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Letter to USTR Emphasizes Large U.S. Trade
Surplus in Steel Trade With Mexico Over the five years ending in 2022, the total U.S. steel trade surplus with Mexico reached $11 billion. “The current trend suggests that, in 2023, it would reach the largest yearly surplus in history: $3.4 billion.” That was one of the powerful points raised by David Gutierrez, the president of CANACERO, Mexico’s trade association for the steel industry, in a letter to US Trade Representative Katherine Tai on Nov. 1. Gutierrez was responding to what he called “recurrent allegations over increasing exports to the U.S.” by Mexico. “There is simply no evidence to support those allegations,” made over the past several months by the U.S. steel industry and several Senators. In fact, as the letter emphasized, the U.S. is benefiting far more from steel exports to Mexico than Mexico is benefiting from steel exports to the U.S: “Currently, U.S. exports account for 14.6% of Mexican steel consumption [while] Mexico’s exports to the U.S. barely account for 2.6% of U.S. steel consumption.” The agreement between the two countries in 2019 states clearly that in determining whether exports have surged “meaningfully,” there must be “consideration of market share.” And U.S. exports’ share of the Mexican market is more than five times greater than Mexican exports’ share of the U.S. market. In a previous newsletter, we wrote: As the Department of Commerce’s International Trade Administration reported in its Global Steel Trade Monitor: “Mexico was the largest market for U.S. steel exports with 45 percent (3.2 mmt), followed by Canada at 44 percent (3.1 mmt). Canada and Mexico have ranked first and second as the top destinations for U.S. steel exports for more than a decade.” Other bullet points in the CANCERO letter, derived from the U.S. Bureau of the Census and the Steel Monitoring and Analysis System, or SIMA:
No Threats But Strong Ammunition The CANACERO letter was careful not to threaten the U.S. with the possibility of Mexican retaliation if the U.S. were to reimpose 25% tariffs on Mexican steel products. In fact, Gutierrez stated in the first paragraph that “the U.S.-Mexico steel relationship is paramount and mutually beneficial for both countries and for the USMCA region.” He added that the Mexican steel industry is a trustworthy ally and partner for the U.S.” and that it is essential to keep working together to build shorter and more secure supply chains and to “combat global excess capacity, mainly from China.” But there is little doubt that, despite what CANACERO calls “unfounded” allegations, if the U.S. acts against Mexico’s steel exports to the U.S., a Mexican response would have a significant impact on the U.S. steel industry. The May 17, 2019, agreement that ended tariffs on Mexico under Section 232 of the Trade Expansion Act of 1962 permits such retaliation. The CANACERO letter ends with a table listing the top 10 U.S. steel exports to Mexico, by product category. According to an analysis of U.S. Census data, in 9 of the 10 categories, U.S. exports have increased by at least 37% between the 2015-17 base and 2023 – and in some categories by far more. For example, stainless pipe and tube exports have jumped 66%; cold-finished carbon and alloy bars, 68%; plate cut lengths, 63%. These data are included with the letter without explicitly stating the risk for the U.S. industry. But there is little doubt that Mexico has ammunition to use if it wishes. This newsletter responded to a question from a reader last month by quoting from the 2019 agreement: “In the event that imports of…steel products surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share,..the importing party may impose duties of 25 percent.” As we pointed out, the key phrase is “importing party,” not “United States.” This means that Mexico not only has a right of retaliation, but also has the same right as the U.S. to initiate Section 232 action against U.S. steel exports to Mexico that constitute surges. Mexican Steel Industry Cooperates with U.S. by Monitoring Trans-Shipments and Placing Tariffs on China, Turkey and Others The letter makes it clear that a tit-for-tat exchange of penalties is not what the Mexican industry wants. To the contrary, CANACERO emphasizes the cooperation it has provided on issues important to the U.S., such as monitoring to prevent trans-shipment of steel exports through Mexico to the U.S. to avoid tariffs. Gutierrez cited a joint statement from the recent U.S.-Mexico High Level Economic Dialogue (HLED): “Ambassador Tai and Secretary Buenrostro agreed on the importance of enhancing steel and aluminum trade monitoring efforts.” In August, the Mexican government adopted 25% tariffs on “steel imported from China and several other countries outside of North America, including Turkey, India and South Korea.” Those tariffs match the duties imposed by the U.S. under Section 232. “The purpose,” said the letter, “is to deter China and other countries from shipping excess steel to Mexico.” In that joint statement following the recent High Level Economic Dialgoue (HLED), the two countries declared: The United States and Mexico are strengthening our region’s supply chains, supporting economic development in Central America and southern Mexico, coordinating to expand workforce development efforts. We collaborated by exchanging best practices to develop secure next generation telecommunications and information and communication technologies (ICT) networks. We are using the HLED framework to reduce inequality and poverty, boost job creation, catalyze investment in our people, and achieve greater regional prosperity. The President of CANCERO also noted that earlier this year the largest Mexican steel mills collaborated with U.S. Customs and Border Protection (CBP) on a pilot program for “trade digitization and supply chain security for steel exports entering the U.S. As part of the pilot, Mexican steel companies have approved a Steel Tech Demo in collaboration with CBP.” The main objective of the project is to “ensure trust, efficiency and transparency that the steel produced and exported from Mexico into the U.S. has a traceable footprint,” complying with CBP requirements for origin. U.S. Interest Grows in Favoring Clean Steel, Like That from Mexico The CANACERO letter