Recent prices of steel and aluminum increased in excess of Section 232 tariffs that started in March, and the Commerce Department is investigating whether companies are using the tariffs as justification to ultimately boost profits, Commerce Secretary Wilbur Ross said during a Senate Finance Committee hearing on Wednesday.
“What has been happening — and it’s a very unsatisfactory thing — there has been a lot of speculative activity,” Ross said. “Storing inventory, withholding product from the market, by various intermediary parties. So the price of steel, and for awhile the price of aluminum, went up far more than is justified by the tariffs, and so we’re starting an investigation into that, trying to find out whether there are people who illegitimately are profiteering out of the tariffs. There’s no reason for a tariff to increase the price of steel by far more than the percentage of the tariff.”
Commerce in March started assessing global tariffs of 25 percent on steel imports and of 10 percent on aluminum imports, which expanded to the EU, Canada and Mexico on June 1, after the U.S. government lifted temporary country exemptions.
The EU on Wednesday announced that $3.24 billion in retaliatory tariffs against the U.S. metal duties will take effect Friday, after the European Commission on Wednesday adopted a regulation to put in place the measures.
As for steel prices, average U.S. prices for hot-rolled bar per metric ton rose from $665 to $982 between June 12, 2017, and June 11, 2018, a 32 percent increase, according to SteelBenchmarker.com, which provides benchmark pricing data for steel.
The fact that there have been some price increases on steel products over the amount of tariffs “clearly is not a result of the tariff; it’s clearly a result of antisocial behavior by participants in the industry,” Ross said.
Sen. Chuck Grassley, R-Iowa, asked Ross when previously inactive domestic steel production facilities could come back online, adding that increased steel capacity could have downward pressure on prices in the U.S.
Ross added that “it should be fairly quick” for those facilities to come back online, after U.S. Steel announced a few months ago the first production restart — of 1 million tons — and subsequently announced a second restart to produce 1.5 million tons.
“It’s coming,” he said. “Exactly what month it will come, I don’t know. But right around the edge of the year, that problem should be pretty well-addressed by most of these new restarts of facilities.”
Committee Chairman Orrin Hatch, R-Utah, asked Ross why his department isn’t granting exclusions for products from countries subject to Section 232 quotas.
Ross noted that the presidential tariff proclamations don’t authorize the Commerce Department to grant such exclusions, but that Commerce is taking into consideration a request made for exclusions from quotas that have already been exceeded or shortly will be exceeded.
South Korea, Argentina and Brazil are subject to straightforward quotas and no tariffs.
“The problem is that a number of countries rammed in a huge amount of product prior to the president’s decisions, and therefore, have put in much more than they had in the prior year,” he said. “So there’s an intellectual challenge as to whether or not to reward those countries that were trying to game the system.”
As for tariff exclusions, Commerce on Wednesday announced its first determinations on 98 exclusion requests for steel products, as the agency decided to grant 42 requests and deny 56 requests, Ross said.
Senators criticized the process as being too slow or overly complicated.
Commerce has received more than 20,000 steel and aluminum exclusion requests, and has posted over 9,200 for public review and comment, Ross said.
“So far, though, there is a high probability that relatively few of those will be granted, because many of them have no substance and/or have some potential substance to have some objections that are well-grounded, posted against them,” he said.
After some further description by Ross of the exclusions’ petition and objection processed, Grassley interjected: “It sounds to me like we’ve got a government-run mercantilist economy as opposed to a free-market economy.”
Committee ranking member Ron Wyden, D-Ore., noted that Commerce has received over 14,000 more exclusion requests than the 6,000 it had said before rollout that it had predicted, pointing out that the number of processed petitions that Commerce announced on Wednesday totaled less than 1 percent of total petitions filed.
Every member of the committee is hearing from small businesses regarding the impacts of the Section 232 tariffs, said Wyden, who added that the committee would be surprised if it heard from any involved small business that the exclusion process is going well.
Ross said that there have been very few exclusion requests that Commerce has exceeded 12 days in responding to.
One positive development of the Section 232 tariffs is that several U.S. trading partners are now ratcheting up actions to reduce steel dumping and target the problem of global overcapacity, Ross said. Canada is taking action, Japan is creating its first enforcement body to target such dumped imports, and Europe is implementing new safeguard measures, he said.
“The only way we’re going to solve the global steel overproduction and overcapacity is by getting all the other countries to play ball with us,” Ross said. “While they’re complaining bitterly about the tariffs, the fact is they’re starting to take the kind of action which, if they had taken sooner, would’ve prevented this crisis.”
He pointed at China as the source of global steel overcapacity, noting that the nation masks such exports to the U.S. by transshipping the metal.
“If you just believe the raw numbers, China’s shipping less to us than they did five years ago,” Ross said. “The reality is quite to the contrary. They are disrupting the global steel market; they’re causing both direct and indirect damage to it. So we have to [assess tariffs] on a global basis.”
