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Section 232 steel and aluminum tariffs and Canadian retaliatory tariffs are gone; threat of auto tariffs lingers; U.S and China clash on tariffs: What comes next?

Author(s): Gajan Sathananthan, Riyaz Dattu

May 21, 2019

In our last international trade brief, we discussed the implications of the European Court of Justice decision that the investor-state dispute resolution mechanism in the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) is compatible with EU primary law. In this international trade brief, we discuss the removal of cross-border tariffs on steel and aluminum between Canada and the U.S. and what’s next for cross-border trade between the countries.

On May 17, 2019, the U.S. and Canada announced  that each country would eliminate tariffs on their cross-border trade in steel and aluminum products imposed in the latter half of 2018. The U.S. will eliminate the tariffs on steel and aluminum imports of 25% and 10%, respectively, from Canada, imposed under section 232 of the Trade Expansion Act of 1962 (the Section 232 tariffs) on the basis of national security threat. In response, Canada will eliminate all tariffs that it imposed as countermeasures to the Section 232 tariffs, which included a diverse range of U.S. products in addition to aluminum and steel.

In order to address concerns regarding trans-shipments, both countries have agreed to implement measures to “prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices […] and prevent the transshipment of aluminum and steel made outside of Canada or the United States to the other country.” The agreement also allows for the implementation of tariffs if imports surge “meaningfully beyond historic volumes of trade over a period of time, with consideration of market share.”

This bilateral agreement between the U.S. and Canada, and a similar agreement between the U.S. and Mexico, removes a large hurdle for ratifying and implementing NAFTA’s replacement (known in Canada as the Canada-United States-Mexico Agreement or CUSMA). Both Canada and Mexico had been steadfast in their position that the newly negotiated replacement to NAFTA would not be implemented in their countries until the tariffs on aluminum and steel implemented on the basis of protecting the U.S.’s national security were removed.

The U.S. decision to take a more conciliatory tone with its North American trading partners may have also been done to provide relief to President Trump’s supporters in the agricultural and manufacturing sector that were already being severely impacted by the retaliatory tariffs by Canada and Mexico. Mexico’s retaliatory tariffs of 25% on U.S. corn, for example, were having a large impact on U.S. farmers, who, in a normal year, send Mexico in excess of 25% of their total exports.

Also, on May 17, President Trump announced a 180-day delay on the decision to impose tariffs on automotive imports, again under Section 232. During this period, U.S. officials will engage in negotiations with their foreign counterparts (principally from Japan and the E.U.) to reduce automobile imports from those countries in to the U.S. Interestingly, the proclamation cited the declining market share of “American-owned” producers, targeting foreign-owned automobile companies (including those with operations in the U.S.) as opposed to directly targeting foreign-produced automobiles.

The proclamation cites the CUSMA as helping “to address the threatened impairment of national security,” implying that the ratification of CUSMA would spare Canada from these automotive tariffs.

These conciliatory moves by President Trump are in stark contrast to the stance the President is taking against China. The U.S. is embarking on a gambit of increasing tariffs in an attempt to have China acquiesce to U.S. demands with regards to Chinese trade practices. Tariffs announced on May 10 increase the rate of tariffs from 10% to 25% on $200 billion of Chinese imports, and tariffs could be extended to all products exported from China to the U.S.

By removing the steel and aluminum tariffs against Canada and Mexico, the U.S. administration may also help isolate and position China as the “bad actor” in the escalating trade war. On the other hand, threatening tariffs against Japanese and E.U. automobiles speaks against the development of any coherent change in direction in trade policy toward working with all of the U.S.’s allies and isolating China. All observers of U.S. trade policy will unquestionably be focusing on the deliberations of the G20 meeting in Osaka late next month, to see if the Trump administration will continue to engage in ad hoc and bilateral trade negotiations using threats and unilateral actions imposing tariffs as leverage in these negotiations, or chart a different path.