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U.S. Steel and Aluminum Makers Would Gain From Commerce Proposals

Even after raising our fair value estimates, though, we still think our coverage is overpriced.

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On Feb. 16, the Department of Commerce released two lengthy reports providing recommendations resulting from its investigations related to Section 232 of the Trade Expansion Act of 1962. These suggest heavy tariffs or quotas on steel and aluminum imports to the United States. The recommended remedies were calculated to achieve an 80% capacity utilization rate for each industry. President Donald Trump now has 90 days to review the proposals and determine the appropriate course of action. Effectively, Trump has been provided a menu of options to address each industry, which includes a global quota, a global tariff, or individual tariffs on a subset of countries. All potential tariffs and quotas would be in addition to the plethora of antidumping and countervailing duties that are already in place.

If the Department of Commerce’s recommendations are enacted, they will be met with significant opposition. Within the U.S., companies that consume high volumes of steel and aluminum will continue to object, as their steel and aluminum input costs are likely to rise. Outside the U.S., countries that export large volumes of steel and aluminum to the U.S. will object that this unilateral action breaches international trade obligations as established under the World Trade Organization. A series of appeals to the WTO would probably follow. Many argue that this aggressive action might spur an all-out trade war, as targeted countries might retaliate with trade sanctions of their own on U.S. export products. Given that the recommendations have been made under the guise of protecting U.S. national security (the nature of a Section 232 investigation), widely believed to be a loophole that facilitates protectionism, U.S. trade partners are likely to cry foul. Regardless, we think it’s highly likely that Trump will follow through on some form of these recommendations.

Andrew Lane does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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