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reflections

Apr 21, 2017 | 00:45 GMT

A National Security Argument on Trade

A decision to explore the national security implications of steel imports to the United States could signal a tactic being considered by the U.S. presidential administration to justify tariffs under WTO rules.
(KEVIN FRAYER/Getty Images)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

This week, U.S. President Donald Trump announced two moves he hopes will boost the country's manufacturing sector. On Tuesday, Trump signed an executive order instructing the government's executive branch to increase the amount of U.S.-made goods and services it purchases. He followed Thursday by telling the Department of Commerce to open an investigation into whether importing steel harms the national security interests of the United States by sidelining its industrial capacity to meet domestic demand.

Invoking national security as a reason to restrict imports presents a slippery slope for trade. Should the Trump administration's investigation find that steel imports harm U.S. national security, it would not only empower the president to impose unlimited tariffs on imports of those products, but it also would pave the way for similar investigations in other economic sectors. Either way, the strategy would in all likelihood face a challenge in the World Trade Organization (WTO).

This would not be the first time the United States has undertaken that kind of investigation. Since it became law, there have been 26 such examinations carried out under Section 232 of the Trade Expansion Act of 1962, the primary tool for authorizing probes into whether reliance on imports of raw or semi-processed commodities harms national security. In only a handful of those cases — all related to petroleum imports — has that determination been made. Even when a national security threat was not found, some of those investigations resulted in presidential recommendations that bilateral negotiations or other measures be pursued.

Even when it was determined that oil imports could threaten national security, in only two cases did the United States pursue penalties. In 1979, the United States banned oil imports from Iran, followed by a similar ban of Libyan oil imports in 1982. But those embargos were not motivated by protectionism. The United States simply has not often used the Trade Expansion Act as a protectionist enforcement mechanism. In fact, since the WTO came into force in 1995, the United States has conducted only two Section 232 investigations. The first came in 1999, and despite resulting in a finding that certain petroleum imports threatened national security, no action was taken. The second occurred in 2001, when the United States investigated whether imports of iron ore and semi-finished steel threatened national security, basically the same ground that the Trump-ordered probe will cover again. The investigators 16 years ago concluded that although the commodities are important to national security, there was no evidence that their importation presented a threat.

With the precedent in mind, if the United States reaches a different conclusion this time around, it will have to justify it by outlining what has changed in the intervening years. The previous investigation delineated a number of criteria for determining what constitutes a threat to national security. For example, it noted that domestic steel demand for critical industries could be met by domestic production even though the United States imported a significant amount of steel. Investigators also argued that the United States does not need to be able to fulfill 100 percent of its steel demand domestically to meet the minimum requirements to preserve national security.

In 2000, the United States produced about 77 percent of its steel (in 2015, that figure was roughly 73 percent). Then, as now, the United States possessed the domestic capacity to meet all of its steel demand. The 2001 investigation also noted that the majority of U.S. steel imports come from "safe" U.S. allies, a fact that remains largely true today. In the first 11 months of 2016, the top five sources for U.S. steel imports were Canada, Brazil, South Korea, Mexico and Turkey, which together accounted for nearly 60 percent of imported steel.

Based on previous practices, it seems unlikely that the Trump administration would be able to use those same standards to make a different determination. Yes, China is now the world's largest producer of steel, but it supplies a massive market with lots of buyers and sellers. For specific, narrow categories of steel products, which are often used in military applications, the argument can become much easier. But if the Trump administration changes the definition of what constitutes "national security" — a determination that is not clearly outlined by law — to include employment and domestic stability concerns, then the United States would certainly have grounds to open future investigations in other sectors under similar competitive stress.

Typically, the United States has used safeguard mechanisms — which largely have been rejected by the WTO — to protect industries under stress.

The United States last employed the measures in the steel sector between 2002 and 2003 to institute tariffs ranging from 8 to 30 percent. But those tariffs were quickly challenged in the WTO, which ruled against their use. In the meantime, a dramatic rise in domestic steel prices that followed the imposition of tariffs caused job losses in sectors dependent on steel as demand weakened. (One study found that more jobs were lost in the secondary industries than the number of total jobs in the steel sector.)

There is no doubt that a WTO challenge could be brought if new tariffs were slapped on steel imports once again. But here's where it gets tricky. The national security argument could be used within the framework of the WTO based on Article XXI of the foundational General Agreement on Tariffs and Trade (GATT), which allows for national security exemptions. The annual trade policy outline submitted by the Trump administration in March even suggested that the United States should assert its interests in dealing with the WTO and possibly ignore its rulings.

The decision to invoke national security interests in any international or domestic agreement has not been taken lightly. In the seven decades that the GATT has been in force, Article XXI has not been exercised often. And when it was, it was typically used to penalize another country, not to protect domestic industry. For example, the United States invoked Article XXI to justify its 1962 Cuban trade embargo.

Trump came to office promising an "America First" agenda that would largely focus on creating jobs and strengthening the U.S. economy. But those ambitions have been limited by both domestic and international constraints. For most observers and trade advocates over the past two decades, bolstering national security has been a reason to increase free trade and interconnected trade ties. In fact, global supply chains are now so deeply entangled that the costs of initiating a war — whether military combat or a trade battle — have increased dramatically as free trade has integrated. If Trump uses national security not as an argument for free trade but rather one against it, it would represent a fundamental shift in the U.S. view. In the past, the United States has argued that the invocation and use of the GATT's Article XXI could undermine the spirit of the agreement. By using national security as grounds for putting restrictive measures into place on trade, the United States could risk compelling other countries to follow suit, fundamentally altering the global trade regime.

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