What actually happens to the EU Safeguard measure on various steel products if the European Union and the United States want to settle their tariff dispute by Nov. 1, 2021? And why is everyone only talking about the end of Section 232 and not an end for Safeguard?
Declared intention: EU and US want to settle trade war
As reported by politico.com magazine, the European Union and the United States want to find a solution to the transatlantic tariff dispute over steel imports by Nov. 1, 2021.
“Both sides have confirmed that they are ready to find a solution by Nov. 1,” the official said, reporting on a conversation between EU Trade Chief Valdis Dombrovskis and U.S. Commerce Secretary Gina Raimondo on Friday. That’s earlier than the year-end deadline set by the two sides in a joint statement in May.
EU and U.S. want to find concrete solutions to restore historic trade routes while establishing a system that complies with WTO rules.
EU wants end to Section 232 – United States rather not
EU trade chief Valdis Dombrovskis would prefer that the United States eliminate Section 232 tariffs altogether. A demand that U.S. Commerce Secretary Gina Raimondo has met directly and has already qualified that with the abolition of 232 the American steel industry would be endangered.
Moreover, steel tariffs are exceedingly popular in the powerful U.S. steel industry and in the so-called mill states, such as Indiana, Ohio and Pennsylvania. Which is why abolition could hurt the Biden administration politically.
A US quota system has been rejected directly by the EU
Dombrovskis has already ruled out a U.S. quota system, as already exists for some other countries, as a solution. Although with the European Safeguard measures on various steel products, a quota regime also exists in the European market, in which the United States is explicitly mentioned with its own quotas. Or it would also be possible to convert the Section 232 Tariffs into a Safeguard measure. However, all these options seem unlikely, as they do not seem to be compatible with WTO regulations.
Is no one talking about Safeguard?
One trade barrier that is mostly disregarded with regard to the EU’s wishes for an end to US steel tariffs is the EU Safeguard measures on certain steel products. The European Safeguard measures were the Europeans’ response to the Section 232 measures imposed by the then U.S. administration under President Trump.
The aim was to prevent steel-related product flows from being diverted to the European Union following the imposition of the U.S. punitive tariffs and to prevent steel producers there from being harmed by imports.
EC whips Safeguard extension through as leverage
Shortly before the first negotiations between delegations of the U.S. government and the officials of the EU, which was supposed to initiate a beginning of the end of the mutual punitive tariffs, the European Commission still pushed the Safeguard extension for another three years through all instances. This was done in such a hurry that the EC made some serious calculation errors, which had to be quietly corrected after they were discovered.
One of the most important reasons given by the EC, namely that steel imports into the EU had actually increased during the period under review and that Safeguard therefore had to be extended, turned out to be a stupid mistake in figures.
Political will for extension greater than reasonableness
It should not remain the only mistake in the Safeguard extension – but the political will of the EC was greater and thus, against all logic, a substantive homeopathic justification for the extension was reported to the WTO as a substitute. Otherwise, the EU would no longer have had a good basis for negotiations with the American government.
But what happens if Washington and Brussels reach an agreement in the tariff dispute?
First of all, European steel producers would be pleased. For 2021 and 2022, Bloomberg has predicted that there will be a shortage of at least 40 million tons of steel in the United States. This has already led to a rapid rise in US steel prices. Price increases of more than 200% since 2020 are not uncommon there. American steel consumers are pretty much left to deal with this shortage on their own, as US steel producers have currently ruled out any significant increase in production.
EU steel producers want unrestricted access to the US market
This, in turn, makes it extremely attractive for European steelmakers, many of whom are already active as multinationals in the U.S., if a purely internal solution were to be reached between Europe and the United States. European steel prices are not yet as high as on the other side of the Atlantic. A sale to the United States would further inflate the profits of EU steel mills and exacerbate the prevailing steel shortage in Europe.
EU second largest steel producer in the world
It is also important to remember that the European Union (EU27) is the second largest steel producer in the world – after China. Around 30 million tons of steel are exported from the EU to the world every year. And the domestic steel mills are still far from reaching their capacity limits. After all, the EU has also built up massive overcapacity in the past and could still ramp up production capacity for steel by around 100 million tons – if it wanted to. Something the United States cannot do so easily.
By the way, the OECD figures are not entirely correct. According to data from the European Commission, steel production capacity in the EU is over 250 million tons per year. So much for the reduction of overcapacities.
What will happen to Safeguard if the EU and the US reach an agreement on November 1?
That depends on what the EU and the US agree on.
If the US government makes changes to Section 232 as a result of the negotiations, then a clause in Regulation (EU) 2021/1029 of 24 June 2021 would automatically kick in. And there would have to be an immediate review of Safeguard by the Europeans. To be read in point 4. paragraph 85 of Regulation (EU) 2021/1029 of 24 June 2021.
“An immediate review of the safeguard measure will also be triggered if the US introduces changes to its Section 232 measure on steel that may have a significant impact on the unduly diverted trade flows it currently generates.”Source: europa.eu
This was also confirmed to us in writing by the European Commission Directorate-General Trade.
What happens if the Section 232 Tariffs are abolished?
So if the United States unilaterally abolishes its Section 232 tariffs, the European Union could also withdraw the counter tariffs of 25% on steel imports from the United States which it had imposed in response to the Trump tariffs. This would open the door for EU steel imports into the United States.
U.S. steelmakers still face closed doors
But U.S. steel exports would still fall under the quota rules and tariffs of the EU Safeguard measure, and will until the European Commission decides that a Safeguard review has found that EU steelmakers remain safe – which is more likely not to be the case. And the import quota of U.S. steel mills to Europe is not that large now. The advantage would clearly be on the EU side.
Why is Dombrovskis so opposed to a quota system in the Section 232 Tariffs for Europe?
Such a significant change to the Section 232 Tariffs, which would assign an import quota to European steel mills, would be reason enough for the Safeguard measures to be reviewed. And as we have already written, the Safeguard extension has been rather hot-rodded and not built on solid evidence (think of the number-crunching).
Does Safeguard measure collapse because of technicality?
If the Safeguard measure, whose extension has already been rejected by many EU member states, then potentially collapses, the United States would still have its Section 232 Tariffs. And the EU, according to the EC and the European steelmakers lobby, would be overrun by imports from outside the EU.
So what will happen now on November 1?
All in all, of course, this is still open now. No real solutions have yet been proposed and it will be very difficult to find them. It is not only about steel and aluminum, but also about a wide range of products where the United States and the European Union have imposed or had imposed punitive tariffs on each other (whiskey, motorcycles and airplanes, for example).
In addition, everything must also be packed into a construct that will hold up before the WTO and not incur the wrath of other trading partners. Politically, the issue is difficult to settle for both sides. For the Americans it is even more difficult, as they have to fight for important votes, while the EU officials are just better civil servants.
We continue to keep an ear to the ground for you.
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