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International trade took a great leap backwards with Agreement in Principle to KORUS 2.0. Korea has accepted an (in)voluntary export restraint which rolls back its steel exports by 30% of the average 2015-2017 level.

The KORUS Agreement and Lighthizer’s recent statements suggest a return to Voluntary Export Restraints (VERs) as his weapon of choice to reduce steel imports. VERs are banned by Article 11.1(b) of the WTO Agreement on Safeguards. The 25% tariff for most countries will hurt trade more than reduced volume, making the VER a “least worst” solution. Indeed, in a tighter market, increased prices will likely mean better overall returns.

Korea did fairly well in the KORUS 2.0 rebalancing. It accepted the 10% tariff on aluminum products. It has avoided reduction in automotive exports, and has not increased access to its markets for sensitive agricultural products. However, Korea did accept currency manipulation requirements more stringent than those in the Trans-Pacific Partnership.

POTUS does not care about WTO obligations. Nor is he moved by threats of retaliation against U.S. exports. Ambassador Lighthizer dismissed farmer and farm state legislator concerns by suggesting they should take one for the team.

And they did. China’s announcement of a possible 25% duty on U.S. pork resulted in a $9/cwt fall in U.S. pork prices. This is a major hit. The price drop has also impacted Canadian hog farmers because of the inter-relationship of prices in North America.

The VERs option is a return to the ‘might is right’ era of the General Agreement on Tariffs and Trade (GATT). VERs were used primarily to regulate competition from low-cost imports of textiles and clothing from 1962 to 2005. The voluntary nature of the measures was not inconsistent with GATT rules at that time. There was no effective avenue for appeal of agreements concluded with the U.S. based on a real risk of a threat of market disruption.

I was a Canadian Textile Negotiator at the time, a member of the GATT restricted drafting group on the Multifibre Arrangement (MFA) and a founding member of the Textiles Surveillance Body (TSB). The TSB did not limit the U.S. textile controls.

Ambassador Lighthizer is very familiar with the U.S. VERs on steel during the 1980s. The U.S. also used VERs on Japanese imports to attract automotive investment. Lighthizer believes in “managed trade” because he knows how to make VERs work and he will ensure that the agreements carry no challenge or appeal rights.

Are steel exporters in 2018 a different audience? Textiles and apparel VERs applied principally to developing countries. They were introduced before China and Russia had joined the World Trade Organization.

Today’s WTO membership will be inclined to avoid creating precedents for a return to the 70s. However, I have a sense of déjà vu all over again. Managed trade and manufactured shortages can become very comfortable, not to mention profitable. Negotiated solutions may be better for some (like Korea) than lengthy negotiations and the crippling tariffs. VERs were historically a “least worst” solution.

How will other countries react to the U.S. tariffs?

The E.U. has launched a safeguards investigation of steel imports to protect against diversion due to the U.S. tariffs.

An E.U. safeguards investigation on aluminum products is expected to follow on Friday, March 30.

Will the E.U. safeguards investigations be contagious? Not many countries have the clout to do this.

There has been litigation and threats of litigation. There will be more but VERs may be too easy an option for smaller countries.

How about Canada?

In excluding Canada from the national security tariffs, President Trump said:

“I expect that Canada and Mexico will take action to prevent transshipment of steel articles through Canada and Mexico to the United States.”

Prime Minister Trudeau has assured POTUS he has taken strong steps to avoid diversion and circumvention.

The Prime Minister’s Office announced that Canada was allowing amendments to the Special Import Measures Act (SIMA) to come into force more than a year after being approved by Parliament.

These changes will bring Canadian law and practice closer to U.S. standards.

The use of new “particular market situation” rules in the Special Import Measures Act is designed to permit CBSA to ignore exporters’ actual costs and selling prices to increase dumping margins. This will permit discriminatory treatment of Chinese exports to continue. At the same time, the U.S. has used this procedure against Korean steel. Canadian agricultural exporters should watch this closely.

The new anti-circumvention provisions in the SIMA would make source switching more difficult and make it less expensive for the Canadian industry to pursue additional remedies.

Giving unions better access to the SIMA system will bear watching. Unions are already interested parties in SIMA proceedings. I represented the International Brotherhood of Boilermakers in Gypsum Board from the USA. In other situations where unions have filed complaints on their own, there have been problems providing data on industry performance and injury information.

Will this be enough to satisfy Trump and Lighthizer? In the current crisis situation, it may be seen as window dressing. Ambassador Lighthizer will want more. Canada may simply be expecting that anything it does will not be enough for POTUS. Or it is waiting to announce specific initiatives based on consultations with the Canadian steel industry?

Lighthizer wants Canada to discipline and prevent exports of Chinese steel fabricated in Canada. This will be a virtually impossible task. Will exporters of steel products need to provide details of steel content?

Most Chinese steel is subject to trade remedies findings in Canada. Anti-dumping and countervailing duties exigible on that steel when imported into Canada may not be drawn back on export to another NAFTA country.

The amendments to SIMA also fall short of the steel industry’s insatiable demands for strong measures to address the “threat of dumping diversion”.

The Canadian Steel Producers Association (CSPA) has been discussing safeguards with the Government. It has also been discussing possible AD/CVD cases – perhaps cold-rolled and galvanized steel sheet from China. It has been difficult to file SIMA complaints on these products where the principal producer is reportedly booked for 12 weeks or more.

There has also been chatter about anti-circumvention investigations on aluminum extrusions.

Canada is between a rock and a hard place. The Trump tariffs will weigh most heavily on Canada. Exclusion is essential, but is not yet guaranteed.

Canadian users of imported steel should expect their businesses will be disrupted to keep POTUS happy on diversions. How will Canada determine what is or is not a diversion and how to regulate the trade?

What will happen to imported steel needed to meet existing contracts or steel of types and kinds not made in Canada?

As much as Canada is tied to respect for the WTO rules, it may have no choice other than to apply its own illegal or questionable measures to ensure survival of its own industries.

A steel industry/government working group will meet March 28 to determine how to avoid surges and diversion. There will be other stakeholders, i.e., unions.

There will be little input from users/stakeholders – while the foxes move into the chicken coop with the help of the farmer.

There are issues which steel users should raise, such as:

  • treatment of goods in transit;
  • treatment of bona fide existing orders and contracts;
  • just in time delivery of steel for the auto industry and pipelines and other manufacturers.

Surtaxes, safeguards and SIMA duties are very blunt and draconian weapons.

The Government of Canada should ensure that its efforts to deal with possible diversions and transshipments do not endanger the existence of its own steel and fabricating industries.

There is considerable risk of collateral damage to fabricators and manufacturers. Hopefully, there will be adequate consultation with steel users. It is probably satisfying to demonize China to POTUS. But in Canada, importers pay SIMA duties. Not being “bowled over” in Trump’s rush to destroy the rules-based international trading system Canada depends on is essential.

There will be a 15 day period for comments on the SIMA changes through the Canada Gazette. This will be an opportunity to help the Government understand the implications not only of the potential SIMA changes, which have been coming for some time, but of potential problems which could adversely impact many more middle class Canadians than are potentially being helped.

The proper approach is to make haste cautiously and consult as broadly as possible.

Peter Clark, president of Grey, Clark, Shih and Associates, is one of Canada’s leading international trade strategists. His clients in Canada and around the world include governments, corporations and trade associations. He is a frequent media commentator and columnist.  Follow him on Twitter at @jpclark14
The views, opinions and analyses expressed in the articles on National Newswatch are those of the contributor(s) and do not necessarily reflect the views or opinions of the publishers.
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