New trade era lies ahead for Canada’s steel and aluminum sectors

The tit-for-tat steel and aluminum tariffs between U.S. and Canadian may have been lifted, but uncertainty remains for these industries and the Canadian businesses they support — at least until a final trade agreement is signed.

Tariffs of 25 per cent on steel aand 10 per cent on aluminum exports to the U.S, implemented by the Trump administration, took effect for Canadian producers May 31 last year under section 232 of the Trade Expansion Act of 1962. (The tariffs had previously been in place since March, but Canada, Mexico and a few other nations had been given temporary exemptions.)

In response, Canada put in place similar tariffs on more than $16-billion of U.S. steel and aluminum imports, and many other products including felt pens, maple syrup and ketchup.

The duties were lifted in May this year, but not without some consequences: Canadian steel and aluminum exports to the U.S. fell to their lowest level in almost a decade, according to Statistics Canada.

Although exports are rebounding, and both industries are breathing a collective sigh of relief, many companies are concerned about the future of free trade, especially with a new agreement to replace the North American Free Trade Agreement (NAFTA) awaiting approval by U.S. legislators.

“You can’t turn sentiment around on a dime,” says Catherine Cobden, president of the Canadian Steel Producers Association, which represents the $15-billion industry responsible for about 23,000 jobs in the country.

NAFTA has been the foundation for the integrated market for more than 25 years, and Canadian steel and aluminum producers have been linchpins in the manufacturing supply chain for American and domestic companies alike, industry associations say.

Ms. Cobden believes the new Canada-United States-Mexico Agreement (CUSMA) — known as the United States, Mexico and Canada Agreement (USMCA) south of the border — would help modernize trade. But it must still be ratified by U.S. Congress, which may not happen soon with the Democrat-controlled House of Representatives focused on impeaching U.S. President Donald Trump, who considers the agreement a key achievement of his administration.

Aluminum producers are also stuck in a holding pattern, says Jean Simard, president of the Aluminium Association of Canada, which represents an industry generating about $5.5-billion annual revenue and employing about 8,500 people.

“The market is very slow,” Mr. Simard says, noting 90 per cent of the approximately 3.2 million tonnes Canada produces is exported to the U.S.

While demand in the U.S. is growing, Mr. Simard said companies are hesitant to hire more workers and expand operations until there’s more certainty with the trade deal.

One key issue for producers is country of origin rules requiring products have an increased, minimum percentage of components from the U.S. to avoid trade penalties under the new agreement. For example, automobiles shipped within North America would have to include at least 75 per cent regional content, Mr. Simard says.

But many firms are uncertain how rules apply to them or how they will be enforced. One worry for the Canadian industry, he adds, is foreign aluminum products coming into the Canadian market and making their way into the U.S. through manufacturing supply chains, resulting in trade violations and tariffs.

“It is a regulatory headache for Canada to ensure its producers can meet the rules and not run into trouble,” he says.

Yet, the need is real to protect the North American market from dumping aluminum, which happens when foreign companies sell their product at below-market prices, negatively affecting domestic producers.

“Canada and the U.S. share the same problem, which is Chinese overcapacity and its impact on the cost and price structure of the global market,” Mr. Simard says.

Government of Canada data from last year show China produces more than 50 per cent of world’s aluminum annually. By comparison, Canada is the third largest producer, accounting for about five per cent of global product.

Mr. Simard notes China embarked on a major urbanization strategy about two decades ago that included hiking its aluminum production dramatically.

Now economic growth in the world’s second-largest economy has slowed. As a result, China’s aluminum industry is faced with excess capacity and is looking to external markets. The U.S, concerned about dumping and under-cutting domestic producers, included China among nations subject to the tariffs.

The same challenges of oversupply apply to steel, Ms. Cobden says.

Again, China accounts for about half of all global production, Canadian government data show. And its production also exceeds domestic demand.

Ms. Cobden says there’s a global surplus of 540 million tonnes of steel in the market today.

“That’s mostly outside of our marketplace trying to get in,” she says

While uncertainty hangs over producers, it is also affecting Canadian manufacturers and exporters requiring aluminum and steel products.

“Everyone is trying to get back to normal,” says Dennis Darby, chief executive officer of Canadian Manufacturers and Exporters.

Mr. Darby says manufacturers had experienced job cuts, decreasing exports and rising prices for steel and aluminum from the tariffs. In many cases, supply chains were disrupted because the market was so integrated, meaning very little product duplication occurred on either side of the border.

“To give you an example, when the tariffs were imposed, there was only one small stainless steel manufacturer in southern Ontario, and it only produced a certain grade of steel for a particular customer in the U.S.,” Mr. Darby says.

The disruption in supply chains posed challenges for companies like Crestline Coach Ltd. in Saskatoon.

Part of a North America consortium of companies manufacturing ambulances and buses, the company of about 260 people had to assign key staff to map out alternative strategies for its supply chain.

“It caused us to restructure to figure out how to mitigate short- and long-term impacts,” says Steve Hoffrogge, Crestline’s president.

The tariffs now gone, the preference is to return to business as usual, he adds. But with no CUSMA firmly in place, Mr. Hoffrogge remains wary.

“You’re sort of a little shy about reverting back to the old supply chain that still has an exposure.”