Analysis

Canada's new steel tariffs will 'kill businesses' in push to please U.S., lawyers warn

Canada's embrace of American-style protectionist measures to prop up domestic steelmakers is set to increase costs for consumers and secondary manufacturers - assuming they can even find steel to purchase amid current shortages. It's also offending key trading partners, most notably Mexico.

Mexico complains directly to Freeland as new measures target $200M of NAFTA partner's exports

Prime Minister Justin Trudeau toured the Essar Steel Algoma facility in Sault Ste. Marie, Ont. earlier this year. This Thursday, his government is applying new emergency surtaxes to protect Canadian steelmakers. (Justin Tang/Canadian Press)

Canada's embrace of American-style protectionist measures to prop up domestic steelmakers is set to increase costs for consumers and secondary manufacturers — assuming they can even find steel to buy amid current shortages.

It's also offending key trading partners.

As of next Thursday, a 25 per cent surtax will be applied to all foreign imports of seven specific kinds of steel once they exceed historical average volumes. It's an emergency tool the federal government's never used before. Many manufacturers would love to stop it from being used now.

"It is going to kill businesses," said trade lawyer Cyndee Todgham Cherniak. Her firm, LexSage, represents clients trying to persuade the Canadian International Trade Tribunal to reverse Finance Minister Bill Morneau's decision at hearings scheduled for January.

"Exactly what we said shouldn't be done to us, we've done to other countries. And, quite frankly, to our own businesses."

Canada already has 78 different trade remedies (duties) in place for countries like China who've been caught dumping steel. This new surtax is part of a push to curb global overproduction and keep cheap steel from sneaking into North American supply chains.

But in the process, Canada's surtax also hits fairly-traded steel from countries Canada normally counts as allies, including Japan and the European Union.

Companies already finding it hard to source quality, affordable steel are about to see more of their best options taxed.

Mexico upset

Some countries are exempt from Canada's new provisional safeguards: two that Canada has free trade deals with now (Chile, Israel) and developing countries (including a few previously fingered for dumping). Mexico, meanwhile, is only exempt for five of the seven products Canada is taxing.

Mexican steel exports worth about $200 million will be hit, including energy tubular products (think pipes and pipelines) currently in short supply in Canada.

Mexico conveyed its concerns by telephone last Monday to Foreign Affairs Minister Chrystia Freeland.

Steelworker Jeremy Spence took a photo with Foreign Affairs Minister Chrystia Freeland after the Liberal government announced $2 billion to protect steel, aluminum and manufacturing jobs in June. (Samantha Craggs/CBC)

American steel products, already subject to a 25 per cent tit-for-tat tariff in retaliation for the levy slapped on Canada at the start of the summer, are exempt from Canada's new surtax.

Morneau's report to cabinet justifying all this is confidential. Canada's notification to the World Trade Organization offers only a vague explanation: that between 2015 and 2017, imports of the seven steel products rose five per cent and spiked 30 per cent in the first quarter of 2018 over the same period in 2017. The "production, sales, market shares and profitability" of Canada's industry were threatened, it said.

These increases predate the global disruption caused by the Trump administration citing "national security" as grounds to protect its domestic steel industry. The U.S. imposed 25 per cent tariffs on steel imports starting in March 2018, although trading partners like Canada, Mexico and the European Union were exempt until early last summer.

Canadian mills can't meet demand

Jesse Goldman, a trade lawyer whose clients include the Canadian Coalition for Construction Steel, says it's not clear that domestic steelmakers are in dire straits yet. One of his clients recently tried to put in an order with a Regina mill, EVRAZ, that Prime Minister Justin Trudeau visited on Canada Day and was told it wouldn't have the capacity to fill it in the near future.

Prime Minister Justin Trudeau spent part of his Canada Day touring the EVRAZ Regina steel factory, as his government brought in $16.6 billion in new tariffs against imported American goods in retaliation for American tariffs on Canadian steel and aluminum. (Michael Bell/Canadian Press)

"We're not structured the same way the Americans are. There's not a ton of slack that could be taken up by the domestic mills here," Goldman said. "Imports have historically played a much larger role in Canada relative to the U.S."

While some American mills may have been struggling before the Trump administration acted, Canadian balance sheets are in the black, Goldman said.

