[Federal Register Volume 86, Number 220 (Thursday, November 18, 2021)]
[Notices]
[Pages 64606-64685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24958]



[[Page 64605]]

Vol. 86

Thursday,

No. 220

November 18, 2021

Part II





 Department of Commerce





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Bureau of Industry and Security





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Publication of a Report on the Effect of Imports of Transformers and 
Transformer Components on the National Security: An Investigation 
Conducted Under Section 232 of the Trade Expansion Act of 1962, as 
Amended; Notice

  Federal Register / Vol. 86, No. 220 / Thursday, November 18, 2021 / 
Notices  

[[Page 64606]]


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DEPARTMENT OF COMMERCE

Bureau of Industry and Security

RIN 0694-XC085


Publication of a Report on the Effect of Imports of Transformers 
and Transformer Components on the National Security: An Investigation 
Conducted Under Section 232 of the Trade Expansion Act of 1962, as 
Amended

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Publication of a report.

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SUMMARY: The Bureau of Industry and Security (BIS) in this notice is 
publishing a report that summarizes the findings of an investigation 
conducted by the U.S. Department of Commerce (the ``Department'') 
pursuant to Section 232 of the Trade Expansion Act of 1962, as amended 
(``Section 232''), into the effect of imports of transformers and 
transformer components on the national security of the United States. 
This report was completed on October 15, 2020 and posted on the BIS 
website in July 2021. BIS has not published the appendices to the 
report in this notification of report findings, but they are available 
online at the BIS website, along with the rest of the report (see the 
ADDRESSES section).

DATES: The report was completed on October 15, 2020. The report was 
posted on the BIS website in July 2021.

ADDRESSES: The full report, including the appendices to the report, are 
available online at https://www.bis.doc.gov/index.php/documents/section-232-investigations/2790-redacted-goes-report-20210723-ab-redacted/file.

FOR FURTHER INFORMATION CONTACT: Kevin Coyne, Industrial Studies 
Division, Bureau of Industry and Security, U.S. Department of Commerce 
(202) 482-4952, [email protected]. For more information about 
the Section 232 program, including the regulations and the text of 
previous investigations, please see www.bis.doc.gov/232.

SUPPLEMENTARY INFORMATION:

The Effect of Imports of Transformers and Transformer Components on the 
National Security

U.S. Department of Commerce, Bureau of Industry and Security, Office of 
Technology Evaluation

Final Report
October 15, 2020

Table of Contents

I. Executive Summary
II. Legal Framework
III. Investigation Process
IV. Description of Products Subject to the Investigation
V. Importance of Products to Critical Infrastructure and National 
Security
VI. United States' and Global Markets for GOES, Transformers and 
Transformer Components
VII. U.S. Production Capabilities, Industry Health and 
Competitiveness, and the Impact of Imports on National Security for 
Transformer Component Manufactures
VIII. U.S. Production Capabilities, Industry Health and 
Competitiveness, and the Impact of Imports on National Security for 
Transformers
IX. Competitiveness and Labor Issues
X. Findings and Recommendations

Appendices

Appendix A: Section 232 Investigation Notification Letters to U.S. 
Department of Defense, U.S. Department of Energy, and Office of the 
U.S. Trade Representative
Appendix B: Table of Acronyms
Appendix C: Federal Register Notice (85 FR 29926)
Appendix D: Summary of Public Comments
Appendix E: Department of Commerce Survey Instrument
Appendix F: Tariffs and Trade Agreements
Appendix G: Summary of Previous U.S. Government Studies

I. Executive Summary

    On May 4, 2020, U.S. Secretary of Commerce Wilbur Ross announced he 
would initiate an investigation into whether laminations for stacked 
cores for incorporation into transformers, stacked and wound cores for 
incorporation into transformers, electrical transformers, and 
transformer regulators are being imported into the United States in 
such quantities or under such circumstances as to threaten to impair 
the national security. Secretary Ross officially initiated this 
investigation on May 11, 2020, in response to inquiries and requests 
from multiple Members of Congress, a grain-oriented steel manufacturer, 
and producers of power and distribution transformers.
    On May 19, 2020, the Department of Commerce (Department) published 
a Federal Register Notice (See Appendix C--Federal Register, 85 FR 
29926) announcing the initiation of the investigation and inviting 
interested parties to submit written comments, opinions, data, 
information, or advice relevant to the investigation. The Department 
received 79 public comments and 30 rebuttal comments from a wide range 
of interested parties, including industry participants, representatives 
of state and local governments, foreign governments, and trade 
associations. A summary of the public comments received is included in 
Appendix D.
    In addition, the Department surveyed (See Appendix E) 87 U.S. 
companies identified as participating in production or distribution of 
electrical steel, laminations and stacked and wound cores for 
transformers, power and distribution transformers, and voltage 
regulators. Survey responses provided the Department with detailed 
industry information that is otherwise not publicly available and was 
necessary to conduct a thorough analysis for this investigation.
    The Department consulted with the Department of Defense (including 
the Office of Industrial Policy and Defense Logistics Agency) regarding 
methodological and policy questions that arose during the 
investigation. Given the vital role that these products play in the 
energy sector and the critical infrastructure of the country, the 
Department also consulted with the Departments of Energy (Office of 
Electricity) and Homeland Security. In addition, the Department 
consulted with the Office of the United States Trade Representative, 
given the trade implications of any actions taken with regard to 
imports of these products.
    The products subject to this investigation are essential inputs to 
the manufacture and functioning of transformers, as well as the 
finished transformers themselves. In particular, this investigation 
focuses on transformers and transformer components (i.e., laminations 
and cores) for which the crucial input is grain-oriented electrical 
steel (GOES). Transformers are critical assets used to step-up and 
step-down power voltages throughout the electrical grid. As such, they 
are fundamental to the efficient transmission and distribution of 
electricity across the bulk-power system of the United States. The U.S. 
electricity grid supplies residential, commercial, and industrial 
customers, as well as the power required to support military and 
defense installations, including bases, arsenals, and laboratories. A 
simplified schematic of the role of transformers in the electrical grid 
is presented below.

