{"id":26682,"date":"2017-11-15T22:57:39","date_gmt":"2017-11-16T03:57:39","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/good-tariffs-make-good-neighbors\/"},"modified":"2017-11-15T23:03:55","modified_gmt":"2017-11-16T04:03:55","slug":"good-tariffs-make-good-neighbors","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/good-tariffs-make-good-neighbors\/","title":{"rendered":"Good Tariffs Make Good Neighbors?"},"content":{"rendered":"

Act 1: New Age of Protectionism<\/u><\/strong><\/p>\n

In April 2017, President Donald Trump issued a memorandum prioritizing federal trade actions to protect the domestic steel industry.\u00a0 While isolationism per se<\/em> is not a novel concept, the unique feature of the April memorandum was the tool with which President Trump pursued this policy.\u00a0 The Presidential Memorandum initiated an investigation under the Cold War era Trade Expansion Act of 1962 via Section 232 [1].\u00a0 Why does this matter?\u00a0 First, because the law gives the president unilateral power to affect trade, without Congressional approval [2].\u00a0 Second, because the law has only been implemented in 26 reviews since inception, only eight of which found a significant threat to national security.\u00a0 The argument for its use today is that America\u2019s ability to independently produce steel is a prerequisite for national defense [2].<\/p>\n

Act 2: Don\u2019t Worry, Be Happy?<\/u><\/strong><\/p>\n

On May 24, 2017, more than 35 panelists arrived at the US Department of Commerce Auditorium in Washington DC to participate in a public hearing for the investigation.\u00a0 The speakers represented the spectrum of stakeholders, including CEOs of steel mills, the International President of the United Steelworkers Union, largely in support of stricter trade regulations.\u00a0 The CEO of ArcelorMittal USA and the CEO of ArcelorMittal Tubular Products North America were also in attendance [3].<\/p>\n

ArcelorMittal is one of the world\u2019s largest metals and mining corporations.\u00a0 The company operates steel production facilities, iron ore and coal mines in 18 countries and has capacity to produce 113 million tonnes of crude steel [4]. As the largest steel producer in North America and Europe, ArcelorMittal has publicly applauded anti-dumping protections [5].<\/p>\n

Since publication of the Memorandum, the company has continued to closely monitor trade cases against countries including China, Russia, Ukraine and Brazil.\u00a0 Given the environment of uncertainty around the state and scope of future regulations, ArcelorMittal\u2019s direct response to the investigation has been limited to petitioning in favor of trade restrictions.\u00a0 In the medium term, they have also continued to update and modernize their facilities.\u00a0 Most notably, the company plans to invest approximately $200 million in structural changes in their Indiana facility to optimize its US footprint and reduce costs [6].\u00a0 These updates will position the company well to take advantage of future whitespace in domestic steel demand.<\/p>\n

Act 3: Measured Optimism<\/u><\/strong><\/p>\n

It\u2019s easy to see why ArcelorMittal would be bullish on protectionism.\u00a0 Large quantities of foreign, low-cost steel lower the overall domestic market price of steel, making it more difficult for higher cost producers such as ArcelorMittal to compete [5].\u00a0 ArcelorMittal\u2019s average steel selling prices have increased by ~5% between Q1 and Q2 2017 alone [6].\u00a0 However, ArcelorMittal should proceed cautiously, being thoughtful of the potential secondary and tertiary consequences of broad regulatory actions.<\/p>\n

First, the definition of \u201cMade in America\u201d is yet unclear.\u00a0 Is the critical factor where manufacturing is domiciled?\u00a0 What about raw materials source?\u00a0 While ArcelorMittal owns and operates mines in the US, the company\u2019s overall self-sufficiency rates are only 55% and 15% for iron ore and coal, respectively [5].\u00a0 Additionally, ArcelorMittal\u2019s Canadian operations produce intermediate steel products that are further processed in the US [5].\u00a0 A strict definition of \u201cMade in America\u201d could preclude use of these Canadian products.<\/p>\n

The protectionist movement could also further incentivize steel-intensive manufacturers to relocate facilities offshore.\u00a0 Imports of steel-containing goods increased by approximately 6 million tonnes in the last decade [7].\u00a0 The American Automotive Policy Council, which represents Chrysler, Ford and GM, submitted a letter to the Department of Commerce arguing against broad applications of tariffs lest the benefit to the steel industry are offset by harm to the automotive industry [8].<\/p>\n

