On March 8, 2018, President Trump imposed new tariffs on steel and aluminum imports into the US.  Effective March 23, 2018, a 25% tariff will be imposed on steel articles corresponding to Harmonized Tariff Schedule (“HTS”) codes 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90.  In addition, a 10% tariff will be imposed on aluminum articles corresponding to the HTS codes for: (a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70).

Potential WTO Justifications

National Security

The new tariffs are based on Section 232 of the Trade Expansion Act of 1962, which allows the President, pursuant to a report by the Secretary of Commerce, to take action against imports that “threaten to impair the national security of the United States”.

In light of this reference to national security, the U.S. might attempt to justify the measures under Article XXI of GATT if challenged before the WTO.  Article XXI provides for a national security exception that allows members to take necessary measures “relating to fissionable materials”, “relating to traffic in arms, ammunition and implements of war”, taken “in time of war or other emergency in international relations”, or “in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security”.  Since the creation of the WTO in 1995, there has been no case law defining the boundaries of Article XXI, and none of the few cases where Article XXI was invoked prior to 1995 gave rise to a definitive decision.  This may reflect the inclination of GATT/WTO members to avoid setting precedents on this subject and leave each other with a wide margin of discretion for the definition of their respective security interests.  In this case however, the EU has publicly contested the relevance of the national security considerations invoked by the U.S., and any adjudication on this matter could have significant implications for the multilateral trading system.

Safeguards

Another possibility would be for the U.S. to invoke WTO provisions contained in the Agreement on Safeguards and Article XIX of GATT that permit “emergency action on imports” (safeguards) if imports in a member’s territory are in such increased quantities as to threaten serious injury to domestic producers.  However, if this action is taken “without prior consultation” or threatens to cause serious injury to producers of another WTO member, and the damage would be difficult to repair, the affected member could launch its own measures to prevent or remedy the injury.  Further, safeguards can only be applied for a maximum of four years – with an extension, up to a total maximum of eight years.  In principle, safeguards must be applied on all imports of that product irrespective of their source (most-favored nation principle).

In 2003, the WTO found that the Bush 2002 Steel Tariffs did not comply with the rules on safeguards, as the U.S. could not demonstrate that: (i) imports had increased, (ii) they were due to unforeseen developments, (iii) there was a causal link between the alleged imports and the serious injury claimed, and (iv) there was a reason for excluding imports from Canada, Mexico, Israel and Jordan.

Exemption for Canada and Mexico

The tariff plans have also provoked intense reactions from Canada and Mexico, leading to a temporary exemption for those countries while they renegotiate NAFTA.  While the President’s proclamation alludes to Canada and Mexico’s “shared commitment to addressing global excess capacity for producing steel, the physical proximity of our respective industrial bases […]”, it has also been made clear that the exemption serves as an incentive to agree on a new NAFTA deal.

European Union Response

In the days leading up to the official adoption, the European Union reacted strongly by denouncing the tariffs and threatening reciprocal measures.

Although the EU has not publicly set out legal grounds for potential retaliatory action, its options include:

  1. Retaliating against U.S. “safeguards”.  To access this option, the EU must first consider U.S. tariffs to constitute “safeguard” measures (see above on “Potential WTO Justifications”).  This would provide grounds for the EU to invoke Article XIX:3 of GATT (and, in tandem, Article 8 of the Safeguards Agreement), which permits (after 90 days from the commencement of a safeguard measure) an affected exporting member to “suspend […] the application of substantially equivalent concessions or other obligations under GATT to the trade of the Member applying the safeguard measure”.  In contrast with the 2003 measures on steel, however, the U.S. has not formally categorized the new tariffs as safeguards and it remains to be seen whether other members (such as the EU) can do so on their own.
  2. Pursuing WTO dispute settlement.  The EU may also initiate dispute settlement proceedings before the WTO for breaches of GATT Article II (violating agreements on concessions), among others.  This route could take anywhere from 1.5 to 2 years, and possibly more, depending on appeals and the capacity of the WTO dispute settlement body (which is presently heavily strained).  Assuming the EU prevails at the end of such a proceeding, the U.S. would be required to amend their measures to comply with the WTO ruling.  If it refuses, the EU could then retaliate by imposing its own tariffs “equivalent to the level of nullification and impairment” resulting from the U.S. tariffs.  Such retaliatory tariffs may be imposed on any product covered by the “same agreement” and “same sector” (in this case “goods” comprises a comprehensive sector).

The EU is currently developing a list of U.S. goods targeted for retaliation.  This is to prepare itself for the first option (retaliating against U.S. “safeguards”), and such a list would also be relevant for the second (pursuing WTO dispute settlement), although less time sensitive.  Although this list has not yet been made public, it apparently includes: T-shirts, jeans, motorcycles, ladders, bourbon, peanut butter, cosmetics, pleasure boats, agricultural and industrial products, and even steel.

  1. Opening safeguards proceedings on steel and aluminum imports. The U.S. tariffs may lead exports of other countries to be re-directed to other areas, including Europe (a so-called “diversion”).  This may in turn justify the opening of safeguards proceedings aimed at protecting EU producers from a strong increase of imports from other countries.

Next Steps

The EU is currently seeking a union-wide exemption from the US measures.  On March 10, 2018, Commissioner Malmström discussed this with US Trade Representative Robert Lighthizer and will reportedly continue talks with the US.

If you have any questions regarding the above, do not hesitate to email us at fclaprevote@cgsh.com, tmuelleribold@cgsh.com, or your usual firm contact.