[[Page 64607]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.000

    In addition to transmission and distribution, transformers are used 
widely in major industrial sectors such as mining, manufacturing, and 
chemical processing. Large commercial users of transformers include 
hospitals, hotels, office buildings, and airports. Sophisticated 
military equipment, such as fighter jets and naval vessels, relies on 
transformers of various types and capacities to provide the correct 
voltage within subsystems. Due to its importance for certain defense 
applications, the Defense Logistics Agency has included GOES among its 
requests for inclusion in the National Defense Stockpile.
    Large Power Transformers (LPTs) are among the most critical 
elements of the United States Bulk-Power System (BPS), which was the 
subject of an emergency declaration issued by President Trump on May 1, 
2020. Executive Order 13920 (E.O. 13920 or Bulk Power Executive Order), 
titled ``Securing the United States Bulk-Power System,'' noted that as 
the backbone of our Nation's energy infrastructure, the BPS is 
fundamental to national security, emergency services, critical 
infrastructure, and the economy.\1\ The President determined that the 
unrestricted foreign supply of electrical equipment constitutes an 
unusual and extraordinary threat to the national security, foreign 
policy, and economy of the United States. The President also determined 
that the evolving threats facing our critical infrastructure have 
highlighted supply chain risks and the need to ensure the availability 
of secure components from American companies and other trusted 
sources.\2\
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    \1\ https://www.whitehouse.gov/presidential-actions/executive-order-securing-united-states-bulk-power-system/.
    \2\ https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system.
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    The global transformer industry is dominated by large multinational 
companies that offer a wide product range and benefit from economies of 
scale. In addition to these large global players, in the United States 
there are also a number of smaller domestic companies that manufacture 
transformers of various power-handling capacities. Many manufacturers 
have established production facilities in locations that allow them to 
take advantage of lower labor costs and environmental standards. 
Mexico, in particular, has become a significant player in transformer 
manufacturing.

A. GOES

    Grain-oriented electrical steel (GOES) is a critical material 
essential to the performance of transformers and accounts for a 
significant portion of the cost of transformer production (about 25 
percent based on responses to the Department survey). AK Steel, Inc., a 
subsidiary of Cleveland Cliffs Inc., is the sole U.S. domestic producer 
of GOES, which it manufactures at facilities in Zanesville, Ohio, and 
Butler, Pennsylvania. While still a leader in the domestic market, AK 
Steel's electrical steel operations are not profitable, in part due to 
years of pressure from lower cost imports.\3\ The CEO of Cleveland 
Cliffs, Inc., has stated that it may shut down the two unprofitable 
plants at which GOES is manufactured. If AK Steel's GOES operations 
were to close, the United States would lack the ability to produce 
transformers of any power handling capacity without relying on foreign 
sources for the key material that is essential to their operation and 
efficiency.
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    \3\ AK Steel Public Comments.
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    The threat to national security posed by imports of GOES (among 
other steel products) was addressed by a Section 232 investigation 
conducted in 2017, which resulted in the 2018 imposition of 25 percent 
tariffs on imports of steel products from most countries. As a result, 
imports of GOES in 2019 were dramatically lower than in 2018 (down 56 
percent). [TEXT REDACTED]
    [TEXT REDACTED].\4\ Moreover, many transformer companies, in public 
comments or survey responses, indicated concern over AK Steel's 
capabilities and capacity to supply a full range of GOES products, 
especially the higher grades that are increasingly in demand due to 
current DOE energy standards for distribution transformers as well as 
general market trends toward energy efficiency.
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    \4\ Department of Commerce, Section 232 Investigation into 
Impact of Steel Imports on National Security, 2018.
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1. Transformer Components (Laminations and Cores)
    This investigation sought to evaluate the status of domestic 
production and the impact of imports for key subcomponents of 
transformers, namely laminations for stacked cores for

[[Page 64608]]

incorporation into transformers, stacked cores for incorporation into 
transformers, and wound cores for incorporation into transformers.
    Arguably the most important part of a transformer is its core, 
which is made up of thin layers of laminations, usually made of GOES. 
Cores may have varying designs and specifications, but their function 
is generally to facilitate the magnetic field necessary for the 
induction of voltages between the two windings (i.e., in order to 
``step-up'' or ``step-down'' the power voltage). The layered 
composition helps reduce the core's energy losses. Transformer 
lamination and core producers make up the primary customer base for 
GOES suppliers such as AK Steel.
    However, over the past few years, there has been a marked decline 
in the domestic manufacturing of laminations and cores (both in-house 
by transformer companies and by independent producers), and a movement 
of production offshore (especially to Canada and Mexico). The United 
States has become highly dependent on foreign sources for these 
critical transformer components.
    A corollary to the movement of lamination and core manufacturing 
out of the United States is the decline of the domestic market for AK 
Steel's GOES. Although not the only factor, the tariffs imposed on 
imports of electrical steel under Section 232 have raised material 
costs for lamination and core manufacturers, affecting their ability to 
compete, because electrical steel accounts for a large percentage of 
the cost of these items [TEXT REDACTED].
    In 2019, laminations with a total value of $40.2 million were 
sourced by surveyed companies. Of this $40.2 million, less than 12 
percent came from domestic suppliers. This implies an import 
penetration level of 88% for laminations. In the years immediately 
prior, there was a dramatic increase in imports of these products--from 
$18 million in 2017 to $33 million in 2019--which displaced U.S. 
production. Over 95 percent of these imports came from Canada (68 
percent) and Mexico (29 percent).
    A similar situation exists with regard to stacked and wound cores. 
Based on survey data, imports account for about 75 percent of wound 
core purchases by surveyed transformer companies in 2019. With regard 
to stacked cores, imports accounted for 54 percent of purchases by 
respondents. [TEXT REDACTED]. However, this firm reported that it shut 
down core production in February 2020 due to its inability to compete 
with imports. [TEXT REDACTED]. With the exit of the leading domestic 
non-captive supplier, future imports of stacked cores will also likely 
exceed 80 percent of purchases, with China serving as a major source.
    Imports of transformer cores (stacked and wound) rose from $22 
million in 2015 to $167 million in 2019--a 650 percent increase--again 
with Canada (52 percent) and Mexico (45 percent) accounting for more 
than 95 percent of the total. Since domestic demand for laminations and 
cores has not increased in parallel with the increase in imports, the 
surge in imports represents displaced domestic production. Moreover, 
neither Mexico nor Canada has indigenous production capability for 
GOES. While Japan is the leading source of GOES for these countries, 
they also import some of this material from China and Russia.

