The steel tariff. What does it mean to the construction industry and to individual steel fabricators?

In 1933, Franklin Delano Roosevelt bolstered the national psyche by suggesting that “the only thing we have to fear is fear itself!” Eighty-five years later, in the summer of 2018, we might paraphrase Roosevelt by suggesting that “the only thing of which we can be certain is that construction markets abhor uncertainty!”

As of mid-June the administration’s Section 232¹ 25% steel tariff will have been a topic of discussion for over three months. Some aspects of the tariffs have become clearer than they were when the tariff was first announced in March. However, the extent of its scope, the potential exemption of some U.S. trading partners, the potential expansion of the tariff to other trading partners, the potential exclusion of some steel products,² and the possibility of combining or replacing some tariffs with quotas remain subject to change. Therefore the long-term impact of the tariff remains uncertain.

But this uncertainty need not give rise to fear in either the overall domestic construction economy or the fabricated structural steel sector of that economy. The tariffs have not created some cataclysmic event in the history of steel pricing; or some event that will stall the current expansion of the construction economy in the United States. With perspective, the current uncertainty can be managed.

Bureau of Labor Statistics and Producer Price Index data reviewed over the past several decades suggest that while the construction market has experienced short-term price instability (at least some of the current instability driven by speculation), current prices are still well below historic highs and fluctuate within a relatively stable band when viewed across the past decade. Likewise, market delivery lead time appears to also fluctuate within this relatively stable band. Current lead time appears to be attributable more to market demand and other cyclical factors than to the tariff. Most importantly, there is no shortage of either steel mill or fabrication industry capacity in the United States – more than sufficient capacity exists to meet increased construction industry demand.³

While short-term market conditions on individual projects can be problematic, the current, limited nature of the tariff,⁴ its prospective exclusions and exemptions, and a variety of alternate procurement options may well make the long-term impact of the Section 232 tariff on the domestic construction industry negligible.

For example, in the unlikely event that no alternatives to tariff-sanctioned products existed, full transfer and absorption of a 25% tariff on the raw materials utilized in fabricating structural steel directly into the domestic construction market would likely only increase the overall framing cost of a hypothetical commercial office building⁵ by something less than 2%.⁶ The prospective exclusions and exemptions to the tariff suggest that only a fraction of the direct impact of the tariff on sanctioned goods will ultimately find its way into the domestic construction marketplace.

However, the process by which the tariffs have been implemented to date have created short-term uncertainty.⁷ This uncertainty, in turn, has simultaneously spawned restraint, speculation and, in some instances, what could be considered counter-intuitive market strategies.⁸

This e-alert will explain the basis and current extent of the tariffs, how they relate to other potential trade sanctions, and options open to individual companies that must deal with cost escalation created directly or indirectly by these tariffs.

1. Tariffs and other international trade sanctions distinguished

(a) Section 232

On March 8, 2018, President Trump issued two Proclamations providing for imposition of import duties on steel mill articles entering the United States from specified countries. These Proclamations were issued under the authority of Section 232 of the Trade Expansion Act of 1962 subsequent to an investigation initiated by the Department of Commerce in April, 2017. That investigation was initiated, “in light of the large volumes of excess global steel production and capacity – much of which [were said to have resulted] from foreign government subsidies and other unfair practices – which distort the U.S. and global steel markets.”

Section 232 investigations are initiated by the Department of Commerce to determine the effects of imported articles on U.S. national security. The results of the 2017 Section 232 investigation were felt to have warranted impositions of the tariffs ultimately ordered by President Trump in March, 2018.

The American Institute of Steel Construction and other industry participants continue to monitor the process and are seeking implementation of federal action to prevent circumvention of the spirit of the current Section 232 tariff that would harm the domestic fabricated structural steel industry.⁹

(b) Section 301

In a separate action, in March the Trump administration also announced imposition of tariffs under Section 301 of the U.S. Trade Act of 1974 on approximately $50 billion worth of Chinese imports.¹⁰ These tariffs were imposed in response to investigative findings by the Department of Commerce that substantiated Chinese policies of coercion. In the course of the Section 301 investigation American companies were found to have been coerced into transferring proprietary technology and intellectual property to domestic Chinese enterprises as a precondition of conducting business in China.¹¹

Section 301 also allows private parties to seek redress through the U.S. government if their commercial interests have been harmed by illegal actions of foreign governments. On May 15, 2018, Jeff Sterner, President and COO of High Steel Structures and a member of the AISC Board of Directors, testified on behalf of AISC before the United States Trade Representative Section 301 Committee. Mr. Sterner requested that the administration add the principal Harmonized Tariff Schedule (HTS) codes for fabricated structural steel to the Section 301 tariff list issued against Chinese imports. Including fabricated steel assemblies in any action taken under Section 301 would close the Section 232 circumvention loophole and protect U.S. businesses in the design and construction industries.

