President Trump, from his campaign through his time in office, has been a vocal supporter of U.S. manufacturing jobs and a critic of what he characterizes as unfair trade practices from traditional U.S. trading partners. This is one reason he withdrew from the Trans-Pacific Partnership, and currently is renegotiating the North American Free Trade Agreement (“NAFTA”). As we are putting this issue of Mainbrace to bed, the administration has announced the successful completion of a new trade agreement with Mexico and Canada, which is now called the U.S.-Mexico-Canada Agreement (“USMCA”). At a later date we will provide insights into the “new” NAFTA and its potential impact on the maritime industry. Keep in mind that Congress will ultimately have to approve the USMCA before it goes into effect.
Although there are hints of some negotiations between the United States and China, we expect this is the last trade deal that President Trump will negotiate because of his increasing rhetoric and tougher stance on the imposition of billions of dollars of new tariffs that go into effect on January 1, 2019. This also explains his imposition of tariffs on thousands of products imported from China, and steel and aluminum tariffs for most countries, including the European Union, as well as his threats to impose tariffs on automobile imports. In this article, we analyze the potential impact of these tariffs on the broader maritime industry.
The president enjoys broad authority to impose tariffs on countries that he concludes are either threatening to impair U.S. national security or engaging in discriminatory practices that burden or restrict U.S. commerce, under Section 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974, respectively. And the president, through his secretary of commerce and U.S. trade representative, has used this broad grant of authority this year without any congressional restraints.
Duties on Steel and Aluminum Imports and Waiver Process
Duties on imports of foreign aluminum and steel went into effect on March 23, 2018, with a temporary exemption on certain country imports. The duties imposed are a 25-percent tariff on steel imports and a 10-percent tariff on aluminum imports. Temporary exemptions for the largest suppliers— Canada, Mexico, and the European Union—expired June 1, but permanent exemptions have been adopted for steel for Brazil and South Korea, and both steel and aluminum for Argentina and Australia. (All the exemptions except for Australia came with strict quota limitations.) At the same time, the secretary of commerce established a process by which companies can request waivers from these tariffs. In a statement issued by the Commerce Department, Secretary Ross stated that he would evaluate exclusion requests, taking into account national security considerations and whether a product is produced in the United States of a satisfactory quality or in a sufficient and reasonably available amount. In June, the Commerce Department began granting its first product exclusions. As of August 20, the Commerce Department had received more than 38,000 exclusion requests and 17,000 objections—far more than expected— however, only a fraction of these have been acted upon, thus far. On September 11, 2018, the Commerce Department published a Federal Register notice seeking to refine and streamline the exclusion process.
China Duties and Exclusion Process
With respect to China, President Trump, acting under Section 301 of the Trade Act of 1974, first imposed 25-percent tariffs on $34 billion worth of Chinese imports, on July 6, 2018. Subsequently, he imposed a second tranche of tariffs at 25 percent on $16 billion of goods, effective August 23. A third tranche of tariffs covering $200 billion in additional goods was finalized on September 17, effective as of September 24, 2018, initially in the amount of 10 percent.
Starting January 1, 2019, the level of the additional tariffs will increase to 25 percent. The president also recently threatened further tariffs on $267 billion of other Chinese goods imported into the United States.
As the additional China tariffs go into effect, many importers and associations, including the U.S. Chamber of Commerce and the National Retail Federation, are pushing the Office of the United States Trade Representative (“USTR”) to establish a meaningful company exclusion process similar to the one established at the Commerce Department. To date, importers whose products are subject to Phase 1 of the China tariffs ($34B) have the right to file a product-specific exclusion request by October 9, 2018. However, with respect to Phases 2 and 3, a similar exclusion process has not yet been announced. This lag in establishing processes for U.S. companies suffering critical and disproportionate harm from the tariffs has heightened concerns among impacted U.S. companies. Even assuming these companies want to start new manufacturing processes in the United States, there is not enough time between now and January 1, 2019, when the 25-percent tariff goes into effect to do so.