B. Transformers

    This investigation evaluated the status of the domestic transformer 
industry in several categories: Liquid-filled distribution transformers 
and small power transformers, medium power transformers, LPT, dry-type 
transformers, and voltage regulators.
    Distribution transformers (both liquid-dielectric as well as dry-
type), and small and medium power transformers are used extensively in 
the U.S. electrical grid--millions are installed and operating. This 
investigation found that domestic industrial production and 
capabilities in these sectors is generally adequate. In the liquid-
dielectric categories, imports account for less than a quarter of 
apparent consumption, and companies in this sector are largely 
financially sound and competitive in the market, based on responses to 
the BIS industry survey. While import penetration is currently 
relatively low, survey participants indicated competitiveness 
challenges, especially from Mexico and China. Survey respondents also 
mentioned workforce issues, such as difficulty finding and attracting 
qualified labor, as a concern.
    Imports play a major role in the dry-type transformer sector, and 
leading U.S.-based producers also have overseas production facilities. 
Countries with low cost labor--including China, Indonesia, and Mexico--
are major sources of imported dry-type transformers. Despite relatively 
strong domestic production capabilities, an in-depth analysis of 
suppliers found a heavy dependence on foreign sources among domestic 
manufacturers in all transformer categories for critical components 
including laminations and cores and the GOES from which they are made, 
as described above.
    This investigation found shortcomings with regard to domestic 
production of LPTs that are critical elements of the United States BPS. 
Because they serve the greatest number of customers, the failure or 
destruction of just a single unit can have a large impact on U.S. 
economic, public health, and security interests. Moreover, long 
procurement lead times and limited availability of spare LPT and parts 
have serious implications for the resiliency of critical 
infrastructure.
    Domestic production capability falls far short of demand for the 
LPT segment of the industry, with imports accounting for over 80 
percent of consumption. This lack of domestic production capability and 
the accompanying extreme dependence on imports has persisted for at 
least a decade, creating a critical infrastructure vulnerability, which 
has been raised in previous Department of Energy assessments.\5\
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    \5\ ``Large Power Transformers in U.S. Electric Grid'', 
Department of Energy, Office of Electricity and Energy Reliability, 
June 2012 https://www.energy.gov/sites/prod/files/Large%20Power%20Transformer%20Study%20-%20June%202012_0.pdf.
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    Only six companies currently manufacture LPTs in the United States; 
[TEXT REDACTED]. The largest domestic producer is Korean-owned Hyundai, 
which has publicly noted that its Alabama facility will be utilized 
``in maneuvering U.S. imposed anti-dumping tariff [sic] and its 
protectionist policies.'' \6\
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    \6\ http://hhiamerica.com/about/sub04.htm.
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    [TEXT REDACTED].\7\ Compounding the issue, domestic LPT producers 
are highly dependent on foreign sources for GOES, laminations, and 
cores.
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    \7\ [TEXT REDACTED].
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C. Findings

    [TEXT REDACTED]. While still a leader in the domestic market, 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.
    There is insufficient or no domestic production capability for 
certain grades and qualities of GOES that are increasingly in demand to 
meet efficiency standards for distribution transformers as well as 
general market trends toward more efficient transformers using higher 
grades of GOES.
    The United States lacks sufficient capacity to produce transformer 
cores

[[Page 64609]]

and laminations, which are the key components in transformers. 
Transformer manufacturers in the United States rely on foreign sources 
(especially Canada and Mexico) for these critical components to meet 
over 75 percent of (non-captive) demand.
    The United States is also highly dependent on foreign-sourced 
transformers, most significantly for the LPTs that form the backbone of 
the BPS.
    Based on the overwhelming dependence of domestic transformer 
manufacturers on foreign sources, the Secretary finds that transformer 
laminations, stacked cores and wound cores are being imported into the 
United States in such quantities and under such circumstances as to 
threaten to impair the national security. In addition, LPTs are being 
imported into the United States in such quantities and under such 
circumstances as to threaten to impair national security. 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.

II. Legal Framework

A. Section 232 Requirements

    Section 232 of the Trade Expansion Act of 1962, as amended, 
provides the Secretary with the authority to conduct investigations to 
determine the effect on the national security of the United States of 
imports of any article. It authorizes the Secretary to conduct an 
investigation if requested by the head of any department or agency, 
upon application of an interested party, or upon his own motion. See 19 
U.S.C. 1862(b)(1)(A).
    Section 232 directs the Secretary to submit to the President a 
report with recommendations for ``action or inaction under this 
section'' and requires the Secretary to advise the President if any 
article ``is being imported into the United States in such quantities 
or under such circumstances as to threaten to impair the national 
security.'' See 19 U.S.C. 1862(b)(3)(A).
    Section 232(d) directs the Secretary and the President to consider, 
in light of the requirements of national security and without excluding 
other relevant factors, the domestic production needed for projected 
national defense requirements and the capacity of the United States to 
meet national security requirements. See 19 U.S.C. 1862(d).
    Section 232(d) also directs the Secretary and the President to 
``recognize the close relation of the economic welfare of the Nation to 
our national security, and . . . take into consideration the impact of 
foreign competition on the economic welfare of individual domestic 
industries'' by examining whether any substantial unemployment, 
decrease in revenues of government, loss of skills or investment, or 
other serious effects resulting from the displacement of any domestic 
products by excessive imports, or other factors, results in a 
``weakening of our internal economy'' that may impair the national 
security.\8\ See 19 U.S.C. 1862(d).
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    \8\ An investigation under Section 232 looks at whether imports 
threaten to impair the national security, rather than looking at 
unfair trade practices as in an antidumping investigation.
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    Once an investigation has been initiated, Section 232 mandates that 
the Secretary provide notice to the Secretary of Defense that such an 
investigation has commenced. Section 232 also requires the Secretary to 
do the following:

    (1) ``Consult with the Secretary of Defense regarding the 
methodological and policy questions raised in [the] investigation;''
    (2) ``Seek information and advice from, and consult with, 
appropriate officers of the United States;'' and
    (3) ``If it is appropriate and after reasonable notice, hold 
public hearings or otherwise afford interested parties an 
opportunity to present information and advice relevant to such 
investigation.'' \9\ See 19 U.S.C. 1862(b)(2)(A)(i)-(iii).
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    \9\ Department regulations (i) set forth additional authority 
and specific procedures for such input from interested parties, see 
15 CFR 705.7 and 705.8, and (ii) provide that the Secretary may vary 
or dispense with those procedures ``in emergency situations, or when 
in the judgment of the Department, national security interests 
require it.'' Id., Sec.  705.9.

