Experts: Carve-Outs for Canadian, Mexican Steel, Aluminum Section 232 Tariffs Likely

Former Canadian Deputy Trade Minister Tim Sargent said at the Center for Strategic and International Studies that Canadian officials and U.S. officials are talking about steel, aluminum and copper Section 232 tariffs.

"Not even autos," Sargent said Oct. 22, as he described how narrow the focus is for tariff relief.

"It is in the U.S.'s immediate interest to settle," he said, given the growing demand for copper, the fact that the U.S. doesn't have a lot of domestic production of primary aluminum, and therefore, has to import more expensive aluminum, and that Canada has traditionally bought more American steel than it exports to the U.S.

He said the terms of a carve-out in those categories "probably can be settled in a way that will be reasonably acceptable to Canada."

Moderator Christopher Hernandez-Roy, deputy director of CSIS's Americas program, referred to press reports from Mexico that quoted Deputy Minister of Foreign Trade Luis Rosendo Gutiérrez saying that Mexico is hoping that by Nov. 1, the U.S. will agree to lower fentanyl tariffs to 12% from the current 25%. (Those tariffs only apply to goods that don't meet USMCA rules of origin.) He also said that the Mexican government is seeking tariff relief on automobiles, steel, aluminum and copper.

Hernandez-Roy asked Karen Antebi, who was a trade counselor in Mexico's Washington embassy 2016-2019, and who also worked on trade for Mexico in the '90s and '00s, whether she thought that was realistic.

Antebi said it could happen. "The question would be, why? As far as I can see, tariffs are the president’s preferred lever in international affairs … so why would he give it up?"

In response to a follow-up question from International Trade Today on whether Canada and Mexico can live with a 25% tariff on cars assembled in their countries as long as they get carve-outs in metals and continue to be able to export parts duty-free, Sargent said that most of the negotiation action is in steel, aluminum and copper, and trying to reach an agreement where Canada can export at historical volumes without paying tariffs.

With regard to leaving the 25% tariff on cars in place, he said, "At least half the parts come from the U.S." in Canadian-assembled vehicles, so the effective tariff is more like 12%. "Can Canada live with that, at least in the short to medium term? Probably, ideally, we’d get that somewhat lower. I don't think we’re going to see unlimited trade, certainly [not] on the auto side."

He said he thinks there will be quotas, but instead of Canada protecting its production through quotas, as it did in the original U.S.-Canada auto pacts in the 1960s, it will be the U.S. using quotas to limit Canadian participation in its market.

Finished cars and parts may continue to have very different treatment. He said that if the U.S. imposed such high tariffs on Canadian and Mexican auto parts that it became uneconomical to import them "you will idle auto plants in the United States. And that is not something the administration is going to countenance."

Similarly, Antebi said the focus of negotiations between the U.S. and Mexico has been on steel and aluminum.

"There is an opportunity for a managed-trade-like agreement," she said, and added that, depending on the details, "I think Mexico would be receptive to that."

"As far as the 25% on autos [remaining in place]? I would like to say no; however, it depends on what that looks like," she said.

Hernandez-Roy interjected that 25% is higher than what Japanese and European exports face.

Antebi said it's possible the 25% headline remains, but effectively, the tariff is lower than the competition overseas.

"That’s why you have lawyers," she quipped. "So we’ll see."

While all the panelists agreed that Mexico and Canada won't get the trade predictability they would like, given the steady stream of new Section 232 investigations, Philip Luck, the director of CSIS's economics program, said how much of the free trade USMCA granted continues after the review may depend both on inflation numbers and on whether China has ended its boycott of U.S. soybeans and other crops.

"I think they spiked the ball too soon that tariffs weren’t going to affect prices," said Luck, who served in the Biden administration.

And, he said, if the boycott continues, farmers will be pushing Congress to restore free trade in North America in agriculture, its inputs and machinery used in farming.