On March 1st, the automotive sector that consumes steel and aluminum was confronted with a potentially large tariff rate increase. The section 232 measures are intended to raise the prices of all steel products – whether imported or domestic – and thus will have an impact on any major purchaser of steel, which includes most automotive companies. Further, many of the parts and components that the OEMs purchase are made from domestic- and foreign-sourced steel and aluminum parts, meaning that the announcement will have a ripple effect on the entire automotive sector.
This article provides a summary of some of the key issues surrounding this announcement. Full details are found in Foley’s full client alert regarding the impact of these new tariffs on the automotive sector.
The Section 232 Announcement
- What was announced?
The Department of Commerce presented the President with three suggested options on steel:
- An across-the-board tariff of 24% on imports from all countries.
- Tariffs of at least 53% on imports from 12 countries: Brazil, China, Costa Rica, Egypt, India, Malaysia, South Korea, Russia, South Africa, Thailand, Turkey and Vietnam. These countries also would have a quota that would prevent them from exporting more steel to the United States than they did last year.
- A quota that would cut world-wide imports of steel by 37% from all countries.
The President chose the first option – a tariff on all steel products – rounding it up for good measure (reportedly because 25 percent “sounds better”). This remedy mirrored the action taken in the section 232 aluminum review, which had similar options, including a proposed tariff of 7.7 percent (also rounded up to ten percent).
The Reaction to the Section 232 Announcement
- Where will the impact be most felt in the automotive sector?
Because steel and aluminum are both used in great quantities in the automotive sector, the impact will be felt very broadly. Companies that purchase a large amount of steel and aluminum obviously will see a greater impact, as will companies that import a greater share of their steel and aluminum inputs. The greatest impact will be felt by companies that use specialty forms of steel and aluminum that may not be available at all from domestic producers or only in limited quantities. It is uncertain at this point whether there will be an exemptions process to take short supply situations into account.
The impact of the measures also will likely impact small consumers of steel and aluminum harder than large ones. Companies that purchase large amounts of steel and aluminum, such as the OEMs and large Tier One companies, still maintain leverage through their ability to swing large purchases among different suppliers. Smaller companies that are more in a position of just accepting the market price do not have the same types of options.
Implementation of the Section 232 Announcement
- How will the Administration implement section 232 tariffs?
It is not difficult for the U.S. Government to change tariff rates. Once the relevant Harmonized Tariff Schedule codes are identified, the Department of Commerce can instruct U.S. Customs & Border Protection as to what the new tariff rates are. Customs, in turn, charges the importers of record the new, higher duties.
- Will there be exemptions?
In its initial section 232 report, the Department of Commerce recommended that the President include a process to allow U.S. companies to grant requests to exclude specific products if there are no U.S. producers of that product, if those producers cannot produce adequate quantities, or for “other” national security considerations. Presumably, the President will implement this process, as otherwise the section 232 relief would have a major disruptive impact on downstream producers, who might need to shutter factories or cut employment to pay the large tariff increase.
In 2002 and 2003, when the George W. Bush administration imposed safeguard actions on broad steel imports, there were hundreds of exemptions issued within six months of the measures being imposed.
Potential Roadblocks to Implementation of the Section 232 Announcement
- Can Congress block the action?
Yes – but only if there are sufficient votes to overcome a likely Presidential veto.
- Will there be a court challenge?
Highly likely. At this point it is unclear how such challenges will be undertaken or how successful efforts to establish judicial jurisdiction will be, because of the rareness of the remedy and the lack of meaningful precedent.
- Will there be a WTO challenge?
Yes. The steel safeguard remedy was struck down by the WTO, resulting in the early termination of that relief under the George W. Bush administration. This will be viewed as a model as to how to respond.
The Repercussions of the Section 232 Announcement
- How long will section 232 tariffs last?
The President has discretion and can decide how long the tariffs will last. President Trump himself has vowed that relief will be put in place “for a long period of time.”
President Trump’s Section 232 Aluminum Announcement
The President also announced that he would impose a similar remedy for the aluminum industry. Here, the Department of Commerce had issued three recommendations: (1) a 7.7% tariff on all aluminum exports from all countries; (2) a 23.6% tariff on all products from China, Hong Kong, Russia, Venezuela and Vietnam, with other countries facing a quota set at 100% of 2017 exports to the United States; and (3) a quota on imports from all countries to a maximum of 86.7% of their 2017 exports to the United States. Once again, the President chose the global tariff option, rounding it up to ten percent.
Coping with the Section 232 Tariffs
Due to the global nature of the section 232 tariffs, there will be widespread ramifications from the section 232 announcements. Even companies that purchase only domestically sourced steel and aluminum will see substantial price increases. Spot shortages are likely to arise, with automotive companies that rely on specialized forms of steel and aluminum that primarily are produced abroad seeking the greatest impact.
Some of the issues that are likely to arise – and some practical advice for coping with them – are as follows:
- What can automotive-sector companies that consume steel and aluminum do to mitigate the damage to their businesses?
Given the likelihood of a broad scope for the tariffs, the essential issue will be how any exemptions process is implemented. Assuming that the section 232 recommendation for a robust exemptions process is adopted, a lengthy queue of applications will quickly arise, much as occurred with the earlier global steel safeguards action. Success will depend on how quickly the application is filed, the strength of the arguments establishing that the steel is in short supply from U.S. producers, and especially the quality of evidence establishing the difficulties in domestic procurement.
Companies that import steel and aluminum also need to evaluate their supply chain carefully, to determine where they act as the importer of record. Under the U.S. Customs system, it is the importer of record who is responsible for clearing Customs and paying any duties. The importer of record bears all responsibilities for paying any duties, even if they are unanticipated. Contractual arrangements to pay duties, including what might seem to be routine designations of the importer of record, can lead to unanticipated costs. Companies that import steel and aluminum need to confirm the responsibility for paying duties and need to take steps to allocate the risk of the new duties for new shipments.
- What will be the supply chain issues flowing from the steel and aluminum section 232 tariffs?
Although the section 232 tariffs are aimed at imported steel, in the wake of the announcement prices of all forms of steel – including domestically produced steel sold in the sport market – rose sharply. Thus, automotive companies that consume steel – even if entirely procured from domestic sources – likely will see an impact from these new tariffs. Issues that may arise include:
- A review and exercise of price adjustment clauses in supply contracts for raw material increases;
- Unilateral demands for price increases or for price surcharges;
- Demands that consumers take over responsibility for duties, including through shifting responsibility for which company acts as the importer of record;
- Product shortages and allocation issues;
- Claims of commercial impracticability under U.C.C. § 2-615;
- Claims of force majeure and the exercise of force majeure provisions in contracts (particularly if the force majeure clause contains broad catchall language such as “or any other events or circumstances that may affect the Company’s ability to deliver products”);
- Refusals to ship product that could trigger actions for duties; and
- Court challenges and international arbitration actions in the case of international supply contracts.
Companies should update their procurement and sales teams regarding these developments and their potential impact across the manufacturing supply chain. Companies may want to proactively conduct a review and risk assessment of key supply chain contracts requiring steel and aluminum input.