    As detailed in the report, all of the requirements set forth above 
have been satisfied.
    In conducting the investigation, Section 232 permits the Secretary 
to request that the Secretary of Defense provide an assessment of the 
defense requirements of the article that is the subject of the 
investigation. See 19 U.S.C. 1862(b)(2)(B). Upon completion of a 
Section 232 investigation, the Secretary is required to submit a report 
to the President no later than 270 days after the date on which the 
investigation was initiated. See 19 U.S.C. 1862(b)(3)(A). The report 
must:

    (1) Set forth ``the findings of such investigation with respect 
to the effect of the importation of such article in such quantities 
or under such circumstances upon the national security;''
    (2) Set forth, ``based on such findings, the recommendations of 
the Secretary for action or inaction under this section;'' and
    (3) ``If the Secretary finds that such article is being imported 
into the United States in such quantities or under such 
circumstances as to threaten to impair the national security . . . 
so advise the President.'' See 19 U.S.C. 1862(b)(3)(A).

    All unclassified and non-proprietary portions of the report 
submitted by the Secretary to the President must be published. See 19 
U.S.C. 1862(b)(3)(B).
    Within 90 days after receiving a report in which the Secretary 
finds that an article is being imported into the United States in such 
quantities or under such circumstances as to threaten to impair the 
national security, the President shall:

    (1) ``Determine whether the President concurs with the finding 
of the Secretary;'' and
    (2) ``If the President concurs, determine the nature and 
duration of the action that, in the judgment of the President, must 
be taken to adjust the imports of the article and its derivatives so 
that such imports will not threaten to impair the national 
security'' See 19 U.S.C. 1862(c)(1)(A).

B. Discussion

    While Section 232 does not specifically define ``national 
security,'' both Section 232 and the implementing regulations at 15 CFR 
part 705 contain non-exclusive lists of factors that the Secretary must 
consider in evaluating the effect of imports on the national security. 
Congress, in Section 232, explicitly determined that ``national 
security'' includes, but is not limited to, ``national defense'' 
requirements. See 19 U.S.C. 1862(d).
    The Department has determined that ``national defense'' includes 
both the defense of the United States directly and the U.S. ``ability 
to project U.S. military capabilities globally.'' \10\ The Department 
also concluded that ``[i]n addition to the satisfaction of national 
defense requirements, the term `national security' can be interpreted 
more broadly to include the general security and welfare of certain 
industries, beyond those necessary to satisfy national defense 
requirements, which are critical to the minimum operations of the 
economy and government.'' \11\ The Department deemed these certain 
industries as ``critical industries.'' \12\ This report applies these 
interpretations of the terms ``national defense'' and ``national 
security,'' in defining ``critical industries.'' In doing so, this 
report considers 16 critical infrastructure sectors identified in 
Presidential Policy

[[Page 64610]]

