Living true to the times, it is nearly impossible to find predictability in current events. That fact makes it quite challenging for businesses, and we have recent events adding to the confusion.
One notable example is that on June 1, the suspension of the 232 tariffs on steel (25%) and aluminum (10%) expire on the relevant goods from Australia, Argentina, Brazil, Canada, Mexico and the EU member countries: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom. Last reports indicate that negotiations with Australia continue, while the NAFTA renegotiations with Canada and Mexico seem mired in the automobile domestic content requirement.
India has joined China in challenging reliance on 232 by the U.S. before the World Trade Organization, but both cases are in the very early stages, so any resolution is far off. After imposition of the steel tariffs, South Korea quickly negotiated a permanent exemption by agreeing to the imposition of a quota. In exchange, as part of the renegotiation of the Korea-U.S. Free Trade Agreement, U.S. automakers obtained greater access to markets in South Korea.
We are in the midst of the changes brought by the U.S. withdrawal from the Iran nuclear deal. In addition, despite statements by various administration officials in recent days to the contrary, on May 29th the White House announced that 25% tariffs will be imposed on Chinese made goods very soon. While a specific list of goods was not published, the list published in April itemized $50 billion worth of goods that could be impacted. The White House stated: “[t]he United States will implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology.” The Administration committed to announce those changes by June 30, 2018. In addition, the release goes on to state, the U.S. continues to pursue action at the World Trade Organization regarding China’s practices regarding licensing of intellectual property. Finally, comes the 25% tariff. The stated focus of the products listed will be “industrially significant technology, including those related to the “Made in China 2025” program.” The final list of products is due to be announced by June 15, 2018. The White House announcement goes on to state a series of additional demands which very much mirror the recent ill-fated meetings in Beijing.
May 23, 2018, of course, saw the announcement by the Trump Administration of a 232 investigation into the auto industry. Much of this action is seen, at least in part, as a ploy to gain a negotiating edge with Canada and Mexico in those NAFTA renegotiations, but whether that works remains to be seen. What this new 232 action portends about continued exemption of the EU member countries from the 232 steel and aluminum case also remains to be seen. As we go to press, the Federal Register notice which outlines the relevant timeline for this new 232 investigation, has yet to be published.
Similar to the steel and aluminum cases, the context for this 232 investigation into the auto industry is also framed as an increase in the trade deficit (imports have grown from 32% of cars sold to 48% in the past 20 years) but also “whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States, including by potentially reducing research, development, and jobs for skilled workers in connected vehicle systems, autonomous vehicles, fuel cells, electronic motors and storage, advanced manufacturing processes, and other cutting-edge technologies.” While framing national security as equating to economic security as permitted by law, the justification for this investigation raises even more questions about whether such action is a proper application of 232, especially since the stated justification seems to focus on the inability of the U.S. to keep up with the competition. Traditional 232 actions have focused on defense articles, strategic resources and energy goods. While being creative is to be encouraged, the legal question is whether this is a step too far? As such, assuming the auto industry investigation (on automobiles, SUVs, vans, light trucks and part) concludes with tariffs be imposed, this context seems to present an even more compelling reason for litigation to challenge the Administration’s action in the U.S. courts.
Reliance on 232 was recently challenged regarding the steel and aluminum tariffs at the Court of International Trade by a German-owned steel exporter who sought an injunction stopping the imposition of these tariffs. Once the injunction was denied, the case was dropped, so the substantive arguments are yet to be fully vetted. See Severstal v U.S., Case No. 18-00057, Slip Op. 18-37 (April 5, 2018).
Further confounding matters is the situation with ZTE. First, the U.S. government conducted an investigation and found that ZTE repeatedly violated U.S. export sanctions on Iran and North Korea, lied about its actions even to its own counsel and internal investigators, and generally flunked the “attitude test.” The company pled to a criminal violation. The immediate fine was $892 million, with $300 million in future penalties, dependent on its compliance with the terms of the deal. A short time later, the full amount had to be paid and a 7 year denial order was issued because the company failed to meet the terms of the settlement. The intelligence community had such serious doubts about ZTE that it recommended against Americans purchasing their smartphones due to concerns about national security.
Then, in the midst of the 232 investigation into China, and the on-going North Korea situation, Mr. Trump instructed the Commerce Dept. to come up with a different solution. While it remains to be seen what will be the ultimate outcome, Mr. Trump seems to favor a larger fine so as to allow the company to continue in business. The amount of the fine being mentioned publicly is $1.3 billion, but we do not yet know if that amount is firm or whether ZTE will get credit for the amount already paid?
Then you have the on again off again meeting with North Korea. News reports indicate the meeting was cancelled due to what Mr. Trump called North Korea’s “tremendous anger and open hostility” to the U.S. which was blamed on China. Given the desire to have China’s support to sway the North Koreans and also to accomplish a major trade deal with China, one has to conclude raising the fine on ZTE to $1.3 billion is related, especially since word has now come out that the Qualcomm – NXP deal will again be approved by the Chinese government. Supposedly there are additional conditions to be imposed on ZTE, including tighter security rules, a Chinese commitment to buy more American components, and a new management team and board. Given that Chinese firms answer in the end to the government, it would not be surprising to find the intelligence community’s position does not change.
Right now the question is will he or won’t he? Will Mr. Trump meet with Mr. Kim? If so, when? If the outcome leads to substantive results, that would be wonderful. The worry has to remain what happens if the outcome is less than satisfactory? What is Plan B?
Given the current climate, for companies right now, the favored approach seems to be to stay the course and remain engaged in the political process whenever and wherever possible, but hunkering down continues to be an ever increasing challenge!
This post was updated on May 31, 2018 with the following:
Today, President Trump announced a resolution with Argentina, Brazil and Australia regarding the 232 tariffs on steel (25%) and/or aluminum (10%), but since there is no similar agreement with Canada, Mexico or the EU, the tariffs on products from those countries was reinstated. See https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-approves-section-232-tariff-modifications-2/ for the basic announcement.
The announcement about Argentina and Australia and their aluminum exports to the U.S. can be found here – https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states-4/ and makes clear a quota has been imposed. A similar announcement was published regarding steel products imported into the U.S. from Argentina and Brazil, see https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states-4/.