The narrative of the so-called “Trump Trade War” is a fluid, fast-moving and unpredictable one. We’ve asked Geoff Short, Associate Director, Asia Pacific, of international trade advisors, The Trusted Trade Alliance to give us the highlights.
The Trump Administration’s recent decision to impose comprehensive tariffs against the importation of a wide range of steel and aluminium products is likely to have far-reaching ramifications for global trade and could end in an international trade war.
The tariffs were first announced in late March as a matter of ‘National Security’ and have provoked a range of proposed retaliatory measures by other countries, including the European Union which has warned that it will not “shoot from the hip” but is prepared for a trade war with the U.S.
Notified by Presidential proclamations, the measures came into effect as of 23 March 2018, and impose an additional tariff of 25% on certain steel and 10% on certain aluminium products imported into the U.S.
The measures are pursuant to Section 232 of the U.S. Trade Expansion Act of 1962 which is only invoked in instances where imports are determined to “impair national security”. The provision gives the President broad authority to implement an array of protective measures.
The President’s proclamations give the Secretary of Commerce power to: “exclude from any adopted import restrictions those…. articles for which the Secretary determines there is a lack of sufficient U.S. production capacity of comparable products, or to exclude…. articles from such restrictions for specific national security-based considerations.”
Intergovernmental lobbying resulted in several countries being given temporary reprieve from the tariffs until 30 April 2018 – including Australia, Canada, Mexico and member countries of the European Union. Just before the midnight deadline for expiry of the exemptions, however, the President extended them for some, though not all, countries. Importantly, the exemption for Australia was extended indefinitely, subject to agreed import restrictions.
Prior to 30 April, a number of countries announced retaliatory tariff measures, including the EU which released a 10-page list of imported U.S. goods that would be targeted if the U.S. does not exempt it from the steel and aluminium tariffs. Meanwhile, China notified the World Trade Organisation of its proposed imposition of additional tariffs of 15% or 25% on 128 imported U.S. products. These tariffs would generate additional duties equivalent to the Section 232 duties to be raised by the U.S. action – in excess of US$600m.
Exemptions open to countries, companies and individuals
While much of the focus in the press has been on whether additional countries might be exempted, on 19 March, the U.S. Department of Commerce published a notice outlining the procedures companies and individuals must follow in seeking product-specific exclusions from the Section 232 duties.
Importantly, a request for exclusion may only be made by individuals or organisations who are using any identified steel and/or aluminium products “in business activities (e.g., construction, manufacturing, or supplying steel [or aluminium] to users) in the United States.” This limitation was imposed to ensure that entities with an established economic nexus to the U.S. are the beneficiaries of any exclusions that might be granted.
The exclusions, if granted, will be product- and company-specific, for a duration of one year, meaning that even if a product has been excluded for other companies or individuals, each claim will be assessed on a case-by-case basis.
Persons or organisations must complete a submission detailing the specific request they oppose to in no more than 25 pages. The Department of Commerce will confer with the United States Trade Representative (USTR) and the Departments of State, Treasury, and Defense before deciding if an exemption will be granted.
A review period of no more than 90 days will apply, after which the Department of Commerce will provide Customs and Border Protection (CBP) with information that will identify each approved exclusion request.
The measures create uncertainty within the international business community, as there is currently no precedent for what qualifies as a successful exemption application.
The US/China stand-Off
In addition to the steel and aluminium tariffs, President Trump has also announced that the U.S. intends to impose tariffs on US$50 billion of Chinese goods and to limit China’s ability to invest in the U.S. technology industry. On 23 March, he directed the U.S. Trade Representative (USTR) to announce a proposed list of products within 15 days.
On 4 April, the USTR published a list of approximately 1,300 Chinese-sourced products for the potential imposition of Section 301 tariffs of 25%.