Directive 21.\13\ Section 232 directs the Secretary to determine 
whether imports of any article are being made ``in such quantities'' or 
``under such circumstances'' that those imports ``threaten to impair 
the national security.'' See 19 U.S.C. 1862(b)(3)(A). Accordingly, 
either the quantities or the circumstances, standing alone, may be 
sufficient to support an affirmative finding.
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    \10\ Department of Commerce, Bureau of Export Administration; 
The Effect of Imports of Iron Ore and Semi-Finished Steel on the 
National Security; Oct. 2001 (``2001 Report'').
    \11\ Id.
    \12\ Id.
    \13\ Presidential Policy Directive 21, Critical Infrastructure 
Security and Resilience (Feb. 12, 2013) (``PPD-21'').
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    The statute does not prescribe a threshold or a standard for when 
``such quantities'' of imports are sufficient to threaten to impair the 
national security, nor does it define the ``circumstances'' that might 
qualify.
    Likewise, the statute does not require a finding that the 
quantities or circumstances are impairing the national security. 
Instead, the threshold question under Section 232 is whether those 
quantities or circumstances ``threaten to impair the national 
security.'' See 19 U.S.C. 1862(b)(3)(A). This demonstrates that Section 
232 may be used to prevent a threatened impairment to the national 
security from occurring before the national security is actually 
impaired.
    Section 232(d) contains a list of factors for the Secretary to 
consider in determining if imports ``threaten to impair the national 
security'' \14\ of the United States, and this list is mirrored in the 
implementing regulations. See 19 U.S.C. 1862(d) and 15 CFR 705.4. While 
the list provided by Congress in Section 232 provides mandatory factors 
for the Secretary to consider, it is not exhaustive.\15\ Congress' 
illustrative list is focused on the ability of the United States to 
maintain the domestic capacity to provide the articles in question as 
needed to maintain the national security of the United States.\16\ 
Congress split the list of factors into two equal parts using two 
separate sentences. The first sentence focuses directly on ``national 
defense'' requirements, thus making clear that ``national defense'' is 
a subset of the broader term ``national security.'' The second sentence 
focuses on the broader economy and expressly directs that the Secretary 
and the President ``shall recognize the close relation of the economic 
welfare of the Nation to our national security.'' \17\ See 19 U.S.C. 
1862(d).
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    \14\ 19 U.S.C. 1862(b)(3)(A).
    \15\ See 19 U.S.C. 1862(d) (``the Secretary and the President 
shall, in light of the requirements of national security and without 
excluding other relevant factors . . .'' and ``serious effects 
resulting from the displacement of any domestic products by 
excessive imports shall be considered, without excluding other 
factors . . .'').
    \16\ This reading is supported by Congressional findings in 
other statutes. See, e.g., 15 U.S.C. 271(a)(1) (``The future well-
being of the United States economy depends on a strong manufacturing 
base . . .'') and 50 U.S.C. 4502(a) (``Congress finds that--(1) the 
security of the United States is dependent on the ability of the 
domestic industrial base to supply materials and services . . . 
(2)(C) to provide for the protection and restoration of domestic 
critical infrastructure operations under emergency conditions . . . 
(3) . . . the national defense preparedness effort of the United 
States government requires--(C) the development of domestic 
productive capacity to meet--(ii) unique technological requirements 
. . . (7) much of the industrial capacity that is relied upon by the 
United States Government for military production and other national 
defense purposes is deeply and directly influenced by--(A) the 
overall competitiveness of the industrial economy of the United 
States; and (B) the ability of industries in the United States, in 
general, to produce internationally competitive products and operate 
profitably while maintaining adequate research and development to 
preserve competitiveness with respect to military and civilian 
production; and (8) the inability of industries in the United 
States, especially smaller subcontractors and suppliers, to provide 
vital parts and components and other materials would impair the 
ability to sustain the Armed Forces of the United States in combat 
for longer than a short period.'').
    \17\ Accord 50 U.S.C. 4502(a).
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    In addition to ``national defense'' requirements, two of the 
factors listed in the second sentence of Section 232(d) are 
particularly relevant in this investigation. Both are directed at how 
``such quantities'' of imports threaten to impair national security. 
See 19 U.S.C. 1862(b)(3)(A). In administering Section 232 to 
``[determine] whether such weakening of our internal economy may impair 
the national security,'' the Secretary and the President are required 
to ``take into consideration the impact of foreign competition on the 
economic welfare of individual domestic industries,'' as well as to and 
analyze whether there exist ``serious effects resulting from the 
displacement of any domestic products by excessive imports.'' See 19 
U.S.C. 1862(d). In certain key product categories, imports of 
transformers and transformer components accounted for over 80 percent 
of U.S. consumption in 2019. In the case of transformer cores and 
laminations, imports have substantially displaced domestic production 
of these items. Because these products are the primary market for GOES, 
the displacement of domestic production by imports also threatens 
threaten the financial viability of the only remaining domestic 
producer of GOES.
    Two other factors included in the statute that are also 
particularly relevant to this investigation are ``loss of skills'' and 
``loss of investment.'' See 19 U.S.C. 1862(d). As imports of GOES have 
increased, losses of U.S. GOES production capacity have caused a 
decline in the skilled workforce needed for the GOES manufacturing 
process. Additionally, as a result of their impact on the revenues of 
U.S. producers, these imports have mitigated investment in U.S. GOES 
production facilities, precluding future sustainable development of 
domestic GOES production. Similarly, these imports also create a 
disincentive for needed investment in U.S. GOES production facilities; 
without this investment, future production of domestic GOES is not 
sustainable. These factors are illustrative of a ``weakening of the 
internal economy [that] may impair the national security'' as defined 
in Section 232.

III. Investigation Process

A. Initiation of Investigation

    On May 4, 2020, the Secretary of Commerce announced that he would 
initiate an investigation into whether laminations for stacked cores 
for incorporation into transformers, stacked and wound cores for 
incorporation into transformers, electrical transformers, and 
transformer regulators are being imported into the United States in 
such quantities or under such circumstances as to threaten to impair 
the national security.\18\ Laminations and cores made of GOES are 
critical transformer components, and transformers are a key element for 
distribution of all types of energy--including solar, nuclear, wind, 
coal, and natural gas--across the country. The decision to launch an 
investigation under Section 232 of the Trade Expansion Act of 1962, as 
amended (19 U.S.C. 1862), followed inquiries and requests from multiple 
Members of Congress, a GOES manufacturer, and producers of power and 
distribution transformers.
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    \18\ Department of Commerce Press Release, May 4, 2020.
---------------------------------------------------------------------------

    On May 11, 2020, the Department officially initiated the 
investigation. Pursuant to Section 232(b)(1)(b), the Department 
notified Secretary of Defense Mark T. Esper of the investigation and 
requested Department of Defense participation as it relates to 
methodology, policy questions, and national defense requirements for 
these products. Additionally, given that the products subject to this 
investigation are used extensively in the electrical grid and critical 
infrastructure of the United States, the Department also notified 
Secretary of Energy Dan R. Brouillette and Acting Secretary of Homeland 
Security Chad F. Wolf. Finally, the Secretary notified United States 
Trade Representative Robert E. Lighthizer,

[[Page 64611]]

noting that Department staff will consult with counterparts in the 
Office of the United States Trade Representative regarding 
methodological and policy questions that arise during the 
investigation. (See Appendix A).
    On May 19, 2020, the Department published a Federal Register Notice 
(See Appendix C--Federal Register, 85 FR 29926) announcing the 
initiation of the investigation to determine the effect of imports of 
Laminations for Stacked Cores for Incorporation into Transformers, 
Stacked Cores for Incorporation into Transformers, Wound Cores for 
Incorporation into Transformers, Electrical Transformers, and 
Transformer Regulators on the national security. The notice also 
announced the opening of the public comment period.

B. Public Comments

    In the Federal Register Notice announcing the investigation, the 
Department invited interested parties to submit written comments, 
opinions, data, information, and advice relevant to the criteria listed 
in Section 705.4 of the National Security Industrial Base Regulations 
(15 CFR 705.4) as it affects the requirements of national security, 
including the following:

    (a) Quantity of the articles subject to the investigation and 
other circumstances related to the importation of such articles;
    (b) Domestic production capacity needed for these articles to 
meet projected national defense requirements;
    (c) The capacity of domestic industries to meet projected 
national defense requirements;
    (d) Existing and anticipated availability of human resources, 
products, raw materials, production equipment, facilities, and other 
supplies and services essential to the national defense;
    (e) Growth requirements of domestic industries needed to meet 
national defense requirements and the supplies and services, 
including the investment, exploration, and development, necessary to 
assure such growth;
    (f) The impact of foreign competition on the economic welfare of 
any domestic industry essential to our national security;
    (g) The displacement of any domestic products causing 
substantial unemployment, decrease in the revenues of government, 
loss of investment or specialized skills, and productive capacity, 
or other serious effects;
    (h) Relevant factors that are causing or will cause a weakening 
of our national economy; and
    (i) Any other relevant factors, including the use and importance 
of the Products in critical infrastructure sectors identified in 
Presidential Policy Directive 21 (Feb. 12, 2013) (for a listing of 
those sectors see https://www.dhs.gov/cisa/critical-infrastructure-sectors).