Finally, trade partners to the US may implement countervailing duties in retaliation to tougher trade borders in the US.\u00a0 India has already imposed anti-dumping duties on certain steel products from the United States and European Union to reduce imports and protect its domestic producers [9].<\/p>\n

Act 4: Hoping for the Best, Preparing for the Worst<\/u><\/strong><\/p>\n

The Secretary of Commerce has until Q1 2018 to present his findings to President Trump [2].\u00a0 Further ambiguity exists regarding the required lead time to implement changes<\/p>\n

Given the additional risks identified in the section above, ArcelorMittal should take proactive measures to protect itself from future shocks.\u00a0 In addition to continuing to monitor changes in Washington, ArcelorMittal should take advantage of the current increase in steel prices to lock in long term customer contracts, secure supplier contracts for domestically sourced raw materials, and invest additional capital expenditures into maintaining and potentially increasing the capacity of its facilities worldwide.\u00a0 Even if there are no adverse consequences of the investigation, by taking these actions, ArcelorMittal has the potential to emerge as a more self-sufficient steel producer.<\/p>\n

Questions<\/u><\/strong><\/p>\n

    \n
  1. Given the highly politicized nature of protectionist policies, how should ArcelorMittal balance its businesses in the US and internationally?<\/li>\n
  2. How should ArcelorMittal\u2019s relationship with its customers (such as Ford, GM and Chrysler) change in the uncertain regulatory environment?<\/li>\n<\/ol>\n

     <\/p>\n

    Word count: 795 (excluding headers)<\/p>\n

     <\/p>\n

     <\/p>\n

     <\/p>\n

    Sources:<\/u><\/strong><\/p>\n

    [1] Department of Commerce United States of America, \u201cPresidential Memorandum Prioritizes Commerce Steel Investigation,\u201d https:\/\/www.commerce.gov\/news\/press-releases\/2017\/04\/presidential-memorandum-prioritizes-commerce-steel-investigation<\/a>, accessed November 2017.<\/p>\n

    [2] Thomas Biesheuvel and Jonathan Stearns, \u201cHow Trump\u2019s \u2018Hammer\u2019 on Chinese Steel Could Hit the U.S.,\u201d Bloomberg Politics, August 2, 2017, https:\/\/www.bloomberg.com\/news\/articles\/2017-07-11\/where-trump-s-war-on-foreign-steel-might-lead-quicktake-q-a<\/a>, accessed November 2017.<\/p>\n

    [3] Remarks made at the Steel 232 Investigation Public Hearing, US Department of Commerce Auditorium, Washington D.C., May 24, 2017, From transcript provided by https:\/\/www.bis.doc.gov\/index.php\/documents\/section-232-investigations\/232-steel-public-comments\/1927-steel-232-investigation-public-hearing-transcript\/file<\/a>, accessed November 2017.<\/p>\n

    [4] ArcelorMittal, \u201cWho We Are, At A Glance\u201d, http:\/\/corporate.arcelormittal.com\/who-we-are\/at-a-glance<\/a>, accessed November 2017.<\/p>\n

    [5] ArcelorMittal. 2016 Annual Report.<\/p>\n

    [6] \u201cBernstein’s 14th Annual Pan European Strategic Decisions Conference\u201d, Presentation, September 27, 2017, ArcelorMittal, Luxembourg City, Luxembourg.<\/p>\n

    [7] Remarks made at the Steel Survival Strategies XXXII Conference, World Steel Dynamics, Marriott New York Marquis, New York, June 26 \u2013 28, 2017, From transcript provided by World Steel Dynamics, accessed November 2017.<\/p>\n

    [8] American Automotive Policy Council, \u201cUnited States Investigation Under Section 232 of the Trade Expansion Act of 1962 To Determine the Effects on U.S. National Security of Imports of Steel\u201d, https:\/\/www.bis.doc.gov\/index.php\/232-steel-public-comments\/1734-american-automotive-policy-council-public-comment\/file<\/a>, accessed November 2017.<\/p>\n

    [9] Reuters Staff, \u201cIndia slaps anti-dumping duty on some stainless steel imports\u201d, Reuters, October 25, 2017, \u00a0https:\/\/www.reuters.com\/article\/us-india-stainlessteel-dumping\/india-slaps-anti-dumping-duty-on-some-stainless-steel-imports-idUSKBN1CU1MF<\/a>, accessed November 2017.<\/p>\n

     <\/p>\n","protected":false},"excerpt":{"rendered":"

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