China moved swiftly to release its own list of responsive tariff items against which similar 25% tariffs were proposed. On 5 April, it targeted key U.S. export commodities with a cumulative annual value of US$50 billion including a wide range of motor vehicles; certain categories of aircraft; soybeans; primary form plastic, as well as plastic sheets, plates, film and other plastic articles; whiskey; inputs for the chemical and allied industries; and beef/beef byproducts.
This move led President Trump, on 5 April, to instruct the USTR to identify a further US$100 billion list of Chinese-sourced products upon which tariffs could be imposed. China almost immediately indicated it would match this escalation if the U.S. followed through.
Although these latest proposed bilateral trade measures do not affect Australia and New Zealand directly, it’s important to note that China and the U.S. are among both our nations’ biggest trade partners. And the increased globalisation of trade means the problems faced by domestic businesses extend well beyond their national borders.
Australian and New Zealand businesses which depend on imports from other countries for part of their supply chain may be adversely affected, especially if the tariffs start extending to other goods, such as those outlined in China’s reactionary measures.
Businesses may find they are at risk of increased costs, if the goods that they are dependent on are sourced from any countries which have been imposed with these tariffs. Consequently, the measures could impact Australia and New Zealand’s economies in the months and years to come.
How serious is it?
The mercurial nature of President Trump’s decision-making processes make it difficult to assess the likely impact of these developments.
On one hand, the latest lists published by the U.S. and China are only “proposed” at this time and are subject to further discussions and negotiations. Indeed, China has specifically noted that there is no effective date for its new tariffs, as it is dependent upon what the U.S. does first. It is possible that some “deal” will be struck which removes the need to implement these measures.
On the other hand, the use of the Section 232 national security rationale to justify the steel and aluminum tariffs is a novel and unaccustomed use of that section. It could set a precedent for other industry sectors in the U.S. to argue for similar tariffs based on alleged threats to the U.S. national security.
What do Australian and NZ companies need to do?
CFOs of Australian and New Zealand companies engaged in international trade should closely monitor further developments in this high-stakes multilateral trade dispute. In scoping the inherent threats and opportunities, considerations should include:
- Define and refine your company’s potential stake in the game by understanding the detail of its supply chains and trade flows. Which industry sector(s) does it operate in? Which markets (export targets or import sources) are key? Which products are relevant and what are their tariff classification codes? (Additional tariffs and other measures are normally attached to specific tariff codes.)
- Identify the key countries involved in initiating or retaliating with new protectionist measures. Does your company export to or import from one or more of these countries?
- If your company is likely to be adversely affected by the measures, is there an exemption or appeal process and, if so, how will you engage it?
- Do you take advantage of any bilateral or plurilateral Free Trade Agreements? Are any benefits under the FTAs at risk from the new measures?
- If protectionist measures are put in place (e.g. by China against specific U.S. imports, or vice-versa), do they create an opportunity for your company to supply a competing product not caught by the measures?
- Will the measures incite trade diversion which might affect your company’s operations – e.g. if certain Chinese products face higher tariff barriers into the U.S., might the Chinese suppliers push sales in alternative markets such as Australia or New Zealand?
- Under your contractual arrangements with customers and suppliers, which party will carry the risk of any increased tariffs? Is there flexibility in the contracts to allow for cancellation of orders or to pass on unanticipated additional duty costs?
This scenario is rapidly moving on multiple fronts. In many respects, the developments are unprecedented in recent history and, accordingly, predicting the next stages is challenging. International traders should monitor developments closely to safeguard and optimise interests.
Through William Buck’s connection with the Trusted Trade Alliance (TTA, www.trusted-trade.net), clients have access to a globally-coordinated network of trade professionals in more than 15 offices on six continents.
TTA is uniquely positioned to provide clients with support in relation to the U.S. actions on steel, aluminium and other products, and advise on the retaliatory tariffs and/or exclusions that might be implemented by other governments.
Associate Director, Asia Pacific
Trusted Trade Alliance
+61 411 360 265