    At the request of several parties, and in light of the global 
pandemic, the initial public comment period, as well as the rebuttal 
period, were extended ten additional days. The department provided an 
additional 24 days to submit public comments, with an additional time 
period provided for the submission of rebuttals to such comments as 
well. The final deadline for the submission of rebuttals to the public 
comments July 24, 2020.
    The Department received 82 written comments concerning this 
investigation, 79 of which were responsive on Regulations.gov for 
public review. Parties that submitted comments included members of 
industry, representatives of state and local governments, foreign 
governments, and other concerned groups.
    All 79 comments were available for response during the rebuttal 
period. Thirty-four rebuttal comments from industry participants and 
other stakeholders were received and 30 were responsive and were posted 
on Regulations.gov for public review. All of the appropriate comments 
and rebuttals were reviewed and factored into the investigative 
process. These responsive public comments received are summarized in 
Appendix D, along with a link to the Regulations.gov docket (BIS-2020-
0015), where comments can be viewed in full.

C. Information Gathering and Data Collection Activities

    Because this investigation commenced during a pandemic during 
which, many public and private sector organizations were shut down or 
operating under limited conditions, the Department decided not to hold 
a public hearing for this investigation. In lieu of a public hearing, 
the Department issued mandatory surveys (See Appendix E) to 87 
companies or divisions of companies identified as participating in the 
production or distribution of electrical steel, laminations and stacked 
and wound cores for transformers, and power and distribution 
transformers. Survey responses were received from most of the major 
participants in the domestic transformer supply chain. The surveys 
collected both qualitative and quantitative information.
    These mandatory surveys were conducted pursuant to Section 705 of 
the Defense Production Act (DPA) of 1950, as amended (50 U.S.C. 4555), 
and collected data on imports, exports, production, capacity 
utilization, employment, operating status, global competition, and 
financial information. The resulting aggregate data provided the 
Department with detailed industry information that is otherwise not 
publicly available, which was necessary to conduct a thorough analysis 
for this investigation.
    Information furnished in the survey responses is deemed 
confidential and will not be published or disclosed except in 
accordance with Section 705 of the DPA.\19\
---------------------------------------------------------------------------

    \19\ Section 705 of the DPA prohibits the publication or 
disclosure of this information unless the President determines that 
withholding such information is contrary to the interest of the 
national defense. Unless or until such a determination is made, 
information will not be shared with any non-government entity in 
other than aggregate form.
---------------------------------------------------------------------------

D. Interagency Consultation

    The Department consulted with the Department of Defense (including 
the Office of Industrial Policy and Defense Logistics Agency) regarding 
methodological and policy questions that arose during the 
investigation. Given the vital role that these products play in the 
energy sector and the critical infrastructure of the country, the 
Department also consulted with the Departments of Energy (Office of 
Electricity) and Homeland Security. In addition, the Department 
consulted with the Office of the United States Trade Representative, 
given the trade implications of any actions with regard to imports of 
these products.
    The Department also consulted with other U.S. government agencies 
with expertise and information regarding the domestic and global 
transformer and GOES industries, including the Department's 
International Trade Administration and the U.S. International Trade 
Commission.

E. Product Scope of the Investigation

    The scope of this investigation includes laminations for 
incorporation into stacked cores, stacked cores for incorporation into 
transformers, wound cores for incorporation into transformers, 
electrical transformers, and transformer regulators. While GOES is not 
the direct subject of this investigation, because it is the primary 
material used in laminations, stacked cores, and wound cores, it is 
included in the scope of products addressed in this report. Products 
were examined in accordance with the Harmonized Tariff Schedule of the 
United States (HTS) up to the ten-digit level. The products and their 
associated HTS code are provided in Figure 1 below.

[[Page 64612]]



            Figure III-1--Product Scope of the Investigation
------------------------------------------------------------------------
              10 digit HTS                     Product description
------------------------------------------------------------------------
7226.19.1000...........................  Non-Oriented Electrical Steel
                                          (NOES) (300-600mm).
7226.19.9000...........................  Non-Oriented Electrical Steel
                                          (NOES) (<300mm).
7225.11.0000...........................  Grain-Oriented Electrical Steel
                                          (GOES) (>600mm width).
7226.11.1000...........................  Grain-Oriented Electrical Steel
                                          (GOES) (300-600mm).
7226.11.9030...........................  Grain-Oriented Electrical Steel
                                          (GOES) (<300mm; <.25mm thick).
7226.11.9060...........................  Grain-Oriented Electrical Steel
                                          (GOES) (<300mm; >.25mm thick).
8504.90.9634 (Post 2016), 8504.90.9534   Transformer Laminations
 (2015).                                  (Stacked).
8504.90.9638 (Post 2016), 8504.90.9538   Transformer Cores (Stacked).
 (2015).
8504.90.9642 (Post 2016), 8504.90.9542   Transformer Cores (Wound).
 (2015).
8504.21.0020...........................  Liquid-Dielectric Transformer
                                          Under 50KVA.
8504.21.0040...........................  Liquid-Dielectric Transformer
                                          50-100KVA.
8504.21.0060...........................  Liquid-Dielectric Transformer
                                          100-500KVA.
8504.21.0080...........................  Liquid-Dielectric Transformer
                                          500-650KVA.
8504.22.0040...........................  Liquid-Dielectric Transformer
                                          650-2,500KVA.
8504.22.0080...........................  Liquid-Dielectric Transformer
                                          2,500-10,000KVA.
8504.23.0041...........................  Liquid-Dielectric Transformer
                                          10,000-60,000KVA.
8504.23.0045...........................  Liquid-Dielectric Transformer
                                          60,000KVA-100,000KVA.
8504.23.0080...........................  Liquid-Dielectric Transformer
                                          Over 100,000KVA.
8504.32.0000...........................  Dry-Type/Other Transformer 1-
                                          16KVA.
8504.33.0020...........................  Dry-Type/Other Transformer 16-
                                          50KVA.
8504.33.0040...........................  Dry-Type/Other Transformer 50-
                                          500KVA.
8504.34.0000...........................  Dry-Type/Other Transformer Over
                                          500KVA.
9032.89.4000...........................  Voltage Regulators.
------------------------------------------------------------------------
Source: United States International Trade Commission and U.S. Department
  of Commerce, Bureau of Industry and Security.

