Are Biden's Tariff-Rate Quotas on European Steel an Improvement Over Trump's Steel Tariffs?

One of the most irritating parts about the Trump presidency and his attempt to "Make America Great Again" was his protectionism. Trump's favorite weapon of choice in his attempts to restrict imports from other countries was the tariff. The tariff that had considerable impact was when he made the decision in March 2018 to implement a 25 percent tariff on steel. This tariff was not only placed on China, but also on U.S. allies in Europe. Trump's argument for the tariffs was that he was helping out the U.S. manufacturing industry. When I criticized Trump's steel tariff, I pointed out how it would cause net job loss, increase prices for the U.S. consumer for multiple goods, create negative macroeconomic effects, increase the likelihood of trade wars, and do next to nothing to prevent the decline in U.S. manufacturing that Trump was trying to minimize. A year later, I illustrated how the results of Trump's tariffs aligned with economic theory. In other words, in spite of Trump's assertion that we would be doing so much winning, the American economy and the American people did anything but win as a result of his tariffs. 

Given how evident the damage caused by Trump's tariffs, I was hoping that Biden would have done the simple, yet effective policy reversal by eliminating Trump's tariffs. Instead of reducing the tariff rate to 0 percent, Biden made a different agreement with the European Union: a tariff-rate quota (TRQ) system on steel and aluminum. The TRQ acts as a hybrid between a tariff and an import quota. To clarify the trade jargon here, a tariff is a tax imposed on imports entering a country. An import quota is a limit of a quantity of a certain good that can enter the country. In the case of a TRQ, anything below the threshold is either taxed at a reduced rate or is duty-free. If the quantity of imports exceeds the agreed-upon threshold, then a larger tax is imposed on the goods that surpass that threshold. Essentially, a TRQ is a two-tier tariff system. To get a summary of the economics of TRQs, you can read what the U.S. Department of Agriculture (USDA) published here.

Here is how Biden's latest TRQ works. As of January 1, 2022, a TRQ on steel and aluminum coming in from the European Union went into effect. The Trump-era tariffs for steel imported from other countries still remains in effect. Under this TRQ, the annual import volume on steel from Europe is 3.3 million metric tons (MMT). The TRQs are based on a first-come, first-serve system. The first 3.3 MMT of steel that enters the United States from the European Union will not be subject to tariffs. If the imports exceed the 3.3 MMT quota, any subsequent steel imports will be walloped with the 25 percent tariffs. 

The question to ask ourselves is whether Biden's TRQ was an acceptable trade policy choice. As we see from the chart provided by the USDA report below, much of the answer to that question will depend on whether steel imports are high enough to make the quota binding or not. I worry for a few reasons that steel imports would exceed the quota. One, European countries will be incentivized to import steel earlier than later so they can get the discounted rate. Two, steel import data show that the annual average imported from 2017 to 2019 would have rendered this quota binding. Three, the American Iron and Steel Institute found that U.S. steel imports increased 44.6 percent from November 2020 to November 2021. Four, the World Steel Association projects that steel demand is only to increase through 2022. 

Steel industry trends combined with economic incentive signal that 2022 steel imports would most probably exceed the limit in the TRQ. What we cannot know at this time is by how much. Even so, we know based on previous tariffs that any of the imports beyond the quota will be subject to the 25 percent tariffs. In theory, Biden's TRQ sounds like an improvement over the Trump's policy because it would mean fewer goods subject to high tariffs. It also reduced trade tensions between the United States and the European Union, as well as remove previously existing forms of EU tariff retaliation. However, I take issue with Biden's TRQ for a number of reasons.

1. The tariffs under Section 232 were intended for exigent national security reasons. While Trump had spurious reasoning for his usage of Section 232, Biden is not even hiding his reasoning for the reckless usage of Section 232: climate change.
2. Speaking of flaunting certain violation of norms, Biden's TRQ violates the World Trade Organization (WTO) rules. More specifically, the most favored nation (MFN) principle in WTO agreements states that if a member reduces export restrictions on one country, it has to do so for all countries. If some of the most prominent members of the WTO cannot follow its own rules, it undermines the validity of the WTO.
3. This violation of WTO norms not only has the potential to harm relations with other such countries as the United Kingdom, Japan, and South Korea. Biden kept the Section 232 tariffs on these allies because he claimed that the tariffs are good for national security. If we extended the same deal (or even a better deal) to these nations, we could also help ease the bottleneck in our supply chains.    
4. There are 54 distinct quotas, which means more enforcement and red tape. The complexities within the quota score-keeping mean more politicking and more rent-seeking. This will also make it more difficult for domestic producers who rely on imported steel and aluminum inputs to find what works best for their business. Larger steel- and aluminum-using domestic firms will be at an advantage because they will have the manpower to navigate the paperwork and the bureaucracy to get the import quota rights. 
• As economist Anne Krueger makes clear, "Because they [European firms] will not have to sell more cheaply to offset what used to be 25 percent, they can instead raise their prices on their exports within the quota quantity." What was once tariff revenue for the U.S. government is now revenue for European producers of steel and aluminum. Larger steel- and aluminum-using domestic producers will also be in a better position to seek financial relief (much like we saw in the Trump administration), which means an erosion of competitiveness and productivity growth throughout multiple markets. 
5. Supply and demand are changing constantly. There is no bureaucrat who has the clairvoyance to predict how the markets are going to play out and which quota would be acceptable. As domestic demand increases, the percent of foreign steel as a share of the market increases. Given that the quotas set are below average of import levels from 2017-2019 and demand is projected to increase, the quotas currently in place will most probably be restrictive in terms of growth for the multiple industries with steel as an input.  
6. As the Coalition of American Metal Manufacturers points out, U.S. steel-using manufacturers are losing business to competitors in other countries because the protectionism does not allow them to have access to the raw materials necessary to stay competitive in the global market. While limiting supply and driving up prices helps domestic steelmakers, it hurts downstream producers that use steel as an input, which ultimately hurts U.S. consumers. 
7. A TRQ is definitionally a two-tier tariff system. As such, one does not get rid of all the costs of tariffs by switching it with a TRQ. Even with the best implementation, one merely minimizes the distortionary, negative effects of tariffs (see here, here, and here for my past analysis on the harm of tariffs). Whether we are talking about tariffs, import quotas, or tariff-rate quotas, they all distort the competitive market for the worst. 

Conclusion: I did not think it would be possible for a president to do a comparable amount of damage to trade as Trump did, but then along came Biden. What the net effects of the TRQs are still unknown because it depends on how well implementation goes. While Biden's move solved some problems with the TRQ, it also caused others. Biden could have simply removed the tariffs and allowed free trade to flourish. Instead, he opted for a more convoluted form of protectionism entangled with bureaucracy and red tape. Whether it was Trump's misguided attempt to punish foreign nations or a misguided attempt at climate change policy, it is ultimately U.S. consumers and downstream manufacturers that pay the price for this nonsensical trade policy. One thing has been made abundantly clear in recent U.S. trade policy: neither the Republican Party nor the Democratic Party presently care to help out the American people by making trade freer.