The tariffs must be applied broadly, and include certain allies like Canada, because the aggregate of U.S. steel imports threatens national security, not because friendly nations like Canada pose a direct national security threat, Ross said.
During a May hearing before the Senate Appropriations Commerce Subcommittee, Ross said steel trade with Canada and Mexico is mostly balanced, even as those countries export significant quantities of steel and aluminum to the U.S.
Sen. Pat Toomey, R-Pa., challenged the notion that the steel and aluminum tariffs pertain to national security, the basis under which they were imposed.
“When South Korea is exempted from [Section] 232 [tariffs] because they agreed to lift the quota on our American car exports, which we weren’t hitting anyway, and they agreed that we would [raise tariffs on] South Korean light trucks, and that got them exempted, that has nothing to do with national security,” Toomey said.
He went on to urge Ross to withhold any tariffs that might be imposed pursuant to an ongoing Commerce investigation into the national security impacts of automobile imports, pursuant to section 232 of the Trade Expansion Act of 1962, the same statute under which the steel and aluminum tariffs were ultimately imposed.
The Section 232 investigation into automotive imports started May 23 at the direction of President Trump.
If Commerce finds that automobile imports threaten U.S. national security, the department could impose tariffs.
The department hasn’t received a response from a letter that Ross sent to Defense Secretary James Mattis in May, asking for his input on the review.
“In the case of steel and aluminum, General Mattis wrote back to us that he accepts the proposition of the threat to national security arising from the imports of steel and aluminum,” Ross said. “I have no idea, at this early stage, what his attitude will be on the automotive sector. But it is a factor that we definitely will consider, as required by the statute, and even more, as required by good common sense, as we consider the automotive and auto parts environment.”
In his opening hearing statement, Hatch said he was “stunned” that Commerce started the Section 232 investigation into automobiles, and the “lessons” of steel and aluminum measures show that tariffs don’t support national security while they harm the U.S. economy.
The amount of trade covered by the automotive investigation is “four times larger than that under the steel and aluminum investigations combined,” Hatch noted.
The average price of an imported car is $23,200, meaning that if Commerce were to recommend a 25 percent tariff pursuant to its investigation, then the agency would be recommending raising the cost of an average imported car by $5,800, Hatch said.
The additional cost of a single car in that circumstance would absorb roughly 10 percent of the median U.S. household income, which is $59,000 per year, he said.
Senators also grilled Ross on the Trump administration’s conclusion of a deal to lift an order preventing U.S. exports to Chinese telecommunications company ZTE, as Wyden and Sen. Michael Bennet, D-Colo., expressed bewilderment about the relaxation of sanctions against the company at the same time the U.S. is planning $50 billion or more—in terms of yearly import value—in tariffs on imports from China.
“It’s…frustrating to watch as the administration’s trade moves tend to seem more like knee-jerk impulses than any kind of carefully thought-out strategy,” Wyden said in his opening statement. “Its most obvious accomplishment on trade is sowing economic chaos that’s united our allies and China against us—unless you rank that behind the rescue of ZTE, an action that sold out American security and got nothing in return.”
Wyden cited May testimony of a Trump nominee before the Senate Intelligence Committee, as Wyden raised concerns about ZTE as a potential espionage threat.
William Evanina, who was nominated in February to continue his position as director of the National Counterintelligence and Security Center in the Office of the Director of National Intelligence, had said that ZTE is a potential espionage threat against the U.S., Wyden said.
Wyden asked Ross whether that espionage threat has gone away.
Ross said espionage matters are outside his department’s jurisdiction, and described the developments of the ZTE case.
The U.S. agreed to lift the export denial order in exchange for ZTE agreeing to several measures, including a combined $1.4 billion penalty and escrow payment to the U.S., as well as the stationing at ZTE for 10 years a team of special compliance coordinators handpicked by the Bureau of Industry and Security (BIS).
A March 2017 court settlement ended another prior denial order on U.S. firms exporting to ZTE, which had been imposed after BIS previously found ZTE to be violating U.S. sanctions on Iran and North Korea. ZTE had paid $892 million to the U.S. government and put another $300 million in escrow under the settlement.
Ross explained that the March 2017 settlement agreement between the U.S. government and ZTE provided for the U.S. to either confiscate the $300 million in escrow or take action to shut the company down.
Earlier this year, BIS re-imposed the export denial order against ZTE after finding proof that members of the company had lied to the U.S. government during the course of the settlement agreement and afterward.
After discovering the false statements, “the staff at BIS…recommended that we grab the $300 million,” Ross said. “I thought that that was not enough of a penalty, and therefore, initiating the action with the support, ultimately, of BIS, that we not do the $300 million, and instead shut them down.”
Trump directed Commerce to revisit the status of the export denial order last month.
Ross emphasized his belief that the U.S.’s ultimate decision to require a $1.4 billion payment, subject ZTE to a monitoring program and require the company to replace senior leadership as well as its entire board of directors, was a strong response.
He added: “From the strictly enforcement point of view, I think if this had been our original solution, everybody would’ve applauded.”