IV. Description of the Products Subject to the Investigation

    The products subject to this investigation are those that are 
critical to the manufacture and functioning of transformers, as well as 
the transformers themselves. In particular, this investigation focuses 
on transformers and transformer components for which the crucial input 
is GOES.
    Transformers are passive devices that change (or transform) the 
voltage or electrical current level using a magnetic circuit. They are 
used to either increase (step-up) or decrease (step-down) voltage to 
ensure the correct voltage for a specific electricity use application. 
Transformers are available with a wide range of power-handling 
capabilities, typically measured in kilo-volt-amperes (kVA), from less 
than one kVA, to more than 100,000 kVA (which can also be expressed as 
100 mega-volt-amperes where 1 MVA = 1,000 kVA). LPTs can be several 
stories tall and weigh hundreds of tons, while transformers for 
consumer products may be small enough to fit in your hand. No matter 
the size, the basic purpose of any transformer is to transform 
electrical power from one voltage to another.
    There are many ways in which transformers can be categorized. 
Common industry terminology may classify by specific type 
(autotransformer, instrument transformer), current type (direct or 
alternating), function (step-up, step-down), core type (shell-form or 
core-form), or type of installation (pole-mounted, pad-mounted, 
underground). The size of a transformer can be measured by the input 
voltage (in kilovolts), the output voltage (in kilovolts), or the load 
capacity (measured by kilovolt amperes). This report will generally 
classify transformers based on their power load handling capacity (in 
kVA) as well as their type of dielectric insulation (liquid or dry). 
These categorizations were chosen because they correspond with the way 
in which the U.S. Census Bureau collects information on imports of 
these items. Transformers of most power-handling capacities are subject 
to this investigation. The exception is very small transformers (under 
1 kVA), such as those typically used in conjunction with power cables 
for consumer electronics including laptops and cell phones, as these 
generally do not use electrical steel cores.
    The most ubiquitous use of transformers is in the electrical grid, 
where they are used by electric utilities and power producers for the 
transmission and distribution of electricity from power generation 
plants to residential, commercial, and industrial customers. In 
addition to the electrical grid, large industrial users such as mines 
and major manufacturing, and chemical plants, as well as large 
commercial users including hospitals, hotels, office buildings, and 
airports may connect directly to the transmission grid and utilize 
their own transformers to take advantage of lower marginal costs.
    Transformers are crucial equipment used throughout the electrical 
grid. Power leaves the generator and enters a transmission substation 
located at the power plant. This transmission substation uses LPTs to 
``step-up'' the generator's voltage to extremely high voltages (155 kV 
to 765 kV volts) for efficient transmission over long distances (up to 
300 miles). For the electricity to be used by commercial, industrial, 
or residential users, it must be ``stepped-down'' by transformers to 
distribution voltages (less than 10 kV; a standard line voltage is 7.2 
kV at a substation). From there, the electricity is distributed locally 
via overhead or sunk power lines before it is further stepped-down by 
smaller transformers (such as pole mounted units) to the 240 volts that 
is standard household electrical service. Additionally, as noted above, 
some large commercial and industrial users may connect directly at 
substation transmission levels. The diagram below presents a simplified 
depiction of the use of transformers in the electrical grid.
BILLING CODE 3510-33-P

[[Page 64613]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.001

A. Types of Transformers

    LPTs generally have power-handling capacities above 100,000 kVA 
(100 MVA) and are used to step-up the voltage up to extremely high 
levels at power generation sites for efficient transmission over long 
distances. They are used again at substations to step-down the voltage 
for more local distribution. LPT are also used by manufacturing sectors 
that require high voltages in their production processes, such as steel 
mills.
[GRAPHIC] [TIFF OMITTED] TN18NO21.002

    Small and medium power transformers, which generally have power 
handling capacities from 5,000 kVA to 100,000 kVA, are also used 
extensively throughout the electrical grid. They are available in a 
wide range of voltage ratings and power handling capacities, to meet 
the specific needs of consumers. For example, they are used at 
substations and at industrial facilities.
    Distribution transformers (up to 5,000 kVA) are used to further 
step-down the voltage at substations to deliver electricity to 
customers. Distribution transformers provide the final voltage 
transformation in the electrical grid. While they are energized for 24 
hours a day, their load fluctuates throughout the day with changing 
energy demands.
    Also located along the electric grid are banks of voltage 
regulators, which are used to compensate for voltage fluctuation during 
power distribution. Voltage regulators play an important role in light 
of the increasing use of distributed energy resources such as solar and 
wind, which are intermittent.
    Transformers can be classified by the material used in core-
insulation (e.g., ``Liquid-dielectric'' or ``Dry-Type''). Cooling is 
important because transformers generate heat and pose potential fire or 
explosion hazards. Liquid-dielectric transformers consist of the 
transformer core placed in a metal sealed container filled with mineral 
oil, which serves as a coolant and insulator.
    Dry-type transformers have a metal housing for insulation but are 
cooled by air convection or fans, or may be encased in resin. Oil-
filled liquid transformers are generally more efficient than dry-type, 
which are more limited in their power-handling capacity and size. 
However, oil-filled transformers require more maintenance, and because 
the liquid may be flammable or toxic, dry-type may be more preferable 
in public spaces.

