The United States and the European Union (EU) released a joint fact sheet on October 31 announcing terms of a tariff agreement completed between the two global economic powers. The agreement includes terms specifying replacing the United States’ tariff with a rate quota on steel and aluminum imported from the EU. As a result, steel and aluminum imports from the EU will be limited to historically based quantities without being subject to a tariff prior to entering the U.S., according to a Commerce Department statement.

This newly forged agreement might prove to have lasting effects on the global economics of metals markets, and it remains to be seen what legal ramifications will arise in the coming months. However, we can explore these issues to make more-informed decisions related to metal markets.

As a brief background, the import tariffs of 25% on steel and 10% on aluminum were introduced in March 2018 using a national security justification under Section 232 of the Trade Expansion Act of 1962. At the time, the Commerce Department asserted that at least one goal of the tariff was to in-crease the utilization rate of American steel mills to at least 80% from a utilization rate of about 75%. According to a Metal Miner market analysis, a steel-mill utilization rate of 80% is considered an indicator of a healthy steel market in the U.S.

At the end of August 2021, the steel-mill utilization rate was approximately 85%, according to the Platts Steel Analysis of S&P Global, perhaps indicating the lack of need for the tariff. The timing of the removal of the 2018 tariff was in question since the tariff’s introduction. There are several market forces at work here, and the answer to the question “When is the best time to remove the tariff?” is certainly debatable. Section 232 of the Trade Expansion Act requires that any decision on altering tariff amounts (including to 0%) must be made by the U.S. president.

One of the market forces at work is the present price of flat-rolled sheet steel or hot-rolled coil steel in the U.S. Platts notes that the late August pricing in America was $1,942 per short ton, marking a new high. However, this compares unfavorably to Chinese steel at $610 per short ton and European steel at $1,210 per short ton. Relatively high American pricing is one indicator of the lack of need for a tariff.

Another market force in play is the notion that many American purchasers of steel may be withholding their orders from the mills until they have a buyer for that steel. This way the purchaser does not have to warehouse expensive stock, or the purchaser may not be able to find willing buyers at elevated prices. It may be of value to note that if the American manufacturers cannot obtain steel at competitive prices, then they will likely lose business to foreign competitors that may be paying far lower prices for steel. The combination of the previously noted record-high steel pricing and record profits for steel manufacturers points to a shortage of American-made steel and a lack of necessity for the tariff.

Another market force is the anticipated large infrastructure bill that may pass both houses of Congress. Passage of the infrastructure bill under current conditions (pre-termination of the tariff) would likely exacerbate the problems of steel shortages and high prices. In addition, U.S. automotive manufacturers such as Ford and General Motors are anticipating relatively large increases in F-150 full-size pickup truck production and full-size truck production.

As a result, a consortium of U.S. steel manufacturers requested the government remove the tariff at the beginning of September. Some promoters of the tariff, however, note that the tariffs should not be removed without first dealing with the underlying issue of global overproduction of steel. Without limits on global steel production and potential “dumping” of steel into the American market, another glut of imports may return the American steel market to the same 2018 conditions that spurred the initial implementation of the tariffs.

Some economic repercussions of the tariffs included retaliatory actions by the tariff subject countries. For example, Canada and Mexico both began to place limitations and tariffs on non-metal goods ex-ported from the U.S., including agricultural products. Consequently, farmers and other groups successfully pressured the U.S. in 2019 to remove the steel and aluminum tariffs of March 2018 (the same tariff now being removed from EU countries). In exchange, the Canadian and Mexican governments agreed to remove all retaliatory tariffs imposed on American goods and that any further retaliatory tariffs relating to steel and aluminum goods may only be placed on steel and aluminum goods.

Like the agreements eliminating the tariffs for Canada and Mexico, the EU will help ensure market-oriented conditions in its market, including the application of safeguards and other appropriate measures, according to the statement released by the Commerce Department.

Additionally, the U.S. and the EU will negotiate further arrangements for trade in the steel and aluminum sectors that take account of both global non-market excess capacity and the carbon intensity of these industries. The U.S. and the EU agreed to form a technical working group to enhance their co-operation and facilitate negotiations on these arrangements. They will also invite like-minded economies to participate in the arrangements. The October agreement specifies that the U.S. will continue to pursue limits on global steel production and seek additional safeguards to limit pollution during the production of steel.

Considering these factors, we can anticipate a reduction in American steel pricing in the next few months. However, supply-chain issues and pent-up demand may limit how much foreign steel can reach American purchasers in order to alleviate market pressures on pricing and storage.

David Resser is a patent attorney with Cooper Legal Group LLC of Independence, Ohio. He has expertise as a mechanical engineer in foundry equipment manufacturing. He can be reached at DRess-er@cooperlegalgroup.com.