On its face, the deal is straightforward. The U.S. will replace its 25% tariff on steel and 10% tariff on aluminum with a tariff-rate quota, or TRQ, that allows a certain amount of imports into the U.S. free of those levies. Once that threshold is reached, the tariffs will be imposed on subsequent imports.

 

The deal resolves a yearslong feud dating to the Trump administration, which set the duties after deeming imported steel and aluminum a threat to national security under Section 232 of the Trade Expansion Act. The U.S. Department of Commerce has published the broad outline of the TRQ arrangement, but left a number of key questions open.

 

Hogan Lovells partner Kelly Ann Shaw, a former U.S. trade official, said that companies on both sides of the Atlantic will be closely consulting with the government in the coming weeks to ensure that they can use the TRQ system as it was intended.

 

"There are certainly some question marks. This agreement doesn't answer every question, though it certainly provides a detailed framework for how the two sides envision this TRQ system working," Shaw told Law360. "At this point, there are a few questions that companies need resolved in order to make use of this TRQ on a practical basis."

 

Chief among those questions is the apportionment of the TRQ itself, which is set to take effect Jan. 1. Commerce's announcement says it will set the annual quota for steel at 3.3 million metric tons — which is the average of imports from 2015 through 2017, the last three full years before the Section 232 tariffs took effect.

 

The announcement also notes that the steel TRQ will be divided up among 54 product categories and among EU member states on a quarterly basis, creating a thicket of product- and country-specific limits on lower-cost imports.

 

The aluminum half of the agreement lays out a TRQ limit of 18 thousand metric tons for unwrought aluminum under two product categories, and 366 TMT for semifinished aluminum under 14 product categories, with EU member-state allocations based mostly on 2018-2019 patterns.

 

Annexes to the announcement show a list of categories that will be covered by the TRQ, but do not expound on the product- and country-specific breakdowns that will dictate much of the trade that takes place under the TRQ.

 

"It's a wait and see," Dorsey & Whitney LLP partner Dave Townsend said. "You really can't at this point, from an importer perspective, plan on knowing what the quota is going to be from your country of origin for your source."

 

Former U.S. Trade Representative general counsel Jennifer Hillman, now a fellow at the Council on Foreign Relations, noted that Commerce's product, country and quarterly limits under the TRQ could lead to as many as 5,832 separate limits on steel and 1,728 for aluminum, depending on how granularly the quota is divvied up.

 

Hillman wrote on Twitter that even though the agreement allows a portion of unused quota shares to roll over to future quarters, such fragmentation may provide a chilling effect for certain EU shippers.

 

"While there is some flexibility … it will be very hard for EU exporters to use even 75% of the quotas given how small the allocations are per product and per country once you divide them up," Hillman said.

 

Commerce did not respond to requests for comment on the apportionment of the TRQ.

 

Another potential headache in the post-TRQ landscape is the prospect of quotas filling up near the end of the quarter and a lag in obtaining information about the status of the quota, importer attorneys said.

 

That is a difficulty arising from TRQs in general, not specifically with the system set up for steel and aluminum. Nevertheless, Townsend said, if there is a rush to fill the quota, some companies may be left out in the cold.

 

"An importer can go look and see how full the quota is for a particular quarter, but there is always this time lag where they are looking at the data, a ship is on the water, and they're saying, 'It looks like it's OK.' And then in the meantime, between the week or two when they checked the data and then entered it, it's possible somebody else came in and filled the quota for their particular category and then they're out of luck," he said.

 

Further complicating matters on the steel side of the agreement is the imposition of a stricter rule of origin that products must meet in order to earn a duty break under the quota limit. Per the agreement, steel goods will only qualify if they have been "melted and poured" within the EU.

 

That rule will qualify only steel goods that are first produced in a European steel-making furnace in a liquid state, and then poured into their first solid shape in a European facility. That imposes a much higher standard for tariff benefits than the current rule, which deems steel as "originating" from Europe if it has been "substantially transformed" there, even if it was melted and poured elsewhere.

 

The agreement warns of strict enforcement of the rule, requiring importers to "provide relevant documentation substantiating compliance with U.S. requirements. Failure to comply could result in remedies and/or penalties as provided for under U.S. law."

 

That reporting burden may be eased by the fact that Commerce has required importers to establish the country of melt and pour as part of its steel import monitoring program since October 2020. Still, with that assessment now a key factor in determining whether an item gets preferential tariff treatment, importers will have to ensure that their verification efforts are sharp, according to Townsend.

 

Soon after the Section 232 tariffs were imposed in 2018, Commerce established a process by which importers could get certain products excluded from the duties if their goods were not available from U.S. sources. Under the deal, that exclusion process will remain in place and exclusions granted in the past fiscal year will be extended through the end of 2023.

 

Crucially, any imports subject to tariff exclusions will not count toward the quota, ostensibly giving importers multiple avenues to earn a measure of tariff relief.

 

Townsend stressed that while there may be some difficulty for companies as they begin navigating the TRQ system, the deal was a "welcome" development for many importers.

 

"It was an obvious fertile area to come to an agreement with the EU, trying to create diplomatic momentum," Townsend said. "This is a good place to pick for the Biden administration."

 

But while the deal has drawn general plaudits from U.S. steel producers and unions, some importer groups and European industry organizations have begun to bristle.

 

"This type of government restriction on raw materials and intervention lead to market manipulations and allow for gaming of the system that could put this country's smallest manufacturers at an even further disadvantage," the Coalition of American Metal Manufacturers and Users said in a statement on Sunday.

 

Putting the criticism more bluntly, trade policy fellows Scott Lincicome and Inu Manak of the libertarian think tank The Cato Institute wrote on Tuesday that "the only clear beneficiaries will be the European exporters lucky enough to win duty-free quota allocations and the lawyers hired to navigate this new managed trade quagmire."

 

Whatever TRQ headaches that might lie ahead, companies will need to get used to them. The EU deal is not the first quota system the U.S. has enacted to address the Section 232 tariff fallout, and it doesn't figure to be the last, as the Biden administration has also begun steel and aluminum talks with the United Kingdom and Japan.

 

Moreover, the U.S. and EU see the deal as a jumping-off point for more intensive steel negotiations aimed at resolving concerns over excess capacity driven by industrial subsidies in countries like China. Akin Gump Strauss Hauer & Feld LLP partner and former U.S. trade official Clete Willems said the U.S. and EU arrangement is by no means a one-off.

 

"The way that you solve this problem is you get a lot of countries to work together to put trade restrictions on China, India and others engaging in excess capacity, you isolate that and that puts pressure on them to actually solve the problem," Willems told Law360. "You need joint action here, and that's what they are envisioning."

Source: Law360