SAFEGUARDS 101
Potential trade restrictions could be another headache for Canada
Canada is moving closer to imposing extraordinary trade restrictions on steel imports in a bid to protect the domestic industry. This week, Finance Minister Bill Morneau donned a hard hat in Hamilton, Ont., the heart of the Canadian steel industry, to announce a 15-day consultation period on whether to apply immediate provisional safeguards on certain steel imports.
The step has raised concerns among trade experts as well as companies that depend on steel imports for their operations. Here’s what it all means and why it matters.
WHAT ARE SAFEGUARDS?
Safeguards are an emergency trade measure that places unusual limits on imports. They are imposed when a surge of imported goods is causing or threatening to cause serious injury to the domestic market. Morneau will evaluate safeguards on seven steel products: plate, concrete reinforcing bar, hot-rolled sheet, energy tubular products, pre-painted steel, stainless steel wire and wire rod.
WHAT’S THE EMERGENCY?
In March, the United States imposed tariffs of 25 per cent on steel imports and 10 per cent on aluminum. The size of the tariffs prompted concerns that foreign producers, finding the U.S. a far less profitable country in which to sell their steel, would seek out other markets. Canada’s primary steelmakers began pushing for safeguards, warning that this “diverted” steel could flood domestic markets, driving down prices and threatening domestic steelmakers.
SO, IS THERE A FLOOD?
Morneau told reporters that the government has seen an increase in imports, though he didn’t specify the size of that increase and hasn’t yet released any data showing a surge. Canadian steelmakers say they have provided the government with a “significant amount of information” demonstrating a surge or threat of a surge in several product categories.
DIDN’T WE ALREADY PUT TARIFFS ON STEEL?
Yes. On July 1, Canada imposed retaliatory tariffs on $16.6-billion worth of U.S. steel, aluminum and other goods. These levies were issued in response to U.S. President Donald Trump’s tariffs of 25 per cent on Canadian steel and 10 per cent on aluminum.
But Canada’s retaliatory tariffs are directed only at the U.S. The safeguards would apply to all countries that export steel to Canada. Apart from the U.S., China, South Korea, Brazil and Japan are the biggest steel exporters to Canada.
HOW WOULD THE SAFEGUARDS WORK?
Safeguards typically limit imports through the use of tariffs or quotas or a combination of the two. A tariff-rate quota (the combo) would put a ceiling on the amount of steel imports allowed into the country under standard duties. A prohibitive tariff would be applied to all imports that exceed that amount.
IS ANYONE RESISTING THE MOVE?
Yes. The safeguard proposal has raised objections from the construction industry, downstream fabricators and manufacturers who have already weathered a significant spike in steel prices and who worry that additional restrictions will hike costs even more. A coalition of construction companies has warned that the Canadian industry can’t make enough steel to supply its needs and that some products cannot even be obtained in Canada. With U.S. supply essentially cut off by Canada’s retaliatory tariffs, imports are more important than ever, it says.
“We find ourselves in an exceptional situation where we do need to consider how we keep the markets stable over the long term,” Morneau said. “We’re going to be hearing from people to make sure we administer it in a way that creates the stability we are seeking without causing harm.”
IS NAFTA A FACTOR?
Morneau was careful to emphasize that a safeguard action is separate from what’s happening at the NAFTA negotiating table. However, industry observers have pointed out that a key justification for the Trump administration’s steel tariffs has to do with concerns about “transshipping.”
This is a practice where cheap steel is sent from one country to another, where its origin are disguised or falsified before it is sent on to a third country (i.e. the U.S.). The U.S. believes countries, including China, are using this process to dodge tariffs. Indeed, Trump raised the issue shortly before imposing steel tariffs in March, stating that Chinese producers “transship all through other countries.”
In reality, there is little evidence to suggest Canada is being used as a hub for transhipment. Nevertheless, the federal government has announced a number of recent steps to bolster the borders against the practice. Safeguards would just add to those defences.
“That’s been half the concern all along, that we really can’t be seen in Washington as being a back door into the U.S. market,” said Robert Wolfe, professor emeritus at Queen’s University who has studied Canada’s trade policy for several decades.
WHY ARE SAFEGUARDS EXTRAORDINARY?
Canada has only ever used this measure on a handful of occasions. The last time was 13 years ago, in a case involving bicycle imports. So a safeguard on its own would be a rare move. What makes Morneau’s proposed safeguards exceptional is that if he decides to impose them, he will do so ahead of an independent inquiry by the Canadian International Trade Tribunal (CITT) — a quasi-judicial body that usually weighs the evidence and makes a recommendation.
This has never been done in Canada, though it is allowed. The World Trade Organization permits provisional safeguards pending an outcome of an inquiry if there is evidence of “critical circumstances” proving a delay will result in damage to the industry that would be difficult to repair.
The steel industry has argued that this is the case: A CITT investigation will take too much time, it says, leaving the domestic market open to damage, especially now that the European Union has imposed safeguards on steel imports, possibly diverting even more steel to Canada.
COULD THIS BE ANOTHER HEADACHE FOR CANADA?
Maybe. Safeguards are politically tricky because they apply to all of our trading partners, not just those accused of dumping cheap steel into Canadian markets. Many of those countries are also suffering under U.S. tariffs, says Debra Steger, a University of Ottawa law professor and a former senior trade negotiator who helped form the WTO.
“It’s one thing for Canada and other countries to impose retaliatory measures when the U.S. tariffs on aluminum and steel were first imposed,” she said. “But now it seems that Canada is using this reason of ‘oh it’s extraordinary times we have to take extraordinary measures’ to justify taking actions that Canada would never have considered taking before and that the government of Canada would have once considered protectionist to be quite frank.”
If cheap or subsidized steel is being dumped into Canada, the industry can initiate anti-dumping and anti-subsidization cases and obtain trade restrictions against the specific countries involved rather than hitting everyone with tariffs and quotas, she said. The Canadian government has already introduced $2 billion in funding to support the steel industry, which is a “better solution from a trade perspective than imposing quotas and tariffs at the border on all trade,” she said.
Four dumping and subsidy investigations have been initiated so far this year compared to three last year, according to the Canada Border Services Agency.
The type and precise timing of the measures to be taken will be determined following the consultation process, which ends Aug. 29, an official from the Finance Ministry said in an email. But balancing the need to shield the market with ensuring that the necessary flow of steel is available to downstream companies could prove a difficult task, Wolfe said. Quotas in particular can be “mind-bogglingly difficult” to administer, he said.
“Of course, when you have a sudden storm you don’t say ‘oh well, too bad for the boats that are out on the water,’” Wolfe said. “If what they are seeing really are sudden surges in steel imports to Canada that are being caused by diversion from the U.S. market, then it would be entirely appropriate to take some measures in order to stabilize market conditions. The only question would be finding a way to do that in a way that doesn’t disadvantage all the other people who buy steel in Canada.”