IG 'alert' on metal tariff exclusions review process may help shape congressional Section 232 reform efforts

05 November 2019 12:33

A new watchdog memo raising flags about the US Department of Commerce’s metal tariff exclusion system may help shape congressional efforts to reform the president’s national security trade authority.

Commerce’s inspector general released the “management alert” last week warning about the possible improper influence in the product exclusions from the tariffs of 10 percent on aluminum and 25 percent on steel imports, first imposed last year for national security purposes under Section 232 of the Trade Expansion Act.

The four-page memo is limited to a broad overview of possible transgressions regarding off-the-record communications between department officials and interested parties throughout the three-part process. The findings do appear to support claims that the process has been biased toward major US-based steel giants with ties to the Trump administration.

“We now have enough information to show that the process is not fair” and that “legislative guardrails need to be provided,” said Vanessa Sciarra, the National Foreign Trade Council's vice president of legal affairs and trade investment policy. The NFTC is one of the many groups pushing Congress to change Section 232.

Commerce opened the exclusion process last year, following President Donald Trump’s orders to impose Section 232 metal tariffs to protect the domestic steel and aluminum industries on national security grounds. The stated goal of the exemptions was to allow US-based manufacturers to import certain metal materials if they can demonstrate the products are not a national security threat and there is insufficient domestic supply. Other firms also have 30 days to object to these requests.

The process, however, has been widely viewed as cumbersome, lacking transparency and having benefited more foreign producers like those in China. The process is also one the reasons for strong criticism of Section 232, a rarely used provision in law enacted nearly 60 years ago during the Cold War. Trump’s decision to invoke the authority has caused tensions between the US and major trading partners to flare. The action has also drawn retaliatory tariffs on American exports, disturbing global supply chains and financial markets.

The aftermath has even prompted several Republican and Democratic lawmakers to band together to craft various proposals that would limit Section 232's use. Senator Chuck Grassley, a top Trump ally who helms an influential committee overseeing trade policy, has been keen to push out legislation tackling Section 232 reform. The memo’s release also may put the exclusion review process on the Iowa Republican's radar.

“More information is needed regarding these specific conclusions, but any indication that the 232 exclusion process is lacking transparency or objectivity would be highly concerning and deserve immediate attention,” Grassley’s spokesman said.

Pending litigation

The IG memo could also have an impact on a pending case over the exclusion process filed in July against Commerce. The US unit of JSW Steel, an Indian manufacturer, argued the department mishandled its request for an exemption from the 25 percent tariff on steel from Mexico and India.

The review of the applications was “arbitrary, capricious, and an abuse of discretion” and violated the Administrative Procedure Act, which governs the federal agencies’ promulgation of regulations, the complaint at Court of International Trade said.

"The IG's announcement is a significant development, which may support or corroborate JSW's claims,” said Devin S. Sikes, international trade counsel at Akin Gump.

“If JSW asks the CIT to take judicial notice of this development, the presiding judge will have to decide whether to accept the development for consideration and what, if any weight, to assign it,” Sikes said.

‘Best-case scenario’ for change

The Court of International Trade won't issue a decision in the JSW Steel case until next year. Also, any federal legislation regarding Section 232 is unlikely to be enacted this year, although a bill that has Grassley’s blessing and has been vetted by his Senate Finance Committee would serve as the standard for future efforts.

The “best-case scenario here is for Commerce” to rethink its guidelines and rules for communicating with external parties, according to Christine McDaniel, a senior research fellow for the Mercatus Center at George Mason University.

McDaniel, who has been investigating the Section 232 review process since it began, said Commerce had underestimated the number of exclusion requests it would receive and was not prepared to handle the “very large administrative burden."

The IG's memo said “cognizant” officials at Commerce have been briefed on the matter outlined in the alert, and the department’s Bureau of Industry and Security (BIS) — the administrator of the product exclusions — must take immediate action to make the review process transparent.

The memo recommends that BIS should consider all decisions to be final once they’re posted online or amend the rules to allow applicants to appeal. It also suggests that the agency create a formal process to change internal criteria used to review exclusion requests. This would ensure the requirements are properly vetted and approved before they’re implemented.

The IG's memo also recommends that BIS document all discussions with interested parties and direct all e-mails concerning specific exclusion requests to official organizational e-mail addresses so that the information becomes part of the official record.

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