Over the weekend, the United States and European Union agreed to suspend the tariffs on steel and aluminum and to start the work of facilitating negotiations with like-minded countries to reduce steel and aluminum overcapacity and carbon intensity. The agreement also reopens the door for U.S. agriculture exports impacted by retaliatory tariffs. But the ag equipment sector remains challenged.
The agreement with the European Union modifies 232 steel and aluminum measures to allow the resumption of duty-free imports of European steel and aluminum into the U.S. in line with historical trade flows. It establishes tariff rate quotas to limit oversupplying above levels before the 2018 tariffs went into effect.
Zippy Duvall, president of the American Farm Bureau Federation, says the agreement is welcome news for America’s farmers. “While the dispute centered around steel and aluminum, farmers were swept up in the turmoil as the EU clamped down on U.S. agricultural exports like orange juice, butter, cheese, pork, nuts and many more. It’s crucial that we now restore those trade relationships.”
Meanwhile, for those industries dependent on steel, the agreement offers some momentum to solve some of the outstanding trade irritants between the United States and the European Union. It also allows more reasonably priced steel back into the U.S. market.
“There's no doubt that the deal announced over the weekend offers some relief for American equipment manufacturers suffering from soaring steel prices and shortages,” says Kip Eideberg, Association of Equipment Manufacturers’ senior vice president of government and industry relations. “Getting back to the negotiating table with possibly our most important trading ally and partner is obviously a step in the right direction.”
Eideberg says the national security Section 232 tariffs imposed by the Trump administration in March 2018 have had a “chilling” impact on equipment manufacturers largely dependent on the price of steel. He notes at a time when the U.S. started seeing demand for farm equipment pick up again, steel prices rose from $500 to $750 per ton to hoovering between $1,500 and $2,000, which obviously makes the cost of equipment more expensive.
He explains the Trump administration put these tariffs in place partly to address the China problem of overcapacity and channeling their production through other countries. But Trump also placed the same tariffs on close allies, such as the United Kingdom, Japan and South Korea, which makes the guise of the tariffs on a national security qualification “laughable.”
“The data has been abundantly clear,” Eideberg says. “These tariffs have not led to more jobs at U.S. steel mills. So, if that's the case, then why continue to punish American equipment manufacturers by forcing them to buy steel at an artificially high price that's a result of tariffs and taking away their ability to source it from other markets around the world because the tariffs make it too expensive? It's forcing us to manufacture equipment with one hand tied behind our backs.”
AEM’s members would prefer to source American-made steel over sourcing it from overseas. However, the pendulum has swung too far right now where the steel industry has benefited from closing in on four years of tariffs “which are nothing but taxes that are paid by American businesses and consumers ultimately,” Eideberg says.
He claims U.S. steel companies are getting away with charging $2,000/ton for hot-rolled coil steel, skyrocketing from prices charged over three years ago. He says equipment manufacturers are willing to pay higher prices as long as the increases are reasonable and gradual. However, that is not how the U.S. steel companies have approached the situation. They are instead charging more than is reasonable.
“When you have U.S. steel mills charging twice as much, if not three times as much, as your competitors who are not, by the way, operating in a lighter regulatory environment or have lower labor costs, and yet can produce the same quality steel and sell it for half the cost, then something is wrong,” Eideberg says.
New trade approach
In addition to the EU eliminating the retaliatory tariffs against the United States, the U.S. agreed to suspend the World Trade Organizations' disputes against each other related to the 232 disputes. It also seeks a commitment to advance the Biden’s climate and worker-centric trade provisions.
Steel and aluminum production are two of the most carbon-intensive industrial sectors, accounting for roughly 10% of all carbon emissions —comparable to the total emissions of India, according to a White House fact sheet.
Commerce Secretary Gina M. Raimondo adds the deal creates a framework through which the U.S. and EU agree to take carbon intensity into account in future negotiations. “The U.S. and the EU both produce steel and aluminum that is ‘cleaner’ than what is produced in much of the world. The lack of environmental standards in places like China is part of what drives down their costs, and it’s a major contributor to climate change,” Raimondo says.
“With this dispute behind us, we are in a stronger position to address global overcapacity from China with an enhanced enforcement mechanism to prevent leakage of Chinese steel and aluminum into the U.S. market. And the deal is a significant win on one of President Biden’s top priorities – fighting climate change,” says U.S. Trade Representative Ambassador Katherine Tai.
“The first ever carbon-based arrangement on steel and aluminum trade contemplated by the agreements would create greater incentives for reducing carbon intensity across modes of production of steel and aluminum made by American and European companies,” says Tai.
Following the deal with the EU, the Commerce Department also released consultations between the United Kingdom as well as with Japan on bilateral and multilateral issues related to steel and aluminum. The Michael Best Trade team notes it will be interesting to see how countries that previously negotiated agreements with the U.S. approach how the agreement may become the template under which other countries can eliminate their steel and aluminum tariffs. "For instance, Canada, Mexico and Australia (on aluminum only) would have to give up much better agreements that essentially allow for normal steel and aluminum trade flows while monitoring for surges. On the other hand, South Korea, Brazil and others that negotiated hard cap quotas in 2018 may seek to upgrade their deals that have restricted steel and aluminum trade, though that could run into opposition from tariff supporters in the U.S. steel and aluminum industries," a notice says from the law firm.
Eideberg expects to see more focus from the Biden administration on negotiating trade with requirements impacting emissions and labor. “They have been unequivocal about how they see the role of trade and the benefits of trade agreements with the U.S. and how this can then be leveraged vis-à-vis other countries to force them to make certain changes on climate or on labor,” he says.
In a broader trade agenda, requiring action on the climate and labor rights can further stall negotiations. He suggests having these issues addressed separately, but in parallel, from the trade negotiations is maybe the better approach.
“My concern would be that adding these two issues is going to make an already complicated and difficult process even more so complicated and difficult,” Eideberg says of trade negotiations. “At the end of the day, that means that it might take longer time to get these trade agreements and deals in place, which will then continue to be a drag on our industry.”