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What is the National Security Rationale for Steel, Aluminum and Automobile Protection?

By Menzie Chinn·June 6, 2018
Robert M. La Follette School, University of Wisconsin-Madison

The Issue:

The Trump administration has implemented a number of trade related measures purportedly on the basis of national security. First, it invoked the seldom-used provision of the trade law to investigate whether imposing import restrictions for steel and aluminum is justified by national security reasons. The Commerce Department's investigation concluded that imports of both metals pose a national security risk and subsequently the administration applied tariffs and quotas to both products. In a new investigation, the Commerce Department has started looking into whether imports of cars or automobile parts could impair U.S. national security.
The question is whether the threats to national security are genuine, or a means of protecting domestic industries under the guise of national security.

The Facts:

  • Recent presidential actions have buttressed a role for national security in trade policy. On February 16th, 2018 the Department of Commerce concluded that under section 232 of the Trade Expansion Act of 1962 (19 U.S.C. 1862(b)(1)(A)) that steel and aluminum imports constituted a national security threat, and on March 8th, the President imposed trade sanctions, with temporary exemptions for Canada, Mexico and the European Union. Those exemptions lapsed on June 1st, making effective tariffs of 25 percent on steel imports and 10 percent on aluminum imports from the European Union, Canada and Mexico. In addition, on May 23rd, the administration initiated a new investigation  to determine whether imports of automobiles, including SUVs, vans and light trucks, and automotive parts into the United States threaten to impair the national security as defined in Section 232 of the Trade Expansion Act of 1962. Public hearings on the issue are scheduled to take place on July 19 and 20, 2018, and the Commerce Department's findings and recommendations are due by mid-February, 2019, but could happen before then.
  • Investigations under section 232 regarding the threat that imports pose to national security have been very rare and in the majority of cases resulted in findings of no threat. Prior to the Trump administration, there had only been 26 Section 232 investigations since the law was established 56 years ago. A finding that there are negative effects on national security would allow the U.S. government to impose trade barriers. Previously, only two investigations concluded there was a threat to national security, both involving petroleum. In the first case, the government banned imports from Libya. In the second case, petroleum imports were found to impair national security, but the Commerce Department’s recommendation was to use other means to reduce oil import dependence. The last investigation, on iron ore and steel, was completed in 2001. The U.S. Department of Commerce concluded “[T]here is no probative evidence that imports of iron ore or semi-finished steel threaten to impair U.S. national security.”
  • The criteria used in past investigations to determine whether imports represent a threat to national security have been fairly narrow. For instance, in the 2001 investigation, the negative impact of imports on national security were identified as arising from either (i) excessive dependence on imports from unreliable or unsafe sources, thereby resulting in vulnerability to a supply disruption, or (ii) threats to the viability of U.S. industries and resources needed to produce domestically goods and services necessary to ensure U.S. national security.
  • In contrast, the recent analyses have used an expansive set of criteria. Commerce Secretary Wilbur Ross recently expressed the view that "national security is broadly defined to include the economy, to include the impact on employment, to include a very big variety of things… Economic security is military security. And without economic security, you can't have military security." Indeed, the report on steel made reference to the impact of imports on the economy concluding that: "… the present quantities and circumstance of steel imports are “weakening our internal economy” and threaten to impair the national security as defined in Section 232." (p.5) The report does not indicate imminent reduction of capacity so that national security needs cannot be satisfied. The aluminum report makes a somewhat stronger case for a national security threat: "The U.S. currently has five smelters remaining, only two smelters that are operating at full capacity. Only one of these five smelters produces high-purity aluminum required for critical infrastructure and defense aerospace applications, including types of high performance armor plate and aircraft-grade aluminum products used in upgrading F-18, F-35, and C-17 aircraft. Should this one U.S. smelter close, the U.S. would be left without an adequate domestic supplier for key national security needs. The only other high-volume producers of high-purity aluminum are located in the UAE and China (internal use only)." (p.3). Nonetheless, the Secretary of Defense, while concurring with Commerce’s assessment that unfair competition eroding our industrial base posed a threat to national security, noted: “[T]he U.S. military requirements for steel and aluminum each only represent about three percent of U.S. production. Therefore, DoD does not believe that the findings in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements.”
  • The top source for imports of steel and aluminum is Canada. Other traditional allies of the United States are also primary sources of steel imports. In 2017, the top source of U.S. imports of steel was Canada with 17 percent of U.S. imports  (by tons). The next largest sources of U.S. steel imports were Brazil (14 percent of US production), South Korea (10 percent) and Mexico (9 percent). Steel imports from China ranked 10th and represented 2 percent of U.S. imports (see here). It would be difficult to argue that imports of steel from Canada could become unavailable to satisfy national security needs. Canada was also the largest source of United States aluminum imports in 2017, accounting for 36 percent of total imports by value. Imports from Canada were over twice as much as Russia, and nearly five times as much as China. It is difficult to see how U.S. security is threatened by reliance on aluminum from Canada. Moreover, by statute, Canada is considered part of the Nation’s national defense industrial base.
  • The link between car imports and national defense requirements is less direct than the case for steel and aluminum. When it initiated the investigation into cars, the Commerce Department emphasized the contribution of the car industry to innovation: "Automobile manufacturing has long been a significant source of American technological innovation. This investigation will consider whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States, including by potentially reducing research, development, and jobs for skilled workers in connected vehicle systems, autonomous vehicles, fuel cells, electric motors and storage, advanced manufacturing processes, and other cutting-edge technologies." The top sources of automobile imports into the U.S. are American allies – Canada, Mexico, Japan, Germany, Korea, and the United Kingdom.
  • As a result of steel and aluminum tariffs, U.S. trade partners have already responded or are in the process of responding with their own retaliatory tariffs. The European Union, Canada and other countries have filed complaints on the U.S. steel and aluminum tariffs with the World Trade Organization and Mexico has expressed the intention of following suit. On June 5, 2018, Mexico imposed tariffs on about $3 billion worth of U.S. products including steel, cheese, apples, cranberries and bourbon. Canada and the European Union have also drawn up a list of retaliatory tariffs to be imposed in the coming months.
  • Imposition of these tariffs under the guise of national defense could have large negative economic effects even in the absence of retaliation. For instance, one estimate indicates a 40,000-job loss in the automobile industry (a heavy steel user) from the steel tariffs alone. With the expiration of exemptions on the EU, Canada and Mexico, some $50 billion of steel and aluminum imports are now covered by tariffs. One can expect the employment impact to be even more substantial. Adding in retaliation (but incorporating the now defunct exemption for Canada and Mexico), the consulting firm Trade Partnership estimated a net loss to the economy of 470,000 jobs. The Peterson Institute for International Economics estimates a 25 percent tariff on imported automobiles (currently at 2.5 percent for non-Nafta members, and 25 percent for trucks) would reduce employment by 195,000 over the course of three years. With retaliation, that number would rise to 624,000.

What this Means:

The primary determination made by the Department of Commerce under the national security statute has historically been whether the U.S. has sufficient productive capacity for the relevant products. It is unlikely that import competition in the steel, aluminum and automobile industries poses a real threat to national security, given the relatively small demand by the military, and the presence of reliable alternative non-domestic sources in allied countries. The fact that the determinations for steel and aluminum have been in the affirmative demonstrates the Commerce Department is using a conveniently expansive definition of national security. The imposition of tariffs is likely to raise prices for downstream consumers in the defense industry, as well as the overall economy. The imposition of protectionist measures is also likely to damage our allies’ economies, and invite retaliation by our trading partners, that in turn will likely lead to a process of escalating protection.

Topics:

International Trade
Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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