Over half of small firms unaware of tariff classification after US Section 232 steel overhaul

Export uncertainty is mounting for small and medium-sized enterprises in the steel, aluminum and copper sectors following the US overhaul of Section 232 tariffs under the Trade Expansion Act. More than half of affected firms have yet to determine which annex covers their export products, and four in 10 companies subject to higher tariff rates expressed concern about deteriorating conditions for exports to the US.

The Korea Federation of SMEs said Monday that 56.3 percent of respondents in a survey of 600 small and medium-sized enterprises affected by the Section 232 tariff changes on steel, aluminum and copper had not yet determined the annex classification for their export products.

The United States overhauled its Section 232 tariff structure for steel, aluminum, copper and derivative products on April 2. The key change abolished the previous metal-content value standard and replaced it with a system that applies tariffs based on the full product price. US Customs and Border Protection also announced that the measure would take effect April 6, imposing additional tariffs of 10 to 50 percent on the full customs value of certain steel, aluminum, copper and derivative products.

South Korea's Ministry of Trade, Industry and Energy had earlier said the overhaul would apply a 50 percent additional tariff under Annex I-A to products composed almost entirely of steel, aluminum or copper, and a 25 percent additional tariff under Annex I-B to derivative products with significant metal content. Some industrial machinery and power grid equipment would be subject to a temporary 15 percent rate through 2027, while certain products with low metal content would be excluded from Section 232 tariffs altogether.

Among respondents who had identified their annex classification, Annex II accounted for the largest share at 16.5 percent, followed by Annex III at 11.0 percent, Annex I-A at 8.3 percent and Annex I-B at 7.8 percent.

Some 20.8 percent of respondents said their effective tariff rate had increased, with the average rise coming to 16.2 percentage points compared with the pre-overhaul level. Only 2.8 percent said their rate had fallen. The perceived impact varied by annex. Among firms subject to the 50 percent rate under Annex I-A, 40.0 percent expected their export conditions to worsen, as did 38.3 percent of Annex I-B firms facing the 25 percent rate. By contrast, 67.7 percent of Annex II firms and 42.4 percent of Annex III firms said they expected no change in their export conditions.

Companies anticipating a decline in exports cited deteriorating profitability from higher tariff burdens as their biggest challenge, with 76.1 percent selecting that option in a multiple-response question. Demands from buyers to renegotiate prices or delivery terms were cited by 37.3 percent, while 25.4 percent reported transaction delays or cancellations.

Corporate responses have been limited. Among firms expecting worsening exports, 52.2 percent said they had entered into price and contract negotiations with their trading partners. Cost-reduction efforts were cited by 43.3 percent, while 18.7 percent said they were exploring alternative markets and 15.7 percent were seeking new local buyers in the US.

When asked what government support they wanted, respondents most frequently cited cost-reduction measures and stronger negotiations with the US over annex reclassification, each selected by 40.3 percent. Support for finding alternative markets in third countries was cited by 22.4 percent, and expanded tariff consulting support for HS code changes by 20.1 percent.

In-depth interviews conducted by the federation after the survey confirmed additional cases of increased burden. Fastener manufacturer Company A said it had effectively paid around 25 percent in tariffs before the overhaul by separating out the steel content value, but was now classified under Annex I-A and subject to a 50 percent tariff on the full product price.

Transmission parts manufacturer Company B said its tariff burden had risen from about 15 percent before the overhaul to 25 percent afterward. The company said it was trying to improve its production processes in response to customer demands for cost reductions, but warned that pressure to cut unit prices could intensify as buyers also push for changes to contract terms.

Trade experts say the overhaul is likely to weigh more heavily on small parts manufacturers with high processing and assembly costs than on raw metal producers, because companies whose product prices are dominated by labor, manufacturing and technical processing costs must now pay tariffs on the full product value.

"Small and medium-sized enterprise products whose price structures are weighted more toward processing costs — such as manufacturing and labor — than toward the cost of steel, aluminum or copper materials are now structurally bearing a greater tariff burden," said Kim Hee-joong, head of the economic policy division at the Korea Federation of SMEs. "We need to strengthen negotiations with the United States to achieve a rational annex reclassification that reflects the actual price structure of these products."