Global Trade Shock – Section 232 & 301
We are following developments of Section 232 and Section 301 carefully, as these policies are designed to substantially impact trade volumes of crucial manufacturing materials. The Section 232 clause falls under the Trade Expansion Act of 1962, granting the president power to act against imports that threaten national security. While it traditionally addresses a concern for wartime production capability, the term “threat to national security” can be defined in a variety of ways, such as that which engenders substantial unemployment, displaces the domestic manufacture of product, or gives rise to excessive foreign competition. A ripple effect on the international market is being observed, as new tariffs bring to bear global trade shifts.
With matters of national security, the government ensures the capacity to produce steel for tanks and other military equipment domestically, rather than rely on imported material which may not be available during times of conflict. The executive action carried out under Section 232 applies a 25% tariff on raw steel, and 10% tariff on raw aluminum, effective March 23, 2018. These rates represent a many-fold increase over the standard U.S. trade-weighted average import tariff rate of 2.0% on industrial goods. Commerce Secretary Wilbur Ross, who conducted the investigation into the impact that certain imports have on national security, called for a reduction in steel imports by 37% and aluminum by 13% in order to re-calibrate domestic production quotas.
Section 232 and its estimated $50-60 billion worth of tariffs have been labeled as restitution for intellectual property damages levied on the U.S. by China. China has been accused of having an unfair foreign policy towards U.S. intellectual property that forces companies to transfer their technology to Chinese soil in order to sell in their market. U.S. firms are in a disadvantaged position against the threat of embargo, giving China leverage to skew deals heavily in their favor.
The impact of Section 232 on China has already created a ripple effect on international trade. China being the worlds largest exporter of raw steel material, accounting for 49% of total production, and with the U.S. being the worlds largest importer of steel, accounting for $29 billion of trade in 2017, the new policies are expected to dramatically re-calibrate production. In the short-term, companies with infrastructure overseas or with a 3PL partner able to fabricate their steel and aluminum parts prior to importation are not as effected by the Section 232 tariffs. However, domestic manufacturers are left with increased raw material prices forcing an adjustment in supply and increased market prices to meet demand.
The National Tooling and Machining Association along with the Precision Metalforming Association have voiced their concerns about the trickle-down effects of the new tariffs. They cite the Section 201 30% steel tariffs that occurred in 2002 as being responsible for the closure of thousands of metal-stamping companies due to a lack of access to globally competitive prices on raw material. Their concern is that broad-sweeping tariffs are dangerous to American prosperity because they put workers at risk of losing downstream jobs as professional tool and die makers and machinists.
China reportedly plans to introduce $3 billion worth of its own taxes against U.S. imports of steel piping, pork, fruit, and wine. As a response to this, on April 3, 2018, the U.S. made an announcement for the introduction of Section 301. An investigation by the Office of the United States Trade Representative decried four categories of action by the government of China justifying the action, including:
- [Using] foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from U.S. companies.
- [Forcing] U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients.
- Unfairly [facilitating] the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer…
- [Conducting and facilitating] unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information.
Section 301 consists of 25% tariffs on 1,300 Chinese products. Included in the list are drugs, medical devices, additional alloyed and unalloyed metals, car parts, household appliances, power equipment, agricultural machinery, textile machinery, media devices, and machine tooling. Follow this link for a press release containing the full list of applicable Harmonized Tariff Schedule subheadings: https://ustr.gov/sites/default/files/files/Press/Releases/301FRN.pdf
Here is the current timeline for the Section 301 tariff investigations:
- April 23, 2018 – Due date for filing requests to appear (with a summary of expected testimony) at the public hearing in Washington D.C.
- May 11, 2018 – Due date for any written comments on the proposed actions
- May 15, 2018 – Date of the public hearing at the U.S. International Trade Commission in Washington D.C.
- May 22, 2018 – Due date for the submission of any post-hearing rebuttal comments
Requests can be made for product exemptions, but these are anticipated to be limited and not reliably granted. A business must prove lack of domestic availability, insufficient domestic quality, or critical infrastructure issues pertaining to national defense. It must be determined that no equivalent U.S. manufacturer exists, and proof of contact and qualification attempts with manufacturers must be provided. Exempt countries are expected to implement measures to stop transshipment workarounds by increasing customs screening, and violations carry a civil penalty equal to either the domestic value of the merchandise, or four times the lawful duties, taxes, and fees owed. Click the following link for information on starting the exemption appeal process: https://www.bis.doc.gov/index.php/232-steel
In the coming months, the ripple effects of Section 232 and beyond will become clearer. It is going to be more important than ever to stay savvy, as new developments will have a significant impact on supply chain logistics. Whether your organization is being effected by these tariffs or is worried about it effecting you in the near future, it is critical to know where you stand and what preventative measures you can take. 889 Global Solutions is closely monitoring the situation as it continues to develop. Should you have any questions regarding the update, please feel free to contact us at firstname.lastname@example.org. To learn more, see The Effects of China’s Proposed Tariffs.