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What's Next for Steel? Understanding Section 232 of the Trade Expansion Act

Producers, buyers and sellers of steel will be impacted by whatever actions result from the Commerce Department's investigation of imported steel. Launched in April with the objective of halting unfair trade practices (one of the Trump administration's goals), the investigation leverages the rarely used Section 232 of the Trade Expansion Act.

Section 232 allows the president to impose restrictions, including tariffs and quotas, on imports for purposes of national security. Since 1962 when the Act took effect, there have been only 26 Section 232 investigations. In five of those investigations, all related to oil, tariffs were imposed due to the finding of a credible national security threat.

While there hasn't been a 232 investigation since 2001, both the Bush and Obama administrations have acted to combat unfair trading practices of countries such as China, who has been accused of dumping artificially low-priced steel. Interestingly, those anti-dumping actions appear to have had an effect, imports stabilizing or declining since 2015. As a result, U.S. steel prices have climbed to near three-year highs, according to the Department of Commerce.

Part of the challenge with a 232 investigation is the question as to whether a threat to national security exists. According to a study by KeyBanc Capital Markets Inc., less than five percent of the steel demand could be attributed to national defense needs. Others think more broadly, including U.S. Steel executive David Rintoul, who argued the "U.S. must think outside the traditional remedies in combating foreign governments' 'ruthless' focus on winning control of the market."

Should the president conclude based on the results of the investigation that action should be taken, the administration could implement a tariff-rate quota, which would impose duties on imports beyond a certain limit. An across-the-board tariff could also be imposed, though the potential of that action has raised concerns regarding a significant impact on the price of consumer goods.

Regardless of the action ultimately taken, many observers believe one outcome may be less uncertainty around the direction of steel prices, which should bring both buyers and sellers more firmly into the market.