makes another key statement: The use of Mexican steel represents a step forward in the fight against climate change given the fact that it is one of the cleanest in the world. The vast majority of Mexican steel is produced with electric arc furnace technology with carbon emissions way below the world’s average. As the U.S. has become more concerned about climate change and the need to protect the competitiveness of the U.S. steel industry, which is making ,large investments to produce clean steel. So interest is growing in developing a system that favors clean steel imports. Three Republicans led by Louisiana Sen. Bill Cassidy introduced legislation Nov. 2 that would “impose a fee on products imported from high greenhouse gas-emitting countries, a move aimed at protecting U.S. manufacturers from competition from China and other countries with lax environmental standards,” reported Politico. “With the foreign pollution fee, we’re attempting to level the playing field to say, ‘OK, China, if you choose not to enforce environmental regulations, we’re going to levy a fee to compensate our country,’” Cassidy said in an interview, characterizing the proposal as a “Republican climate policy.” The American Iron and Steel Institute (AISI), a Washington-based trade association, expressed enthusiasm. “The most effective way to reduce global greenhouse gas (GHG) emissions is through policies that hold the most GHG-intensive producers in the world accountable,” said Kevin Dempsey, the institute’s president, in a press release. “AISI thanks Senator Cassidy for his leadership in introducing legislation to establish a GHG border fee to accomplish that goal.” Some AISI members, such as Nucor, use electric arc furnaces with limited emissions, but, according to Reuters, one of the largest, Cleveland-Cliffs is making a massive “bet on blast furnaces,” which, in their current state, are less environmentally friendly. The Cassidy bill follows bipartisan legislation from Sens. Kevin Cramer (R-ND) and Chris Coons (D-Del) that would order the Department of Energy to produce a study on the emissions intensity of producing various goods in different countries “in order to demonstrate the relative ‘carbon advantage’ that U.S. companies have over their foreign competitors.” Either of these steps could eventually lead to a U.S. carbon border adjustment mechanism (CBAM) that would apply penalties for high-carbon imports. Inevitable Movement of the Global Steel Industry Toward Decarbonization It is clear that the global steel industry will have to get cleaner. A report issued last month by the research firm Wood Mackenzie concluded: Decarbonisation will support the emergence of new production, processing and trading hubs for low-carbon iron and steel. Driven by rising demand for green steel, the industry’s push for net zero is set to transform the value chain of a commodity essential to the industrialised world. The report, titled, “Metalmorphosis: How decarbonization is transforming the iron and steel industry,” pointed to three driving factors: “1) steel producers moving to phase out highly polluting blast furnaces and replace these with electric arc furnaces (EAFs), powered by renewables; 2) growing demand for less carbon-intensive feedstocks; and 3) the steel industry’s increased use of high-grade scrap through recycling.” The firm predicts that “mature markets with higher carbon prices will move [away] from importing finished steel from more emissions-intensive producers, such as China and India.” Instead, low-emission steel produced in electric-arc furnaces (EAF) will dominate. Wood Mackenzie notes that “steelmakers in Europe, Japan, China and the US are the first responders in EAF adoption.” The firm neglects to mention Mexico, where producers like Deacero, the Monterey-based family-owned steel manufacturer, is a leader in green steel production. An Environment & Energy article about the report quoted its co-author, Isha Chaudhary of Wood Mackenzie: Iron and steel production accounts for approximately 8% of the world’s carbon emissions and is a hard-to-abate industry. With the right levels of investment and policy support, decarbonizing the industry is a realizable goal, bringing with it the potential to transform the industry outlook. Chauydhary continued, “As this transformation takes hold, the impact on trade patterns and the steel value chain will be substantial. The decarbonization of iron and steel is already underway, and few industry players will be left untouched.” Near-Shoring Boosts Mexico’s Economy – and Helps the U.S. as Well In a piece headlined, “Mexican businesses warmed by glow of ‘near-shoring’ dawn,” Reuters reported that “the trend of locating manufacturing capacity in Mexico, closer to the U.S. market, rather than in Asia [is projected to] add up to 1.2 percentage points to growth, which is expected to reach 3.5% this year.” The article by Noe Torres on Nov. 6 added: Nearshoring was on the lips of many executives during third quarter earnings calls, and in the first six months of 2023, Mexico raked in around $29 billion in foreign direct investment, up 5.6% from 2022. More than half was in the industrial sector. Near-shoring benefits not just Mexico, but the U.S. as well. Shorter and more secure supply chains substitute for longer ones to Asian markets like China, which have been found to be unstable. Torres quoted Lorenzo Berho, head of construction firm Vesta as saying that Mexico “has a great labor pool. It has good logistics. Enrique Navarro, finance chief at Banco Regional said that relocation activity should fuel "a lot of growth" in northern, western and central Mexico. “As it seeks to lure manufacturing capacity away from Asia, Mexico can take advantage of its shared border with the United States, the world's largest economy, and multiple trade pacts, including USMCA, which includes Canada,” said the article. In a good example of the trend, Deacero imports scrap from the U.S. to Mexico, uses it to manufacture steel wire, which is then sent to a Mid Continent Steel & Wire, a Deacero subsidiary in Poplar Bluff, Mo., that is the largest U.S. nail manufacturer and a major employer in southeast Missouri. The Reuters article reported that “total Mexican construction output jumped almost by 46% in August year-on-year.”
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