Section 301 Committee Hearings and Maritime Industry Reactions
The USTR held six days of public hearings from August 20 to 26, 2018, on the proposed imposition of the third round of China tariffs. Companies were allowed to speak for five minutes and then submit their final comments requesting generic exclusions by September 6, 2018.
From our review of the public comments posted on regulations.gov (Docket USTR-2018-0026), it is reasonable to conclude that most comments were opposed to the tariffs and those requested or submitted by the maritime industry were similar in their opposition.
Here are some salient examples of concerns expressed by the leading maritime industry groups or representatives either in public statement on their websites or on the record above. For example, the American Association of Port Authorities (“AAPA”) President and CEO Kurt Nagle stated that the “impact of expanding Section 301 tariffs on cargo and equipment moving through American ports would be significant.” (Ports Association Urges Caution On Increasing U.S. Trade Tariffs, AAPA Press Release, August 20, 2018.) The AAPA release noted that Nagle will request that the “multi-million-dollar container cranes that U.S. ports have on order and are considering purchasing from Chinese factories, in which there are no American-made alternatives, be exempt from tariffs.” Nagle’s plea for an exemption was echoed by John Rinehart, CEO and Executive Director of the Virginia Port Authority, who stated that the “imposition of the proposed additional 10% or 25% ad valorem duty will put our $700 million infrastructure project at risk for schedule and cost—putting jobs in our communities, across our commonwealth, and around our country at risk.” (Rinehart statement, August 10, 2018.) Ultimately, the cranes were part of a small list of items dropped from the final tariff list; however, the AAPA continues to sound the alarm on the negative impact that the tariffs will have on the country’s ocean-borne commerce.
The American Petroleum Institute (“API”), in its request to testify, stated that it was reviewing the impact of the China tariffs on significant numbers of oilfield equipment imported from China (e.g., transmission shafts and cranks). API concluded that the “breadth of the impact of the proposed Section 301 tariffs on our industry runs counter to the actions this Administration has taken to liberalize the development of domestic oil and natural gas resources and could restrict the capacity of the U.S. to enhance our energy security.”
The National Marine Manufacturers Association (“NMMA”), in its July 25, 2018, request to appear at the USTR hearings, stated that its testimony will focus on how the tariffs—especially those focused on the import of vessels and component parts from China, such as fiberglass—would harm the U.S. recreational boating industry and have a detrimental impact on U.S. marine businesses, workers, and consumers. As early as March 9, 2018, NMMA issued a statement condemning the president’s move to impose a 10-percent tariff on imported aluminum and a 25-percent tariff on imported steel, saying that the “president has chosen 150,000 workers in the steel and aluminum industry over 6.5 billion workers in user industries” (i.e., those that rely on the metals). (Marine Industry Condemns Aluminum and Steel Tariffs, Trade Only Today, March 9, 2018.)
Finally, in our sampling of maritime testimony in opposition to the proposed China tariffs, even the American Wind Energy Association (“AWEA”) found much with which to be concerned. AWEA’s CEO Thomas C. Kiernan wrote to USTR Ambassador Lighthizer to express his concern that the “proposed tariffs would significantly raise the costs of [certain] parts and components that are incorporated into U.S. wind turbine manufacturing and construction” causing “excessive economic harm to the wind energy industry in the U.S.” (Kiernan letter to Lighthizer, August 13, 2018.)
Summary and Conclusions
While we understand that some companies and industries support new tariffs, the majority of the maritime groups and importers of consumer products from China are concerned and opposed.
We have yet to see whether President Trump carries through on his threat to impose an additional $267B of new tariffs on China imports and when and whether the USTR will exercise its discretion to grant exclusions generically for some of these imports. We are waiting on how the secretary of commerce will exercise his authority to issue product-specific waivers to some importers of steel and aluminum. But, most of all, we are watching whether the president will enter into new trade deals with the European Union and China, which will preempt or modify the tariffs he has already imposed. As the current trade disputes escalate, the risks of more serious disruptions to global trade, and to the maritime and ports sector globally, will only increase.