Following several months of back-and-forth negotiations, on October 31, 2021 the U.S. and EU agreed to settle their differences relating to the U.S. imposition of tariffs on steel and aluminum products under Section 232 of the Trade Act of 1962, which the Trump Administration originally imposed on imports from the EU in June 2018. The resulting agreement, which both parties described as an effort to “facilitate the decarbonizing of the steel and aluminum industries” as well as address “the issue of overcapacity in these industries caused by non-market practices,” consists of four broad components: (1) the U.S. agreeing to replace the 25 percent tariff on EU steel products and 10 percent tariff on EU aluminum products imposed under Section 232 with a Tariff Rate Quota (TRQ) system; (2) the EU agreeing to suspend the 25 percent retaliatory tariffs imposed on certain U.S. goods entering the EU; (3) the mutual agreement to suspend the World Trade Organization (WTO) disputes relating to these two measures; and (4) the Parties agreed to establish a “global arrangement to address carbon intensity and global overcapacity” which will reportedly be open for other interested trading partners to join. Related, the Department of Commerce (Commerce) intends to revamp the entire Section 232 product exclusion process.
U.S. TRQ System
The U.S. announced a TRQ system to replace the Section 232 measure as part of its settlement with the EU. Details are still emerging on both sides of the Atlantic. The TRQ measure applicable to steel products is understood to include the following features:
- It is set to come into effect on January 1, 2022. (The current Section 232 regime remains applicable until that time and, even after that date, the underlying authority to impose tariffs under Section 232 will remain in place as a legal matter).
- Steel quotas will cover an aggregate of 3.3 million metric tons across 54 product categories (See Annex 1 to Commerce announcement) allocated on an EU member state basis based on historical trade trends (i.e., 2015-2017).
- The TRQ will only apply to products “melted and poured” in the EU, which is designed to limit circumvention, e.g., by China (this requirement only applies to imports of steel, not aluminum).
- It will be applied on a quarterly basis, with up to 4 percent of unused quarterly quota carried forward by half a year (e.g., up to 4 percent of the Q1 2022 quota, if unused, will roll over into Q3 2022).
- U.S. demand for steel will be calculated annually. If demand grows by 6 percent, the steel quota will increase by 3 percent. Comparatively, if demand contracts by 6 percent, the quota will decrease by 3 percent.
- The quota will be administered on a “first come, first served” basis.
- Volumes imported in excess of the quotas may be imported with payment of a 25 percent tariff. This feature sets this quota system apart from other Section 232-related TRQs the U.S. negotiated with other trading partners (e.g., Brazil), which include absolute quotas.
- “Derivative products” from the EU covered by Proclamation 9980 will not be subject to Section 232 duties.
- The existing exclusion process will continue to apply. Excluded quantities will not count against the quota limit. Exclusions granted and exercised in FY2021 will be automatically continued for 2 more years through December 31, 2023. Additional EU imports may be eligible for exclusion under the revamped exclusion process as well.
The TRQ system applicable to aluminum products is quite similar, but has some distinguishing features. The measure applicable to aluminum is as follows:
- It is set to come into effect on January 1, 2022.
- Aggregate aluminum quota is 18,000 metric tons for unwrought aluminum under 2 product categories and 336,000 metric tons for semi-finished (wrought) aluminum across 14 product categories.
- Derivative aluminum products addressed in Proclamation 9980 will likewise not be subject to 232 tariffs.
- The aluminum quota will be applied on a semi-annual basis, with no more than 60 percent of the TRQ to be filled within the first half of any given year.
- There is no immediate mechanism for the quota to be adjusted.
- Volumes imported in excess of the quota may be imported with payment of a 10 percent tariff.
- The quota will be administered on a “first come, first served” basis.
- The exclusion process will remain in effect for EU aluminum products.
- Setting aluminum product exclusions apart from steel product exclusions, however:
- There will be no automatic renewal of aluminum product exclusions granted and exercised in FY2021, and
- In-quota importations of aluminum products will count against the quota volume.
U.S. officials have said the TRQ system will be implemented through a Presidential Proclamation. The Proclamation will need to be issued ahead of January 1, 2022, when the system is scheduled to come into force.
EU Suspension of Retaliatory Tariffs
The EU has announced its intention to suspend the “rebalancing measures” that it implemented against the U.S. in June 2018 in response to the Section 232 tariffs on steel, aluminum and derivative products. The EU was due to implement additional “rebalancing measures” that would have doubled the tariffs enacted under these rebalancing measures on December 1, 2021. As a result of this settlement, the EU will forgo its additional rebalancing measures entirely and the retaliatory tariffs on U.S. products will be lifted on January 1, 2022.
Suspension of WTO Disputes
Finally, the parties agreed to “pause” their bilateral WTO disputes on steel and aluminum.
Next steps
- Once the settlement is implemented, the U.S. will publish updates on quota consumption. Importers will need to monitor these quotas to ensure that their imports are timed to fall within the quotas as-administered in order to avoid paying tariffs.
- U.S. demand for steel will be calculated annually. If demand grows by 6 percent, the steel quota will increase by 3 percent. Comparatively, if demand contracts by 6 percent, the quota will decrease by 3 percent. For the same reasons, close attention should be paid to the annual adjustment process.
- Companies interested in further details regarding quota categories and volume allotments should inquire further with USTR and Commerce.
- In industry briefings Commerce has said that it intends to completely overhaul its Section 232 exclusion process for steel and aluminum products (applicable to imports from the EU and elsewhere) in the coming months. A notice and comment period to that end is expected to be rolled out soon.
- The Administration may begin negotiating similar agreements with other trading partners, such as Japan and the United Kingdom, at some point in the future—although no further details have been made public at this point.
- Hogan Lovells would be pleased to help interested parties with questions about the agreement and what this means for your company.
Authored by Kelly Ann Shaw, Warren Maruyama, Craig Lewis, Jonathan Stoel, Deen Kaplan, Chandri Navarro, Lourdes Catrain, Nicholas Laneville, and Maria Arboleda.
