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 manufacturersassuming 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 foreignimports ofseven specific kindsof steel once they exceed historical average volumes. It's an emergency tool the federal government's never used before. Many manufacturerswould 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 tryingto persuade the Canadian International Trade Tribunal to reverse Finance Minister Bill Morneau'sdecision 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 forcountries like China who've been caught dumping steel. This new surtax is part of apushto curb global overproduction and keepcheap steel from sneakinginto North American supply chains.

But in the process, Canada's surtaxalso hitsfairly-traded steel from countries Canada normally counts as allies, includingJapan and the European Union.

Companies already finding it hard to sourcequality, affordable steelare about to see more of their best options taxed.

Mexico upset

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

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

Mexicoconveyed itsconcerns by telephone last Monday to Foreign Affairs Minister Chrystia Freeland.

American steel products,already subject to a 25 per cent tit-for-tattariff in retaliationfor the levy slapped on Canada at the start of the summer, areexempt from Canada's new surtax.

Morneau's report to cabinetjustifying all thisis 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 predatethe global disruptioncaused by the Trump administration citing"national security" as grounds to protectits domestic steel industry. The U.S. imposed 25 per cent tariffs on steel imports starting in March2018, although trading partners like Canada, Mexico and the European Union were exempt until early lastsummer.

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 itin the near future.

"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," Goldmansaid."Imports have historically played a much larger role in Canada relative to the U.S."

While some American mills may have been strugglingbefore the Trump administration acted, Canadianbalance sheets arein the black, Goldman said.

Canada's steel mills are mostly foreign-owned and oriented toward largeAmerican 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 busyserving domestic customers inside itsnewtariff wall.

That's a problem for theconstruction sector in places like Western Canada; mills from the U.S. Pacific Northwest were far less expensive to ship fromthan Ontario mills. Goldmanhas aclient who was quoted a rail shipping rate of $170/tonne from Hamilton, Ont. and $29/tonne by shipping containerfrom 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 productsas the market responds tosupply shortages.

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 safeguardsare meant to helpmiddle-class workers, it should remember thatfar 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 alternativesin 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 saidthe cost of acondominium may increase by $10,000.

Finance admitsshortages exist

Appearing before the House of Commons trade committeeTuesday, Morneaudefended the surtax andsaid retaliation from other countries was "not an immediate concern."

"Wedidn'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 havemade the casethat steel shortages existthat can't be addressed by Canadiansuppliers, at least in the short term.

Accordingly, 50Canadian 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 toa quarter of the total surtaxes Canada has collectedon U.S. imports so far.

"We made a commitment to use the revenues that come in to support the industry," Morneau told the committee. ButOpposition MPs said the process is too difficult for smaller businesses and realrelief 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 returnto an "appropriately free market," Morneausaid.Canada is having "positive interactions" with the U.S. on steel tariffs and "there is a path" toresolution.

Is the new steel surtaxpart 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," TodghamCherniaksaid.

But the Trump administrationalso wants countries like Canada and Mexico to limit theirfuture steel exports with quotas.

In an interview with CBC Ottawa Morninghost Robyn Bresnahan on Thursday, Freeland was asked what Canada was prepared to give up to get steeltariffs 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 opsmakes TodghamCherniakwonder if Canada's embraced some Americanpolitical strategyas 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.