Sunday, April 01, 2018

Steel Tariffs for National Security - Really?

Steel tariffs on the grounds of national security? The argument simply does not stand basic scrutiny.

There can be valid concerns as set out in Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. §1862) which give broad and open authority to the executive branch to invoke national security interests as grounds for trade restrictions or tariffs. Likewise Article XXI of the General Agreement on Tariffs and Trade (GATT) provides formal rules for any nation to do likewise if deemed legitimate for national security interests.

Yes, steel is a critical component in the machinery and weapons of national defense, but these tariffs are not about national security, and oddly the enacted sanctions target our allies and friends disproportionately verses China or other potential adversaries.  Objectively considered, the timing and target industry were much more likely of a domestic political nature, i.e. geared towards an electorate of workers and families within the steel and coal industries (coal is still supplies near 1/5th of the energy used in steel production and is used in carbonizing steel). Considering that these tariffs were announced during the run up to a high visibility US congressional special election in the steel and coal producing state of Pennsylvania and given that this off year election was poised to be an embarrassment to the president and the GOP – (and ultimately was with the race going to the Dem by a slim 0.2 percent margin in a district that Mr. Trump carried by nearly twenty percentage points) -  it is more likely this move was pure domestic politics than an issue of true national security.

Why do steel imports not pose a national security risk?  Because the steel that the US military and defense establishment use constitute only a very small fraction of total domestic steel consumption and there is more than ample domestic capacity to meet Department of Defense (DoD) requirements. Following the September 11th attacks on the US, the Commerce Department evaluated whether iron ore and semi-finished steel imports were a threat to national security. For its part in providing information for the commerce departments study, the DoD estimated that it needed about 325,000 net tons of finished steel products per year—less than 0.3 percent of the domestic industry’s annual output. With the post 911 increases in US military size and procurements during protracted operations in the Middle East and stepped up operations worldwide, that number has increased, but only about 3 percent of steel shipped domestically in 2016 was used for national defense and homeland security. 

Our options, in the event that the U.S. enters into a major international conflict requiring a larger share of domestic steel or secure supplies of non-US steel to supply our defense and security requirements are: (1) increase domestic steel production, and /or reallocate a greater percentage of the domestic steel for the Pentagon. The most recent domestic steel production numbers from late March of this year estimate utilized domestic US steel manufacturing capacity at 77.4% ( ), showing more than ample room to increase production to meet US defense needs even if those needs rose multi-fold. (2) Increase imports from allied countries to meet our military steel needs. (1)   There exists no reasonable expectation that Canada (America’s largest supplier of imported steel and a NATO ally) or Europe intend to thwart our supply requirements.   Considering that out greatest geopolitical rival China ranks 10th on the list of leading sources of imported steel and is only 3 percent of US imported steel and Russia is our 11th ranked source at 2.3 percent of US steel, the idea of US national security prerogatives becomes even more shaky.

The counter argument is that while US imports of Chinese and Russian steel are small, China accounts for nearly half of world’s crude steel production. This is a legitimate concern but must be considered in context of China also representing 45% of the world’s steel use in finished products, and therefore the vast majority of their steel production is consumed in domestic Chinese manufacturing.  

None of the top 9 suppliers of US steel imports are adversaries to the US and several are close allies such as South Korea, Japan, and our NATO ally and number one supplier Canada.  In addition to the US maintaining close trading and security alliances with its largest imported steel suppliers, the United States has defense procurement memorandum of understanding with the majority of our top suppliers. (2)

If you are looking for a real national security risks to the US within resource production and supply, I suggest rare earth elements. It is difficult to argue that Chinese or Russian steel - or aluminum production for that matter (China and an all combined east and central Europe produced approx. 12.5% each of world aluminum as of February 2018 ) - is a more pressing issue than China’s near monopoly in rare earth minerals (approximately 90% of the world production). Rare earth elements are not only critical for our high-tech economy and consumer electronics, but also will be in increasing demand as critical elements in our efforts to curb CO2 emissions to address the real threat of global climate change. Where production and control of the rare earth elements market becomes a more immediate concern relative to national security, aside from the near monopoly our closest near peer rival has achieved, is the direct criticality to defense. These elementd are vital in lasers, radar, sonar, night vision gear, missile guidance, smart bombs, jet engines and alloys on armored vehicles.  Addressing this REAL national security supply chain issue requires the extractable deposits in the US, Canada, Europe and within other western aligned and US friendly nations be developed. The United States, and to a greater extent Canada and Iceland, have known rare earth element reserves at advanced stages of development. However, extraction by the same techniques employed in China  - which produce acid drainage from open pits mines, heavy metals and radionucleotides laden air borne dust from milling, contaminated waste water and  hazardous solid waste from concentration operations and chemical waste from final separation processes (3) - is not environmentally responsible or acceptable. New processes or methods of mitigating the environmental impact must be developed and implemented, and the research and development dollars to spur innovation and new extraction technologies must be funded as a real US national security priority.

Likewise, the US should be concerned with evolving control in cobalt and lithium production and markets. The US comes in somewhere around a distant eight in global lithium production, and China or Chinese based corporations seem intent on locking down a sizable share of global lithium and cobalt resources, both elements with growing demand for battery production. If lithium-based batteries continue to be most promising for a growing electric car market, home power storage and to power an insatiable market for mobile electronic devices, lithium may be the new oil.  Move over OPEC, hello OLEC – Organization for Lithium Exporting Countries, a far greater emerging threat to US security than steel is or will ever become.

It is often uncompetitive industries that argue the loudest for protections based on national security consideration. Certainly, manufacturing of nuclear weapons or printing domestic currency or advanced new technology with duel use implications should not be outsourced. However, the national security argument can be applied to few low-end goods, services, or technologies. Even when there is some basis for a national security argument, if the nation does not have an absolute or comparative advantage in production, it is to the nation’s overall advantage to engage in trade to procure much of these good or services.

Rather than lash out with unwarranted tariffs that risk destroying the international order under the guise of national security imperatives, how about we leverage the institutions of the global order we constructed (via GATT, WTO G20, etc.) to hold accountable actual trade practices counter to the laws and norms of a free and open market when they do exist.  Where our disadvantage is shown through objective investigation to originate from within rather than secondary to unfair practices, we must remedy the situation through coherent governing, forward looking industrial and education policy, and through new market formation within those areas where we have a true competitive advantage or can create a comparative advantage within the framework and norms of the liberal international order of free and open markets.


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