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USMCA Aims To Boost Domestic Steel, But It’s No Guarantee

Paul Sancya
Forgings shaped from raw steel move down the line at a Michigan factory, eventually becoming gears and other auto parts.

The steel industry has largely applauded a forthcoming trade pact between the U.S., Mexico, and Canada, but it remains to be seen how the deal will shake out for domestic steelmakers.

President Donald Trump is expected to sign USMCA, which recently passed the House and Senate, in the coming days.

Under the deal, automobile manufacturers would be required to meet several criteria to avoid import tariffs. In addition to creating new labor protections for auto workers, the agreement requires at least 70 percent of a vehicle’s steel and aluminum to be purchased from North American producers to qualify for the tariff exemption. The steel would also have to be melted and poured, and not just finished, within the trade zone – a crucial provision for U.S. steelmakers because some countries have circumvented Trump’s 2018 steel tariffs by shipping to Mexico, which has been exempt from the 25-percent duty since last year. Mexican steelmakers then make only slight alterations before exporting to the U.S.

In a concession to Mexico, the U.S. agreed to delay enforcement of the melted-and-poured requirement until seven years after USMCA is finalized.

But industry groups have already hailed USMCA's automotive provisions.

American Iron and Steel Institute President and CEO Thomas Gibson called the deal’s passage in the U.S. Senate last week “great news for steelmakers, our workers, and our customers."

Philip Bell, president of the Steel Manufacturers Association, also cheered the agreement for “maintaining free trade between the three countries” while ensuring “that more steel is made within the region.”

But analyst Monica Bonar, who leads the U.S. metals and mining division at the credit ratings agency Fitch Ratings, offered a more guarded assessment.

She acknowledged that one benefit of the deal is that it promises “a return to certainty on trade with Canada and Mexico." Trump undermined that certainty earlier in his presidency by threatening to withdraw from the existing North American Free Trade Agreement, a 1990s-era trade deal which eliminated most tariffs between the three member countries.

Still, Bonar said, it remains unclear how USMCA will impact U.S. steel producers. The industry, she noted, continues to contend with a global steel glut and a slump in U.S. manufacturing.

Moreover, compliance costs associated with USMCA could deter automakers from switching to North American suppliers for certain vehicle parts, Bonar said.

“It’s hard to see that protectionism really is a long-term benefit to any industry really,” she said. “It’s just hard to count on, and I don’t think producers generally do count on it. They do strive to be globally competitive.”

With oversupply issues and weak demand in the manufacturing sector keeping steel prices low, Bonar continued, USMCA likely has not been “first and foremost” in the minds of domestic producers.

Foreign government steel subsidies have helped to drive overcapacity in the market and have led some suppliers to “dump” their product in the U.S. by slashing prices on imports. Trump’s tariffs and the resulting trade war, meanwhile, have been a drag on manufacturing.

United Steelworkers Legislative Director Roy Houseman agreed that “global overcapacity in steel is a significant hurdle facing U.S. workers, and it is one of the key problems we must address in fixing America’s broken trade system.”

Still, the steelworkers union was one of many labor groups to support USMCA.  In a statement, Houseman said, “The U.S. cannot abandon efforts to protect domestic manufacturing” in the absence of “a multilateral effort to address excess capacity.”

Two Pittsburgh-based steel manufacturers, Allegheny Technologies Incorporated and U.S. Steel, declined to comment on how USMCA could affect them.

But another global steel producer, AK Steel, predicted USMCA would incentivize automakers and auto parts manufacturers “to increase … their use of North American steel,” and added that the company is “very supportive” of the deal. AK Steel has headquarters in Ohio and operates plants in North America, including one in Butler, Pa.

Bonar noted that USMCA could help by serving as a template for future negotiations between the U.S. and other governments.

In the meantime, however, Bonar said it is difficult to predict how much North American automakers will adjust their complex supply chains to qualify for the USMCA tariff exemption. She said such disruption would cause short-term inefficiency and would also increase ongoing administrative costs associated with enforcement of USMCA.

“The onus to really monitor and ensure that you aren’t sort of circumventing tariffs on steel … and the ability to kind of look at the volumes that are coming in here and there really bespeaks compliance and could actually result in higher steel costs relative to imports,” Bonar said. “So it’s quite a lot of moving parts.”

Overall, though, the American Steel and Iron Institute said it expects USMCA to “strengthen manufacturing supply chains with [U.S.] automotive, auto parts, pipe and tube and [other manufacturers] as it enhances the rules of origin for steel-intensive goods, which incentivizes the use of North American steel in these industries.”

The Congressional Budget Office predicted that, while automakers would replace some imports with products made closer to home, they would also continue to buy vehicles and parts from sources outside North America. The office estimated that duties on those goods would cost automakers nearly $3 billion more in tariffs over the next decade.

Bonar said car manufacturers could either pass those costs on to consumers or “sort of sharpen their pencils and work with their vendors to get them to take some of the hit." Regardless, she added, “generally when the automotive industry is struggling, steel takes some of the pain.”

*This story was updated at 11:02 a.m. on Tuesday, Jan. 24, 2020, to reflect that AK Steel operates plants in North America only. A previous version incorrectly described the company's European locations as plants.