ASIL Insights

On March 5, 2002 the President signed a proclamation imposing, effective March 20, increased tariffs on imports of certain steel products. [1] The action triggered immediate and adverse reaction from US trading partners.  The case is expected to trigger retaliation against the US directly in the form of increased tariffs on US exports and indirectly in the form of World Trade Organization (WTO) complaints being filed against the US on unrelated issues.  More importantly, it may affect the recently launched Doha round of multilateral trade negotiations under the WTO if other nations follow the US lead and impose or retain restrictions, particularly against US exports. [2]

The President's action was taken pursuant to Section 201 of the Trade Act of 1974. [3]   The duties are referred to as "safeguard measures."  Duties were increased on certain flat steel, hot-rolled bar, cold-finished bar, rebar, certain welded tubular products, carbon and alloy fittings, stainless steel bar, stainless steel rod, tin mill products and stainless steel wire.  A tariff rate quota was applied to steel slabs. The duties were imposed for a three-year period and are to be progressively reduced as required by the WTO. [4]   The duties range from 30% ad valorem to 8% ad valorem in the first year; 24% ad valorem to 7% ad valorem in the second year; and 18% ad valorem to 6% ad valorem in the third year.

The duties apply to all imports of the covered products regardless of origin as required by the WTO, [5] with two notable exceptions. First, pursuant to Section 312 of the North American Free Trade Agreement Implementation Act, imports from Canada or Mexico are exempt because the President determined that imports from Canada and Mexico did not contribute importantly to the serious injury to the US steel industry found by the International Trade Commission, or ITC (a US government agency).  Second, pursuant to Article 9 of the Agreement on Safeguards, imports from most developing countries that are members of the WTO are exempt because no single country's share of imports into the US during the period under investigation exceeds 3 percent, and all developing country WTO members collectively account for not more than 9 percent of total US imports of the product concerned.

This case began in June 2001. On June 5 President Bush announced a comprehensive initiative to respond to the challenges facing the US steel industry. As part of that initiative the President directed the US Trade Representative, Robert Zoellick, to request the ITC to initiate an investigation under Section 201 of the effect of steel imports on the US steel industry.  The ITC initiated the investigation on June 22, 2001.

 Section 201 investigations proceed in two phases. The first phase is devoted to determining whether the US industry is "seriously injured" and whether that injury is caused by increased imports of like or directly competitive imports. If serious injury and causation are found the ITC proceeds to the so-called "remedy phase" in which it determines what import relief to recommend that the President grant the domestic industry. While the President generally follows an ITC recommendation, he is not required to do so.  Section 201 does not require a finding of an unfair trade practice by US trading partners for relief to be granted.

For the purposes of this investigation the ITC divided steel imports into 33 product categories. In October 2001 the ITC reached affirmative injury determinations for 12 product categories, negative injury determinations for 17 product categories and was evenly divided on the remaining 4 categories.

These determinations on the question of injury were notified to the WTO on November 11, 2001, pursuant to Article 12.1(b) of the Agreement on Safeguards.  The United States offered to hold consultations with countries having substantial interests as exporters. On January 18, 2002 the EU accepted the US offer and consultations were held on February 13. The consultations centered on the EU's concerns regarding the ITC determination that increased imports had been the cause of the economic problems of the US steel industry. [6]

On the basis of ITC recommendations announced in December 2001, the President imposed the increased tariffs on steel on March 5, 2002.

Under GATT Article XIX and WTO Agreement on Safeguards Article 12, countries taking safeguard measures are required to compensate WTO member-trading partners for their trade lost as a result of safeguard measures. The theory is that the trading partners have not engaged in any unfair trade practice and therefore should not be made to bear the cost of actions taken by an importing country to protect its industry. The amount of the compensation is to be determined by the parties during mandated consultations. Generally the compensation takes the form of a reduction in duties on other products exported by the affected trading partners. The President's March Proclamation contained an offer to consult that already has been accepted by the EU, Japan, Australia, and New Zealand.  The EU claims that it alone is owed $2.5 billion in compensation, representing the amount of steel trade it claims will be lost as a result of the US action.

If these US-initiated consultations do not result in an agreement on the level of compensation, US trading partners will be entitled under the Agreement on Safeguards to retaliate by imposing restrictions on an amount of US exports "substantially equivalent" to the amount of trade they lost as a result of the US safeguard measures. [7]   The selection of which US exports to restrict is made by the importing country.  In this case it probably would not be limited to the steel sector. Any retaliation would take effect within 120 days of March 20, the date the US imposed increased duties on imported steel. If the US objects to the retaliation it could bring a case under the WTO Dispute Settlement Understanding.  Such a case likely would take several years, during which time the retaliation would remain in effect.

In addition to seeking compensation under the Agreement on Safeguards, US trading partners have the right to challenge the US action under the WTO's dispute settlement provisions. The EU initiated that process on March 7 by requesting consultations.  In its request letter to the US, the EU claimed that the US measures are in breach of the US obligations under the GATT 1994 and the Agreement on Safeguards. Specifically the EU claimed that the US (i) failed to prove imports had increased; [8] (ii) provided relief beyond what was required to prevent or remedy any injury; [9] (iii) applied safeguard measures to some developing countries (Czech Republic, Poland, and Slovakia) even though their imports fell below the 3% exclusion threshold; and (iv) violated the non-discrimination obligation of the Agreement on Safeguards and the GATT by exempting Canada and Mexico. [10]

If the EU-initiated consultations do not result in an agreement the EU may request a panel, [11] which would have 9 months to reach a decision.  An appeal would take an additional 12 months.  If the EU prevailed, it would be entitled, as it would under the Agreement on Safeguards discussed above, to retaliate by imposing restrictions on US exports in an amount equal to the amount of trade it lost as a result of the US action.

Many expert observers expect a victory for the EU in this case. They note that while US imports of steel rose significantly in 1997 and 1998, as the US claims, the value of US overall steel imports have declined by about 25 percent between 1998 and 2001- a more relevant period for the purposes of the Agreement on Safeguards. An EU victory might trigger similar cases by other trading partners that together could result in substantially increased tariffs on US exports worldwide.