United States: Exemption of tariffs on steel and aluminum products reached for some countries others extended until 1 June

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1 1 May 2018 Indirect Tax Alert United States: Exemption of tariffs on steel and aluminum products reached for some countries others extended until 1 June EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 30 April 2018, President Trump signed two Presidential proclamations extending the exemption status, until 1 June 2018, for the additional tariffs of 25% on specifically defined articles of steel, and additional tariffs of 10% on specifically defined articles of aluminum for goods imported into the United States (US), from Member States of the European Union (EU), 1 Canada and Mexico. The exemption status for the EU, Canada and Mexico, as well as for Argentina, Australia, Brazil and South Korea, were set to expire at 12:01 am on 1 May under Proclamations 9704 and 9705 and were based on a procedure which allowed countries to reach agreement with the US on satisfactory alternative means to address the threat to the national security caused by imports from that country. Under the latest proclamations, Argentina, Australia and Brazil have now been granted permanent exemption for both additional steel and aluminum tariffs, whereas South Korea has been granted permanent exemption only from the additional steel tariffs.

2 2 Indirect Tax Alert Detailed discussion Background The additional duties were first imposed by President Trump on 8 March following the US Department of Commerce s investigations and recommendations to the President under Section 232 of the Trade Expansion Act of 1962, as amended, which concluded that imports of certain steel and aluminum products threaten to impair the national security of the United States. 2 A detailed list of the products subject to the tariffs may be found in the EY Global Tax Alert, US President Trump imposes tariffs on steel and aluminum products Mexico and Canada excluded, dated 9 March Also in March, the United States Trade Representative announced an agreement in principle on the general terms of amendments and modifications to the United States-Republic of Korea Free Trade Agreement (KORUS FTA), following the negotiation process that began in Both nations are presently finalizing the terms of the KORUS FTA negotiations to meet required domestic procedures in both nations before provisions can be brought into force. The revised agreement addresses key issues related to tariffs on certain products, trade in automobiles, investment and trade remedies.the KORUS FTA includes a quota on exports of steel and aluminum articles to the US, while Korea also extended certain restrictions on exports of trucks to the US as well as increasing the number of vehicles permitted for import into Korea without additional emission standards. Countries impacted by the initial Section 232 duties imposition have all sought negotiations with the Trump Administration. The exemptions provided allowed time for the US to negotiate key trade provisions and amendments to agreements. It is believed the agreements to be finalized with Argentina, Australia and Brazil will have similar provisions, among others. Latest developments Country by Country analysis In the latest proclamations, the US has determined that continuing discussions with the EU Member States, Canada and Mexico warrant continued exemption from the additional duties until 1 June. It is believed that the ongoing renegotiations surrounding The North America Free Trade Agreement (NAFTA) impacted the extension decision. The US also continues to discuss trade imbalance matters with the EU and plans to continue to do so during the extension period. Separately, the US determined that it is appropriate to provide Argentina, Australia and Brazil with a permanent exemption from the additional steel and aluminum duties, in exchange for reaching agreements in principle with each country. This approach is similar to the permanent country exemption from duties on steel made effective 1 May for steel imports from South Korea following the March agreement in renegotiating the KORUS FTA. Details of the latest agreements for Argentina, Australia and Brazil have not yet been released but are expected to be finalized within 30 days. The President has noted specifically in the proclamations however, that if the satisfactory alternative means necessary to finalize the agreement is not achieved in a reasonable time period, re-imposition of the tariffs is possible. It is also important to note that besides the country exemptions noted above, no other specific country exemptions are in process. Latest developments New impacts on multinational companies with US operations The latest proclamations also make key adjustments which may impact importers, manufacturers and exporters of articles subject to the additional tariffs. Specifically, US Foreign-Trade Zone (FTZ) admissions subject to Section 232 at time of import are restricted to the applicable additional duty rates regardless of resultant manufacturing. However, clarification is provided that merchandise produced in an FTZ from non-subject articles, but bearing a tariff number subject to Section 232 at time of entry from the FTZ are not to be subject to the additional duties. For manufacturers, this means that value-added processes in the US FTZ will no longer result in a punitive duty cost. Prior guidance was unclear on this point. Also of importance to note is the inclusion of a restriction on using the US Duty Drawback program for any article of steel or aluminum subject to additional duties under the Section 232 orders. Importers who also have export operations will need to evaluate impact of this restriction for articles ultimately exported from the US to other markets. What to Expect Next One consideration for the extension to 1 June is the negotiations on NAFTA between the US, Mexico and Canada, following seven regional negotiation rounds, which are now

3 Indirect Tax Alert 3 in the Permanent Round. All three countries are working diligently to resolve a number of key points, including duties on steel and aluminum, and other sensitive commodities traded among the partners and trade matters that remain in dispute. Related to steel and aluminum, is the specific content rule of origin being considered for automobiles. The US is also seeking trade concessions from the EU but without a trade agreement to renegotiate. Steel and aluminum from Europe is used in many US industries. The US is seeking reduction of automobile tariff rates into the EU as an offset for exempting steel and aluminum tariffs. Besides the country exemptions, importers should be aware that the original Presidential proclamations acknowledged that for certain articles of steel and aluminum where there is a lack of sufficient US production capacity of comparable products, and provided a process for the Commerce Secretary to exclude import restrictions on those steel articles as necessary based on requests by affected domestic parties. This process has seen approximately 3,800 requests to date, with only 100 or so being processed and posted for requisite public comments. Actions for businesses Importers and exporters of steel and aluminum products under the scope of both orders, and those who use steel and aluminum products made from the subject products, may still be significantly impacted by the additional duties imposed despite the announced country exemptions. Importers of subject articles from the EU, Mexico and Canada should continue to carefully monitor developments under the current extension and prepare alternative planning should the parties not reach agreeable conclusion by 1 June. Additionally, a number of countries not receiving the exemption have either taken or warned of retaliation actions should the tariff remain in place. Therefore, exporters of products to impacted countries should assess the risk of retaliatory duties being imposed in the future. As previously commented, it will be difficult for many companies to adjust supply chains or sourcing patterns quickly, if they can be adjusted at all, and consequently companies may incur significant excess costs. Impacted businesses should review sourcing options, and consider short supply exemptions if merited. US exporters will want to carefully monitor reactions of primary export locations, as the scope of any retaliatory measures could be very broad. Endnotes 1. The European Union (EU) member states include: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. 2. See EY Global Tax Alert, US Department of Commerce proposes duty surcharge on steel and aluminum imports, dated 20 February 2018.

4 4 Indirect Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, Chicago Nathan Gollaher Ernst & Young LLP, Dallas Armando Beteta Bill Methenitis Ernst & Young LLP, Houston Michael Leightman Bryan Schillinger Ernst & Young LLP, Irvine Robert Smith Todd Smith Ernst & Young LLP, New York Jeroen Scholten Ernst & Young LLP, San Jose Michael Heldebrand Ernst & Young LLP, Seattle Dennis Forhart

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