The Unintended Effects of Section 232

Back Story

The Trump administration recently placed a 25% tariff on steel imports into the United States. The affected tariff codes cover steel mill products (“steel”) which are defined at the Harmonized System 6-digit level as:

  • 720610 - 721650 
  • 721699 - 730110  
  • 730210
  • 730240 - 730290
  • 730410 - 730690      

An importation of any of these tariff code from any country that isn’t currently exempt from the steel tariff would be subject to the 25% tariff.

The New York Times recently released an article regarding CP Industries, a manufacturer of seamless vessels to store gases at high pressure. They are steel cylinders of up to six tons that are sold to the likes of the Navy, NASA and T. Boone Pickens’s Clean Energy. To manufacture their vessels they exclusively use Chinese steel as no company in the United States produces pipes large enough for CP Industries to make its six-ton container.

The company estimated that it could get only a fifth of the steel pipe it needed domestically, from only one American firm. Domestic pipe is, delivered in random lengths and requires additional milling, cutting, and testing, raising processing costs by about 16 percent. Also, the Chinese pipes are much cheaper, the company added: Pipes from China delivered in Philadelphia cost $1,680 per metric ton, while U.S. Steel is charging $2,728 per metric ton at its works in Lorain, Ohio.

Tariff Change

Only raw steel within the defined tariff codes is affected by the tariff change. Finished products made of non-American steel that undergo a tariff shift are not impacted by the 25% tariff. Therefore if a manufacturer were to produce the same containers as CP Industries and import the finished product into America they would not be charged the 25% tariff rate.

In this case, one of the largest competitors of CP industries happens to be a Chinese firm. CP Industries reported the Chinese firm can produce the same product at a 10% cost savings. The 25% tariff has given the Chinese firm a significant competitive advantage.

Importer Impact

Now any American firm using imported steel to produce finished goods will be at a disadvantage as compared to any other company that is importing the same finished good. Firms importing raw steel and manufacturing it in the United States would receive cost savings by importing into a third country and manufacturing their product in that country, then shipping the finished product into the United States.

Chinese finished goods distributors aren’t the only companies that could benefit from this tariff. Companies in other countries importing finished good that are also being manufactured in the United States will gain a competitive advantage.

Understanding tariff codes are extremely important as all trade is based on tariff codes including tariffs, duty rates, planned audits, and countervailing duties. In our current volatile trade environment, it is imperative to understand how changes may affect the products you are currently importing and exporting. A subtle change in a product may drastically affect the process of importing that product.

Frontier is committed to ensuring our clients are compliant with trade regulations while also finding ways to use tariff to your advantage.