(c) Antidumping and Countervailing Duty Actions

Members of private industry, such as the fabricated structural steel industry, can also petition government to seek redress from what participants in the industry believe to be violation of international trade law through antidumping and countervailing actions. These actions are initiated with the U.S. Department of Commerce and the International Trade Commission by private individuals and companies.

A standard technical definition of dumping is the act of charging a lower price for the like product in a foreign market than the normal value of the product in its country of origin – for example charging less for the product in the export market than the price of the same product in the domestic market of the exporter or in a third country market. The implied objective of dumping is to increase market share in a foreign market by driving out competition, thereby creating a monopoly situation where the exporter will be able to unilaterally dictate both price and quality of the product. Where dumping and damage to a domestic industry can be established, the United States government can impose antidumping duties against the sanctioned, exporting country.

The U.S. Department of Commerce can also impose countervailing duties against countries found guilty of providing illegal, or “counterviable,” subsidies to its industrial exporters in an effort to gain an illegal advantage over competing products in an importing country – situations where a foreign country is found to have illegally subsidized its exporters with resulting injury to domestic producers of like products in the importing country.
As of the date of this writing, all four areas of redress for violation of international trade law may be in play: Section 232 investigations, Section 301 investigations, antidumping investigations, and countervailing duty investigations.

2. Relief from the impact of tariffs.

The enabling federal legislation granting authority for the administration to establish tariffs provides limited relief to some workers displaced by imposition of the tariffs. However, the legislation does not contain a mechanism to address the tariff’s impact on private contracts.

Wartime “national security” actions taken by the federal government that disrupt private commerce – usually diversion of materials – can, in theory, temporarily excuse an impacted contractor from the duty to perform or liability for delay in performance of a private contract caused by wartime governmental action. However, this remedy does not expressly provide for reimbursement, on private contracts, of cost increases incurred as a result of the governmental action. In other words, under the right set of facts a private party might be able to walk away from a contract impacted by government action; but the private contractor is not guaranteed a price increase if it sticks around and completes the work. There may be a limited exception to this general principle that will allow reimbursement of increased costs incurred in these circumstances under contracts with the federal government.

There is a considerable body of law dealing with “force majeure” events, wartime risk-shifting regulations, and the Uniform Commercial Code and Common Law principles of “impracticability,” ‘frustration of purpose,” and “impossibility” of performance. However, again, the remedy provided by these legal principles is generally limited to relief from the duty to perform the private contract in question or relief from liability for the consequences of delay in performance of the private contract. Absent enabling contract provisions allowing for price adjustment, these legal principles, on their own, do not specifically allow contract price adjustment when a party with a duty to perform is faced with a force majeure event or circumstances that make performance impossible or commercially impracticable.

These principles do, of course, offer some bargaining leverage to a private contractor when negotiating a price increase. If the private contractor can make a convincing case that it is entitled to “walk away” from a contract obligation under one of the legal theories reference above, it could be less expensive for the project owner to negotiate a cost increase than to find a new contractor to complete the work and/or fight the issue in the legal system. We are aware of one such gutsy strategy that was successfully carried out by a steel fabricator on a large project during the 2004 cost escalation driven by global scrap prices.

A key element in all of these remedies is the extent to which the price escalation or market disruption could have been anticipated by the private party at the time that it entered into a fixed price contract. In 2004 the scrap crisis came on suddenly and without warning to most participants in the fabricated structural steel industry. The element of surprise and breadth of the impact on the construction industry shored up our arguments in 2004.

Not so for the steel tariff. Its potential application has been a subject of discussion, in one form or another, for months. At this point it is very difficult to argue that the tariff is, or was, unanticipated. This means that the issue of actual or potential cost increases to the industry arising as a result of the tariff has to be addressed differently on private contracts for (1) existing contracts in place at the time that the President first tweeted his intention to levy the tariff earlier this year, (2) pending bids, and (3) future bids.

Because there is frequent confusion over some of the legal terms surrounding this issue, let’s take a little more space to delve into some of the relevant legalese:

a. Force Majeure

This is the most commonly used and most commonly-misunderstood legal term that is bandied about when the unexpected occurs and costs increase during performance of a fixed-price contract.

Force Majeure is a French term, literally meaning “superior force.” The clearest definition of force majeure, in our view, comes from the Cambridge English Dictionary: “an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement.”

The possibility that a force majeure event can excuse contract performance or give rise to a contract price adjustment is solely a creature of the French Civil Code, not the English or American Common Law. Absent a specific contract clause incorporating the French Civil Law force majeure principle, force majeure relief is not automatically applicable to construction contracts in the United States.¹⁴

This is important for two reasons. First, because the French force majeure principle is more forgiving than its American equivalent, discussed below; and, second, because, for the French force majeure principle to apply to American construction contracts, a force majeure clause must be specifically written into the contract.

