Keeping pace with trade: From words to action

A significant number of trade-related events continue to take place. These include the United States placing 25 percent tariffs on various steel products and 10 percent tariffs on various aluminum products coming into the country from a wide range of trading partners, including Canada, Mexico, the EU, and China. And, interestingly, two press releases from the European Commission have addressed greater cooperation between the EU and China in support of “the rules-based multilateral trading system with the World Trade Organization (WTO) at its center.” This illustrates how important it is to monitor not just U.S. bilateral trade actions, but the trade relationships that are emerging and strengthening between other foreign countries, since these will impact your customer, supplier, and competitor positioning as well.

While there are many opinions on what’s in a country’s national security interest and what is or is not within the structure or spirit of the WTO, we’re starting to see increasing tariffs in many trading lanes, shifting production utilization within global manufacturing footprints and developing opportunities with new free trade agreements beyond the shores of the United States. Political words are turning into governmental action, resulting in input cost increases, market pricing pressure, and shifts in global trade.

Political words are turning into governmental action, resulting in input cost increases, market pricing pressure, and shifts in global trade.

In response to the expiration of country exemptions by the U.S. to the 25 percent steel tariffs and 10 percent aluminum tariffs established under the U.S. Section 232 investigation, Mexico responded with a 20 percent additional tariff on a range of agricultural and other products and a 15 percent additional tariff on steel products, and the EU placed incremental tariffs of up to 25 percent on a broad range of U.S. industrial, steel, aluminum, and agricultural products. The United States' largest trading partner — Canada — placed incremental 25 percent and 10 percent tariffs on imported steel and aluminum, respectively, and 10 percent surtaxes on 39 agricultural, processed food, and other consumer products.

With these additional tariffs in place, attention has turned to two fronts: United States – China trade and the Section 232 automobile and automotive parts investigation. On July 6, the United States imposed 25 percent incremental tariffs on $34 billion of Chinese imports (List 1) while it evaluates incremental tariffs on an additional $16 billion of Chinese goods (List 2). This action was the result of a U.S. Section 301 investigation of unreasonable and discriminatory Chinese technology transfer and intellectual property practices. The Chinese countered with a 25-percent additional tariff of their own on $34 billion of U.S. imports across 545 products, including motor vehicles and agricultural products. This completely reversed China’s enactment of a duty reduction on U.S. vehicle imports from 25 percent to 15 percent on July 1, when China also announced it would roll back automotive joint-venture ownership limitations on July 28. The net effect is that U.S. vehicle imports into China are now assessed a 40-percent tariff — a clear example of the uncertainty being injected into international trade, even within a one-week window.

The next piece of the United States – China trade puzzle companies will need to work through is the proposed 10-percent U.S. incremental tariff on $200 billion of additional imports of 6,031 products (List 3). These tariffs were proposed by the Trump administration on July 10, 2018, and are subject to the timeline laid out below.

No doubt there will be ongoing attention paid to the rollout of these tariffs and other trade-related pronouncements, along with the outcome of the Section 232 investigation to determine whether automobile and automotive part imports threaten to impair national security. While the law allows up to nine months for the investigation, Secretary Ross said, after a speech on June 21, that the investigation would be completed by late July or August. At that point, the president has up to 90 days to take action on the recommendations coming out the study, and implementation may follow within 15 days.

All of these actions need to be considered with the ongoing North American Free Trade Agreement (NAFTA) negotiations. While conversations certainly continue, hard, detailed NAFTA negotiations are awaiting direction from the newly elected Mexican president, Andrés Manuel López Obrador, who takes office on December 1. And, of course, the U.S. political context of all this trade activity becomes even more complex given our midterm elections will closely follow the likely release of the Section 232 report in August, its review by the president in September, and action by October.

All analysis points to negative ramifications if the United States places a 25-percent tariff across the board on the $143 billion of imported automotive parts and the nearly 50 percent of all vehicles sold annually in dealerships. There were over 2,000 comments submitted to the public docket and, by one count, 99 percent were against imposing tariffs on the automotive sector in general and utilizing Section 232 provisions to do so in particular. Many of the testimonies provided in the July 19 public hearing asked the U.S. Department of Commerce (DOC) to assist industry by clearly articulating the actual imported products the DOC believes are national security risks. One outcome that might establish a U.S. response to the Made in China 2025 plan without a broad tariff on automotive vehicles and parts could be the targeting of the advanced components called out in the original DOC notification: connected vehicle systems, autonomous vehicles, fuel cells, electric motors and storage, advanced manufacturing processes, and other cutting-edge technologies. That’s because immediate negative economic implications will be constrained since these components aren’t significant across current U.S. production, but the administration can point to maintaining a strong technological base for national security.

Next steps

• July 23: Chinese List 2 comments due
• July 24: Chinese List 2 tariffs hearing
• July 27: Chinese List 3 hearing appearance requests and expected testimony deadline
• July 31: Chinese List 2 post-hearing comments due
• August 17: Chinese List 3 written comment submission deadline
• August 20-23: Chinese List 3 public hearings
• August 30: Chinese List 3 post-hearing comments due
• October 9: Deadline for exemption requests to the original Section 301 Chinese tariffs
• TBD: Chinese List 2 tariff implementation
• TBD: List 3 tariff implementation
• TBD: Automobiles and automotive parts Section 232 investigation release

It’s imperative for businesses to take advantage of this comment period, contact legislative representatives, and lend a voice to the process through trade association representatives. The potential impact of the additional tariffs on Chinese products and a Section 232 investigation on automobiles and automotive parts for the industry and the U.S. economy will need to be evaluated in the total context of the outcome of related trade negotiations — specifically NAFTA once negotiations begin again, but also with the EU, Mexico, Canada, and other trading partners over steel, aluminum, and agricultural, and industrial products.

While public comment and exemption process periods are open, companies should closely monitor the public docket for information from customers, suppliers, and competitors.

While the public comment and exemption process periods are open, companies should closely monitor the public docket for information from customers, suppliers, and competitors. For example, the exemptions that have been granted to individual companies for the steel and aluminum tariffs are posted on www.regulations.gov (docket number BIS-2018-0006 for steel and BIS-2018-002 for aluminum).

We'll continue to keep you informed. In the meantime, if you have questions, feel free to give us a call.