U.S. tariffs on steel and aluminum imports: Action items for businesses

By now, you've heard about the new tariffs on imported steel and aluminum instituted in early March 2018. It's no surprise many businesses have questions and concerns. Here's our overview and key actions to consider.

The situation

The 25-percent tariff on imported steel and 10-percent tariff on aluminum were based on findings from the U.S. Department of Commerce. The tariffs will apply to all goods entered, or withdrawn, from warehouse for consumption on or after 12:01 a.m. EDT on March 23, 2018.

With objectives to increase U.S. steel mill operating capacity to 80 percent (from an estimated 72.3 percent in 2017) and primary aluminum production to 80 percent (from an estimated 39 percent in 2017), the Department of Commerce found that "excessive" steel imports and the "present quantities and circumstances" of aluminum imports are weakening both the domestic economy and national security.

Since the tariffs are being justified as a means to maintain national security, the termination dates are uncertain. How long will the capacity utilization rates need to stay above 80 percent before the Commerce Secretary determines the tariffs are no longer needed? And what about the politics involved in the determination of exemptions, the determination of whether negotiations with Canada and Mexico on NAFTA are agreeable, as well as ultimate termination? Right now, those questions are open. The nomination of Larry Kudlow as chair of the National Economic Council will also be important since his public positions are supportive of free trade.

The country suspensions and the exclusion process

On March 23, 2018 the Trump administration announced that steel and aluminum imports from the following countries will be temporarily suspended through April 30, 2018:

• Argentina
• Australia
• Brazil
• Canada
• Mexico
• The 28-member countries of the European Union
• South Korea (steel only)

By May 1, 2018, based on the status of the discussions the President will decide whether t these countries will remain exempt from the tariffs. The European Union will negotiate on behalf of its member countries. The Trump administration continues to state these suspensions are subject to “pending discussions of satisfactory long-term alternative means to address the threatened impairment to U.S. national security.”

It has already been reported that South Korea has negotiated a quota of steel imports equal to 70 percent of the average level over the past three years, along with an extension of the existing 25 percent tariff on two-door, light-duty pickup trucks through 2041 as part of the on-going re-negotiation of the Korean-US Free Trade Agreement (KORUS). Expect analogous announcements out of the North American Free Trade Agreement (NAFTA) related to Canada and Mexico to keep these countries on the suspension list.

The exclusion process was posted to the Federal Register on March 19, 2018. The most important considerations for both steel and aluminum exclusion submissions include:

• The two exclusion processes follow the same structure, but have different criteria based on the differences between the steel and aluminum industries.
• Only individuals or organizations, not trade organizations, using steel and aluminum in business activities in the United States may submit exclusion requests.
• Approved exclusions will be made on a product basis and will be limited to the individual or organization that submitted the specific exclusion request, unless the Secretary of Commerce approves a broader application of the product based exclusion request to apply to additional importers.
• The forms with required documentation and additional information are found within the Federal Register posting. The reviews are expected to be completed within 90-days with the approved exclusions being posted in the Federal Register for a 30-day comment period.
• If approved, the tariff exemption is retroactive to the public comment posting date. The exclusions are generally expected to be one-year in duration.

How manufacturers can assess the impact

Manufacturers know the cost of their raw materials and material cost in purchased semi-finished goods, but there is always uncertainty about where the material is purchased from, particularly when buying steel or aluminum through distributors and service centers. For the auto industry, provenance may be more certain given the strict material specifications that may limit where materials are sourced from. For other manufacturers, contractors, and those with steel and aluminum in their bills of materials, the primary source of materials may be a surprise. And again, domestic prices will rise — although perhaps not one-to-one — with import prices.

To begin to minimize the impact of the new tariffs, consider the following steps:

• Identify the materials, material processes and processors, and fabricators in your supply chain, as well as inbound and outbound logistics patterns. Do this as far down through the supply chain as possible.
• Match these steps in the value stream against the list of countries that have suspended tariffs. Be careful to identity the country of origin, not the point of shipment. For remaining material and components in the value stream, match these to the Harmonized Tariff Schedule (see below) to determine what content is subject to tariffs. Be careful — aluminum tariffs also include downstream aluminum castings, forgings, tubing, and similar products.
• Carefully review contracts with suppliers and customers to assure your company is as material-neutral as possible, and not accepting material cost increases from a supplier that cannot be mitigated with the customer.
• While complete cost neutrality is never possible — neither in absolute terms nor timing — this is where you can initiate discussions with suppliers and customers. Where is supplier renegotiation possible? Where are customer opportunities, such as material resale programs, available and commercially viable?
• Identify where alternative sources are viable (they are always available, but can the sources be certified, validated, etc.?).

For other manufacturers, contractors, and those with steel and aluminum in their bills of materials, the primary source of materials may be a surprise.

While the many and broad effects of the new steel and aluminum tariffs won't be fully evident for some time, manufacturers should consider taking the steps above now — and stay abreast of developments through your colleagues, advisors, and industry associations. This is particularly important as the country suspensions are only through April 30, 2018; with country additions or exclusions tied to complex, on-going trade negotiations.

As always, if you have any questions, feel free to give us a call.