The USMCA, Newly Jeopardized, Was Never a Free Trade Agreement
Prospects for congressional ratification of the US-Mexico-Canada Agreement (USMCA) have dimmed as a result of President Donald Trump’s threat on May 30 to impose steadily escalating tariffs on Mexico. Trump vowed to impose those tariffs over Mexico’s alleged failure to stem immigration into the United States. But there is little question that such a step would run counter to the USMCA, which was signed last year. The Trump administration issued the latest threat by claiming that the president could invoke national security as the basis for imposing the tariffs. Ironically, as part of the USMCA, the administration agreed to eliminate its Section 232 (“national security”) tariffs on steel and aluminum imports from Canada and Mexico. In return, Canada and Mexico promised to drop retaliatory tariffs on the same products plus US agricultural exports.
Trump’s latest action calls into question US reliability.
But assuming, optimistically, that Presidents Trump and Andrés Manuel López Obrador resolve the latest crisis and sheath the threatened tariffs, it’s worth taking a closer look at the steel and aluminum pact that paved the way for the USMCA. Murky clauses in the accord ensure that steel and aluminum prices throughout North American will remain above world levels. The pact, in short, is not a free trade agreement. It is a managed trade agreement, at the expense of metal-using industries and ultimately consumers and taxpayers across North America. US metal-using industries employ 1.8 million workers, compared to 0.2 million for steel and aluminum production combined. Consumers and taxpayers (via public infrastructure projects) are dinged over $900,000 annually for each steel (or aluminum) job preserved by the enduring protective apparatus.
Core Concessions that Propelled the USMCA Forward
Under the USMCA, the United States had agreed to drop its 25 percent tariff on steel imports and its 10 percent tariff on aluminum imports from Canada and Mexico, imposed in 2018. The tariffs covered $5.1 billion of steel imports and $6.9 billion of aluminum imports from Canada, plus $2.5 billion of steel imports and $0.2 billion of aluminum imports from Mexico (all numbers at 2017 levels). In return, Canada will drop retaliatory tariffs that covered $12.8 billion of US exports, and Mexico will drop retaliatory tariffs that covered $3.6 billion of US exports. Neither Canada nor Mexico will pursue cases in the World Trade Organization (WTO) that challenge the legitimacy of the Section 232 tariffs, and the United States will drop its WTO case that challenged Canadian and Mexican retaliatory duties. As of May 20, 2018, Section 232 tariffs on steel and aluminum imported from Canada and Mexico were removed, and so were retaliatory tariffs on US exports.
Trade Protections Are Still in Place
But in fact, protection continues. For starters, the three countries agreed to impose antidumping and countervailing duties to protect domestic firms against subsidized and dumped imports. Methods for calculating these penalty duties are generally tilted against foreign suppliers. And the North American partners will consult on measures to ban the transshipment of aluminum and steel products made elsewhere. As a result, supply chains that rely on metal imported from Asia, Europe, or South America will be truncated.
Steel and Aluminum Tariffs Are Still an Option
In addition, the United States can resurrect the 25 percent and 10 percent tariffs on steel and aluminum as the ultimate enforcement weapon if imports “surge” beyond historic volumes of trade over an undefined period. Canada and Mexico can do likewise, but that’s only theoretical symmetry. Like beauty, the definition of surge is in the eye of the beholder. If import volumes exceed an undefined “historic level,” the importing country can request consultations with the exporting country. After consultations, the importing party may impose 25 percent and 10 percent tariffs on steel and aluminum surge imports. If the importing country resurrects tariffs, the exporting country agrees to retaliate only in the affected sector (aluminum or steel).
The surge provision is designed to ensure that Canada and Mexico manage their steel and aluminum exports so that US prices remain above world levels. This is a 21st century version of “voluntary export restraints” (VERs), a favorite 20th century tool of managed trade. In the same protective spirit, but with clearer definition, US steel imports from Argentina, Brazil, and South Korea are currently subject to annual or quarterly quotas, calculated as three-year averages of prior export volumes. Steel imports from the rest of the world (Australia excepted) still pay the Section 232 tariffs.
And the USMCA Still Aims at Keeping Prices High
In the end, high prices remain the goal of this accord. After Section 232 tariffs entered into force in March 2018, US steel import volumes declined, and prices rose both for landed imports (inclusive of tariffs) and for domestic production. The gap between US steel producer prices and CIF (cost, insurance, and freight) import prices (pre-tariff prices, roughly world market prices) rose to 10 percent by the end of 2018. In a full employment economy, competing domestic firms can easily raise their prices in response to higher landed prices for imports. The US steel import volume decreased, by 11 percent, to 30.6 million metric tons in 2018, compared with 2017.
Similar trends characterize aluminum. Aluminum import volume declined by 10 percent in 2018, to 6.1 million metric tons. Prices increased as well. The gap between domestic aluminum producer prices and CIF import prices increased to 10 percent by December 2018.
Eliminating Section 232 steel and aluminum tariffs was essential to clear the way for ratification of the USMCA. The same must be said, even shouted, for Trump’s threatened tariffs as a tool to halt Central American refugees. But no one—certainly not the metal-using industries and their employees—should be fooled into thinking that free trade is on the horizon.
1. The employment numbers are annual averages of 2018 data collected from the Bureau of Labor Statistics.
2. The numbers in the joint US-Mexico statement suggest a ceiling on the expansion of bilateral steel trade: “In assessing whether there has been a surge in steel imports, the United States will consider that new investment in the United States may require an additional 225,000 metric tons of billet from Mexico; Mexico will consider that new investment in Mexico may require an additional 200,000 metric tons of cold-rolled steel from the United States.”