Also, because the force majeure legal principle is not a creature of English or American Common Law, when a force majeure clause is incorporated into an American construction contract there is a strong probability that a court or arbitration panel will likely enforce the force majeure provision exactly as written. We have seen instances where force majeure clauses were terribly one-sided and imposed harsher results on unsuspecting contractors than would have existed had there been no clause at all. As with all contract clauses, force majeure provisions must be read carefully before they are accepted.

b. Impossibility of Performance, Impracticability of Performance, and Frustration of Purpose under the Uniform Commercial Code and the Restatement of the Law of Contracts

These are the American equivalents of the French principle of force majeure. If the need should arise, refer your counsel to cases indexed under UCC Section 2-615 and Section 261 of the Restatement of the Law of Contracts.

As indicated above, the relief provided by the UCC and American Common Law is generally not as comprehensive as that provided by the French Civil Law’s force majeure principle. Application of the UCC and the cases indexed under the UCC and under the Restatement is an extremely fact-sensitive process; and the most fact-sensitive element in that process is the degree to which the event in question could have been anticipated by the parties at the time the contract was executed.

c. Omnibus price adjustment clauses.

An omnibus price adjustment clause is not the same as a force majeure clause. A force majeure clause is generally more comprehensive in nature whereas a price adjustment clause is more narrowly focused on fluctuations, up or down, in contract costs tied to a specific industry index. The existence of these clauses in construction contracts recognizes the potential for volatility in component costs but the inability of the market to accurately predict the quantum, or direction, of that volatility.

In 2004 the American Institute of Steel Construction (AISC) constituted a balanced committee of industry professionals that prepared a suggested industry price adjustment clause.15 The standard terms and conditions published by many state DOT’s and other agencies include a wide variety of price adjustment clauses. The rationale behind incorporation of these clauses on public contract work is that, in the long run, a public owner with an ongoing portfolio of work will pay less for that work if contractors are not forced to include contingency costs in their bids for potential market volatility.¹⁶

3. Conclusion and Recommendations – these are fairly straight-forward

(a) Keep yourself apprised of the administration’s policy determinations in this area as they unfold; and keep your options open. Know what alternate sources of material are available – these may change over time.

(b) Support AISC’s efforts to petition government for uniform application and enforcement of its tariff authority.

(c) Read your contracts. Where appropriate negotiate for fair price adjustment and force majeure clauses.

(d) Give serious consideration to legitimate inquiries for substantiating data to support antidumping and countervailing duty cases against countries that are violating international trade law.

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¹Section 232 of the Trade Expansion Act of 1962

²As of the date of publication of this article it is said that in excess of 10,000 requests for exemption have been received by the Department of Commerce – creating a considerable backlog.

³See, www.aisc.org/why-steel/made-in-america/, http://markets.businessinsider.com/commodities/news/nucor-ceo-not-worried-about-steel-supply-shortage-2018-4-1021701824.

⁴In its current form, the Section 232 tariff applies only to “raw” mill imports from sanctioned countries; not to fabricated steel components or to “raw” materials imported from countries not subject to the tariff.

⁵A comparable impact could be expected for concrete framed structures as a function of the amount of reinforcing steel in the structure and increasing concrete prices.

⁶March 2018 study published by the American Institute of Steel Construction. American Metal Market, March 8, 2018.

⁷See, “Gilbane GC Monitoring Contracts Amid Steel Tariff Questions,” Law 360 (May 23, 2018).

⁸See, “Why Caterpillar can’t keep up with a boom in demand.”

⁹See, Yoders, Jeff, “US Steel Fabricators Want Tariffs Extended to Foreign Shops,” Engineering News Record, April 18, 2018.

¹⁰Section 301 authorized the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce.

¹¹As reported by Politico on Tuesday, June 12, 2018, USTR is expected to publish the final list of goods that will be hit with the duties by Friday, June 15, 2018, and then impose the tariffs shortly thereafter, according to a May 29 White House announcement. The authorizing statute for the tariffs, Section 301 of the 1974 Trade Act, allows USTR to take up to 30 days to put the duties in place after a formal determination is published in the Federal Register. So far, USTR has not published that determination. In addition, President Trump can delay the duties for a maximum of another 180 days if USTR determines that substantial progress is being made in the talks with China, or that a delay would help to bring about a satisfactory solution.

¹²As of the date of publication of this article a number of orders had been issued under this process against China and other countries.

¹³https://en.wikipedia.org/wiki/Dumping_(pricing_policy)

¹⁴Other than possibly in the state of Louisiana.

¹⁵

The Subcontract Price is based on the current prices and surcharges for the steel types and shapes necessary for the Project as posted and made publicly available by _____(STEEL MILL) on ______(DATE). Notwithstanding anything herein to the contrary, any increases or decreases in the price of the steel ordered by Subcontractor for the Project, or any additional surcharges imposed on the steel ordered by Subcontractor for the Project, after _____(DATE) shall result in a corresponding dollar-for-dollar increase (or decrease) in the Subcontract Price.

¹⁶In January 2016, an AASHTO Subcommittee on Construction Contract Administration published a table that compares these clauses on highway contracts across all 50 states. The table is of interest to us because it indicates that many state highway contracts contain provisions dealing with price escalation for asphalt, fuel, and concrete; but not so much for steel.