Steel as National Security Issue? Here's the U.S. Law: QuickTake

(Bloomberg) -- U.S. President Donald Trump looks set to turn to a Cold War-era law to stem the flow of steel imports, part of a campaign pledge to save American industrial jobs. He is on the verge of deploying a weapon known as the "nuclear option" or the "big sledgehammer," a little-used part of 1962 trade legislation, to counter cheap imports that he argues put national security at risk by weakening the domestic steel industry. Such heavy tools can prompt a furious response from other countries, triggering complaints to the World Trade Organization.

1. What is this weapon?

Section 232 of the Trade Expansion Act of 1962 allows the president to adjust imports without a vote by Congress should the Department of Commerce find evidence of a national-security threat from foreign shipments. Commerce Secretary Wilbur Ross, a former steel tycoon, says such a threat exists, and Trump says he plans to levy tariffs of 25 percent on imported steel and 10 percent on imported aluminum.

2. What’s the case for steel as a national-security concern?

Advocates of a Section 232 action say that a weakened U.S. steel industry would be less ready to build tanks and other weaponry should a military crisis arise. The law doesn’t define “national security,” so the president has wide latitude to determine a threat.

3. Does the U.S. military agree?

U.S. Secretary of Defense James Mattis, in a memo to Ross, concurred that imports of steel and aluminum “based on unfair trading practices” do"impair the national security." But he added that the military’s requirements for steel and aluminum "each only represent about 3 percent of U.S. production," so those trading practices don’t have an effect on meeting "national defense requirements."

4. Is there a U.S. precedent?

Since 1962, industrial groups and government officials have occasionally cited Section 232 to question whether imports of oil or uranium -- or watches or screws -- represent a threat to national security. In all but a few instances, the reports came back saying that imports of the material had no adverse effect on national security. When they did constitute a threat, little action was taken. In the most recent case before this one, in 2001, the Commerce Department investigated iron ore and semi‐finished steel and determined that imports didn’t threaten national security.

Steel as National Security Issue? Here's the U.S. Law: QuickTake

5. What’s the problem with importing steel?

It hurts U.S. steel jobs in states that helped Trump win the presidency. The U.S. isn’t alone in wanting to protect its domestic steel markets. The global steel industry has an estimated capacity surplus of more than 700 million metric tons, with about half of that in China, which is exporting record amounts. China’s trade partners have been pushing Beijing to tackle domestic-market distortions rooted in state intervention. The EU and U.S. are the world’s largest steel importers and have been vocal campaigners for China to do more to re-balance the overall market.

6. Where do U.S. imports come from?

The global steel industry has been described as a game of whack-a-mole. If exports are blocked in one market, the action shifts elsewhere in what’s known as the ripple effect. While China is seen as the bogey-man of steel dumping, its shipments to the U.S. have fallen by 72 percent since 2014, the result of tariffs imposed under President Barack Obama. China was only the 11th-biggest exporter to the U.S. in 2016. However, in the same period, imports from Vietnam rose more than six-fold. Of the total 30 million tons the U.S. imported in 2016, almost a third came from Canada and Brazil.

7. How would other countries respond to a U.S. crackdown?

Any move by Trump is likely to prompt a rapid response from the rest of the world; the European Union, for instance, has said it will retaliate if “unjustifiably hit” by U.S. curbs. And the U.S. isn’t the only country that can cite national security as a pretext for tariffs. Article 21 of the General Agreement on Tariffs and Trade (GATT) allows members of the World Trade Organization to take "any action which it considers necessary for the protection of its essential security interests." WTO nations have generally eschewed the use of Article 21, but that could change. The use of it by one nation could ignite "tit-for-tat protectionism under the guise of ‘national security,’" the law firm White & Case LLP said in a 2016 report.

8. How would the WTO get involved?

The U.S. would notify the WTO -- the international arbiter of trade disputes -- of steel-import restrictions and could cite national security as a justification. Other countries could object, perhaps by claiming the U.S. was improperly discriminating by targeting only some steel-exporting nations. Ultimately, a WTO dispute-settlement panel would rule.

9. What could go wrong for the U.S.?

The biggest threats are increasing domestic steel prices -- which would create pressures on other areas of manufacturing in the country -- and tit-for-tat retaliation by trade partners. Because the U.S. doesn’t ship much steel abroad, it could see other exported products become targets. The U.S. wheat industry warned that a restriction on steel imports may lead other countries to use similar national-security claims to hurt American farmers.

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