Canada's steel mills are mostly foreign-owned and oriented toward large American clients, not smaller Canadian orders. Early export data suggest Canadian steel is still heading south, despite the U.S. tariffs.

But American exports to Canada are drying up, with the U.S. industry keeping busy serving domestic customers inside its new tariff wall.

That's a problem for the construction sector in places like Western Canada; mills from the U.S. Pacific Northwest were far less expensive to ship from than Ontario mills. Goldman has a client who was quoted a rail shipping rate of $170/tonne from Hamilton, Ont. — and $29/tonne by shipping container from Taiwan, a country now subject to Canada's safeguards.

'Like winning the lottery'

While it's true that a limited amount of foreign steel can enter tariff-free after the surtax hits, the volumes the government set are very low: the amount for rebar, Goldman said, amounts to about one shipload every 50 days.

Getting import permits for tariff-free steel will be "like winning the lottery," so most importers will just start adding 25 per cent to all prices, Goldman said. And that's on top of price increases of 30 to 50 per cent already reported for some products as the market responds to supply shortages.

U.S. President Donald Trump, seen here touring a steel plant in Illinois last July, has arguably introduced more measures to protect the U.S. steel industry than any other sector. Several senior officials in the Trump administration have ties to the U.S. steel industry. (Jeff Roberson/Associated Press)

In industries with fixed contracts, like construction, some may decide it's better to walk away from a project than swallow that kind of a price hike, Goldman said.

If the government's safeguards are meant to help middle-class workers, it should remember that far more of them work in construction than in steel mills, he noted.

"From our perspective, this looks like a bit of political theatre," he said.

Consumers (or taxpayers, in the case of public infrastructure projects) are the ones who ultimately pay for pricey steel, or accept cheaper, lower-quality alternatives in their infrastructure and goods.

Canada likes to point out to American officials how their softwood lumber duties affect the affordability and growth of the U.S. housing market. But these steel safeguards could do the same thing in Canada, at a time when affordable urban housing is meant to be a government priority. Goldman said the cost of a condominium may increase by $10,000.

Finance admits shortages exist

Appearing before the House of Commons trade committee Tuesday, Morneau defended the surtax and said retaliation from other countries was "not an immediate concern."

"We didn't want to leave it and hope that nothing would happen," he said. "We'd rather take those provisional safeguards now and have a process [in] which downstream users, if they have an issue, can come to us."

Some of those users already have made the case that steel shortages exist that can't be addressed by Canadian suppliers, at least in the short term.

Finance Minister Bill Morneau announced a short consultation period to get feedback on provisional steel safeguard measures during a visit to a steel factory in Hamilton, Ont. in August. (CBC)

Accordingly, 50 Canadian businesses have been approved for refunds and will no longer pay the retaliatory tariffs Canada is collecting. Other applications for relief are being considered, and more companies can apply.

A government official speaking on background said these remissions may add up to a quarter of the total surtaxes Canada has collected on U.S. imports so far.

"We made a commitment to use the revenues that come in to support the industry," Morneau told the committee. But Opposition MPs said the process is too difficult for smaller businesses and real relief is taking too long.

Morneau, sounding frustrated, said he's got no playbook for this. "I share your outrage. This is not a situation that we wanted to be in."

Matching Trump

The goal is to return to an "appropriately free market," Morneau said. Canada is having "positive interactions" with the U.S. on steel tariffs and "there is a path" to resolution.

Is the new steel surtax part of this path? It appears to be.

"It's most likely the United States is asking for us to apply the same pressure against China as they are," Todgham Cherniak said.

But the Trump administration also wants countries like Canada and Mexico to limit their future steel exports with quotas.

Prime Minister Justin Trudeau visited steelmaker EVRAZ Regina back in March, before the U.S. stopped exempting Canada from its national security tariffs. (Michael Bell/Canadian Press)

In an interview with CBC Ottawa Morning host Robyn Bresnahan on Thursday, Freeland was asked what Canada was prepared to give up to get steel tariffs lifted.

"Why should I give up anything? We will lift our tariffs when they lift their tariffs," the minister said.

Seeing Trudeau and ministers like Freeland pop up at steel mills for photo ops makes Todgham Cherniak wonder if Canada's embraced some American political strategy as well.

"It's working well in the United States, with President Trump saying to unions and to workers, 'I got your back.' So are we doing the same thing because oh, we have an election in 2019?" she said.

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