Overview
On October 30, 2021, the United States and the European Union (“EU”) reached an agreement to replace the tariffs imposed under Section 232 of the Trade Expansion Act of 1962 (“Section 232”) on EU imports of steel and aluminum with a tariff-rate quota (“TRQ”) that is scheduled to take effect on January 1, 2022. The deal allows a certain volume of EU steel and aluminum to enter the United States each year without the application of Section 232 tariffs. Imports over that volume will be subject to Section 232 tariffs, which are currently 25 percent for steel imports, and 10 percent for aluminum imports. According to details released by the Department of Commerce (“Commerce”), the TRQ is based on historical import values and will be allocated by product and by EU Member State. For steel, the TRQ will be broken down into 54 product categories, with the total annual amount set at 3.3 million metric tons per year, starting in 2022. The annual amount for the aluminum TRQ will be 18,000 metric tons for unwrought aluminum and 366,000 metric tons for semi-finished (wrought) aluminum. The quota levels for unwrought aluminum will be subdivided into two product categories, and the quota levels for semi-finished aluminum will be subdivided into fourteen product categories. The United States will conduct annual reviews to adjust the steel TRQ amount based on US demand using data from the World Steel Association, but at this point there is no similar provision to adjust the levels of the aluminum TRQ.
The steel TRQ will be administered on a quarterly basis, and if there is unused TRQ volume for any quarter, the United States will allow up to four percent of that remaining volume to be rolled over to a later quarter. The agreement also allows the EU to request consultations regarding any substantial under-use of the TRQ. In order to determine the country of origin of these imports, the steel TRQ imposes a “melt-and-pour” requirement, meaning that steel products must be wholly produced in the EU in order to qualify for this quota. US officials have said that this country of origin rule is to prevent the transshipment or utilization of Chinese steel. As a result, even if a product is considered to be produced in an EU Member State under the US Custom and Border Protection’s normal country-of-origin analysis, it may not qualify as an EU-origin product under the TRQ. In contrast to the steel TRQ, the aluminum TRQ will be administered on a semi-annual basis, with no more than 60 percent of the volume permitted to enter during the first half of the year. Unlike the steel TRQ, however, there is no ability to roll-over any unutilized aluminum quota. Although there appears to be no similar origin requirement like the “melt and pour” limitation with regard to steel, Commerce’s guidance states that an importer must provide a “Certificate of Analysis.” When the Section 232 duties on steel and aluminum products were first imposed in 2018, a number of countries, specifically Korea, Argentina, and Brazil, were able to avoid the imposition of tariffs by agreeing instead to an annual quota. But the TRQ in the US-EU agreement differs from these earlier quota arrangements in a number of important respects. First, unlike those prior quota arrangements, imports can continue to come in from the EU even after the quota ceiling is reached; any amounts in excess of the stated quota are simply subject to Section 232 duties. Second, the quota systems for Korea, Argentina, and Brazil counted material that received an exclusion against the quota amount, but allowed that material to be brought in after the quota ceiling was reached. This led to some challenges for importers, as those companies who received exclusions often had to wait until the quota was exhausted to import the excluded product so as not to deplete the quota. By contrast, under the agreement with the EU, imports of aluminum and steel products that receive a Section 232 exclusion will not count against the TRQ. In addition, steel (but not aluminum) exclusions that were granted and utilized during the U.S. fiscal year 2021 (October 1, 2020 to September 30, 2021) will be automatically extended until December 31, 2023. However, similar to the prior quotas, the US intends to count imports against the TRQ on a first-come, first-served basis for each product category from each EU Member State. In exchange for this TRQ commitment, the EU has agreed to suspend all of the retaliatory tariffs it had imposed in response to the Section 232 action. These retaliatory tariffs covered a number of high-profile exports from the United States, including motorcycles and bourbon. In addition, both parties will suspend ongoing WTO challenges that relate to the Section 232 tariffs. At the same time, the EU announced that it continues to consider the Section 232 duties on steel and aluminum to be incompatible with WTO rules, and that it will keep the suspension of its retaliatory tariffs under review in order to address potential developments in case the situation for EU exports subject to the Section 232 duties deteriorates. Finally, the US and EU have also agreed to negotiate a global arrangement to address excess capacity and carbon intensity of the steel and aluminum trade by 2024. Although details have yet to be worked out, other “like-minded economies” will be invited to join, with participants agreeing to undertake the following actions:
- restrict market access for non-participants that do not meet conditions of market orientation and that contribute to non-market excess capacity, through application of appropriate measures including trade defense instruments;
- restrict market access for non-participants that do not meet standards for low-carbon intensity;
- ensure that domestic policies support the objectives of the arrangements and support lowering carbon intensity across all modes of production;
- refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity;
- consult on government investment in decarbonization; and
- screen inward investments from non-market-oriented actors in accordance with their respective domestic legal frameworks.
These measures are clearly directed at imports of Chinese steel, which is frequently criticized for its excess capacity and high-emissions production, and the White House fact sheet specifically references the Chinese steel industry as a target. Although this global arrangement is intended to be compatible with international obligations and multilateral rules, restricting market access may be difficult under countries’ WTO obligations. It is also unclear at this point how this agreement will interact with the EU’s proposed carbon border adjustment mechanism, though it is possible that the border enforcement mechanism for this agreement may ultimately be some type of CBAM. In the same vein, the US and EU agreed to intensify ongoing cooperation in areas including trade remedies and customs, and non-market excess capacity in the global steel and aluminum sectors. News of the deal has generally been received favorably by many US manufacturing companies, as manufacturers have been facing record steel and aluminum prices, which were exacerbated by the Section 232 tariffs. Businesses that were facing increased retaliatory tariffs by the EU have also been pushing for a deal. Shortly after announcing the agreement with the EU, the United States issued statements that it is “consulting closely” with both the United Kingdom as well as Japan on aluminum and steel issues, with a focus on overcapacity and the climate impacts of the sectors. This may indicate that the US is trying to come to similar agreements with these two countries, and involve them in the proposed global arrangement.
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