On May 4, 2020, former Secretary of Commerce Wilbur Ross announced the initiation of a Section 232 investigation into whether certain transformer components used in electrical power grids are imported in quantities that threaten national security. See SmarTrade Update of May 11, 2020. The investigation focused on transformers and transformer components (i.e., laminations and cores) for which the crucial input is grain-oriented electrical steel (GOES). Despite the formal request for public comments on the matter and a November 2020 decision by former President Donald Trump to exclude Mexico from any formal Section 232 actions (see Update of November 5, 2020), no formal determination was issued by the Department of Commerce on this investigation, and no actions were taken by then-President Trump within the statutory time period. Further, the report by the Department of Commerce was not released until July 2021. The Department of Commerce report was made public for the first time last month and revealed a number of noteworthy findings:
- The global transformer industry is dominated by large multinational companies that offer a wide product range and benefit from economies of scale, with a number of smaller domestic companies that also manufacture these products.
- The United States essentially has one manufacturer of these products, and the market has eroded “due to the migration of production of transformer components (and finished transformers) out of the United States. If this manufacturer were to shut down GOES production, “the United States would be completely dependent on foreign sources for material critical to the manufacture of transformers.”
- Large Power Transformers (LPTs) are among the most critical elements of the United States Bulk-Power System (BPS), and the United States is “highly dependent” on foreign-sourced transformers. This dependence on imports leaves the United States with “insufficient production capability for LPTs to meet the needs of the critical energy infrastructure of the United States.”
- The United States lacks sufficient capacity to produce transformer cores and laminations, which are the key components in transformers. Currently, transformer manufacturers in the United States rely on foreign sources to meet over 75 percent of demand.
The report notes that the energy sector has been identified by the Cybersecurity and Infrastructure Security Agency (CISA) as a critical infrastructure sector “whose assets, systems, and networks, whether physical or virtual, are considered so vital to the United States that their incapacitation or destruction would have a debilitating effect on [the national] security” of the United States. Since the U.S. electricity industry contains more than 9.700 power plants, with hundreds of thousands of miles of transmission lines and transformers, the failure of the U.S. power structure, and specifically LPTs, presents a “growing concern” for vulnerability, threats and the need for enhanced security.
Despite no actions in response by then-President Trump, the report did offer the following “non-mutually exclusive” options to address threats to the national security:
- Negotiate either bilaterally or trilaterally with Canada and Mexico to reduce imports of subject products and/or to utilize more U.S. GOES in their production.
- Impose tariffs or quotas on imports of some or all of the products subject to this investigation.
- Provide direct production subsidies or R&D, capital expenditure loans, or other financial incentives to support domestic production of the products.
- Impose domestic content requirements for transformers.
- Establish a stockpile for some or all of the transformers and related products.
- Change the Harmonized Tariff Schedule (HTS) classification for laminations and cores to the steel HTS category rather than the transformer category.
- Establish a working group to provide further recommendations.
Overall, the report concluded that domestic production of these products “is sufficient to support critical infrastructure and national security requirements and U.S. firms remain competitive” despite their dependence on imported transformers and related parts.