers to the US market. Note that the US imports steel from 110 countries and territories. It shows that Canada, Brazil, South Korea, Mexico, and Turkey are the top five providers of steel into the US. Imports from Vietnam surged (190%) in 2016, and there are some suspicions that this is a direct or indirect result of China.

There are domestic and international implications of more protection for the steel industry. The protection is for steel producers, so the cost of the protection will be shouldered by consumers. The value-added by the US steel industry is about 0.2% of GDP or about $36 bln. The value-added by companies that use steel as an input (think autos, construction, appliances) account for roughly 5.8% of GDP or a little more than $1 trillion.

The quota coupled with a tariff on exports about the quota is seen as having less impact than across the board tariff. However, we need to be careful in distinguishing a relative price increase from a general increase in prices. The latter is inflationary, but the former is not. A higher relative price of steel may encourage substitution, for example, and the use of wood, non-steel alloys, and other materials.

Internationally, either action by the US Administration will be controversial. Claiming national security interest is also seen raising the stakes. Although only Germany is the top 10 providers of steel to the US, several eurozone countries, including Italy, Spain, Belgium, and Latvia export steel to the US. The EU has threatened to challenge the US at the WTO should any of its members be subject to the tariff.

Even if the US case has merits, many US allies wish that the US would go through the multilateral process created by the WTO. The US has an impressive track record at winning case its take to the WTO. The WTO is not just about the rules of trade, but it also provides a conflict resolution mechanism.

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About the author

Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting firms and global investment banks.

Officially, Marc Chandler is Global Head of Currency Strategy, Brown Brothers Harriman since October 2005. Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank.

Disclaimer

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets.

This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.

There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters.

The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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