[[Page 64614]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.003

    Dry-type transformers are commonly used in light industrial and 
commercial applications; some are used indoors or underground. They are 
often used in cases in which liquid-dielectric transformers present 
unacceptable environmental, explosion, or fire hazards.
    Specialized transformers perform specific functions in the electric 
grid. For example, instrument transformers step-down currents and 
voltages for accurate and reliable measurement by secondary equipment 
such as meters, protection relays, and other devices. Another 
specialized type of transformer is the autotransformer, which is used 
in power transmission systems to interconnect systems operating at 
different voltage; this type of transformer can also be used as a 
voltage regulators.
    Transformers have been in use for over 100 years (Westinghouse 
built the first reliable commercial transformer in 1886) and are 
becoming more complex as they evolve to become part of the growing 
interconnected ``smart grid.'' \20\ The smart grid is an automated 
network with a two-way flow of energy and information that is capable 
of monitoring and controlling energy metrics between the power plant 
and the end user, as well as at the many points in between. To function 
as part of the smart grid, transformers must be able to communicate in 
real time, be capable of extensive customer interaction, feature remote 
digital monitoring, and have the ability to self-diagnose and repair 
malfunctions.
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    \20\ https://global.abb/group/en/about/history/heritage-brands/westinghouse.
---------------------------------------------------------------------------

B. Transformer Construction

    Regardless of their size or application, all transformers work 
through electromagnetic induction, a process in which a coil of wire 
magnetically induces a voltage into another coil of wire in close 
proximity to it. The basic structure of a transformer is two coils of 
copper wire: The ``primary winding'' and the ``secondary winding.'' The 
primary winding takes the power into the transformer, and the secondary 
winding delivers the power from the transformer. The difference in 
voltage between the primary and secondary windings is achieved by 
differences in the number of coil turns in each winding.\21\
---------------------------------------------------------------------------

    \21\ https://circuitdigest.com/tutorial/transformer-basics.
---------------------------------------------------------------------------

    The two windings are not in direct contact with one another, but 
rather are each wound around a closed magnetic circuit that forms the 
core of the transformer. The core is not solid, but is made up of thin 
layers, or laminations, usually made of GOES. This layered composition 
helps reduce energy losses (eddy flow and hysteresis) within the core. 
Core laminations are the main material input in an electrical 
transformer and can account for up to 50 percent of a transformer's 
cost.\22\
---------------------------------------------------------------------------

    \22\ https://www.worldofsteel.com/Types%20of%20CRGO.html.

---------------------------------------------------------------------------

[[Page 64615]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.004

    Electrical transformers are typically produced with either stacked 
or wound cores. Stacked cores are most often used in larger 
distribution and power transformers, while wound cores are used in 
small and medium distribution transformers that step-down the voltage 
from the transmission line and provide power. In either case, GOES is 
the most common material used.
    When used in stacked cores, GOES is sheared or stamped into 
individual laminations, which are then stacked together to form the 
core. Stacked laminations often resemble letters of the alphabet, 
including C, E, L, U, and I shapes. Commonly used core shapes include 
E-I, E-E, L, and U-I. When used in wound cores, a continuous length of 
GOES is wound around a mandrel multiple times to form the core. Copper 
windings (electricity conductors) are wrapped around both stacked and 
wound cores.
    Transformers can be produced in ``single-phase'' or ``three-phase'' 
models. A single-phase transformer has one primary and one secondary 
set of windings, while a three-phase transformer has three primary and 
secondary windings around three core limbs. Most commercial electric 
power applications use three-phase transformers, while lower voltage 
and distribution level transmissions use single-phase transformers.
    There are two typical configurations for the core and windings of a 
transformer: Core-form and shell-form. In core-form, the windings are 
in a cylindrical shape around the legs of the core. In shell-form, the 
windings are wrapped around the center of the core. Core-form 
transformers are the most widely used because they are generally 
simpler in design and less expensive than shell-form transformers. 
Shell form transformers typically use more electrical steel and are 
more resistant to short circuit offering an advantage for extra high 
voltage applications. For this reason, they are often used in 
industrial applications, such as steel mills, where short circuits are 
common.

C. Electrical Steel \23\
---------------------------------------------------------------------------

    \23\ This section draws from USITC's report, Grain-Oriented 
Electrical Steel From the People's Republic of China, the Czech 
Republic, Germany, Japan, the Republic of Korea, Poland, and the 
Russian Federation: Initiation of Antidumping Duty Investigations, 
78 FR 65283 (October 31, 2013).
---------------------------------------------------------------------------

    As noted in the above description of transformer construction, the 
key material used in the core of most transformers is GOES; this 
application accounts for the majority of GOES consumption. The magnetic 
properties of electrical steel are integral to the primary function of 
transformers, i.e., converting voltage from one level to another.
    Electrical steel is a flat-rolled silicon alloy. The benefits of 
adding silicon to steel include increased electrical resistivity, high 
permeability, and low hysteresis loss. There are two types of 
electrical steel: GOES, also known as Cold-Rolled Grain Oriented Steel 
(abbreviated CRGO), and non-grain-oriented electrical steel (NOES), 
also known as Cold-Rolled Non-Grain Oriented Steel (abbreviated CRNGO).
    GOES is the most energy efficient type of electrical steel used to 
transport and transform mechanical energy to electrical energy. Its 
primary application is in transformers where energy or core loss is 
critical (particularly large and medium-sized electrical power and 
distribution transformers. In contrast, NOES is more commonly used in 
electric motors and generators, as well as in some smaller 
transformers.
    GOES is milled to yield exceptionally good magnetic properties. It 
can be sold in sheets or strips in fully processed form (annealed by 
the manufacturer) or semi-processed (requiring further heat treatment 
by purchaser). GOES, which typically contains approximately 3.2 percent 
by weight of silicon, is manufactured using specialized rolling and 
annealing (heat treatment) processes, which produces grain structures 
uniformly oriented in the rolling (lengthwise) direction of the steel 
sheet. Compared with NOES, this uniformly oriented grain structure 
permits the GOES steel sheets to conduct a magnetic field with a higher 
degree of efficiency in the direction of rolling.
1. Types of GOES
    GOES is produced in compliance with specifications issued by 
standards organizations and various proprietary specifications. For 
example, conventional GOES is available in standard gauges 
(thicknesses), ranging from 0.007 inch (0.18 mm) through 0.0138 inch 
(0.35 mm), and high-permeability GOES is found in two standard 
thicknesses (0.23 mm and 0.27mm). Conventional products in the standard 
thicknesses are often referred to as U.S. or American Iron and Steel 
Institute grades M2 through M6. Thinner gauge GOES is often preferred

[[Page 64616]]

because thinner laminations yield lower core losses in transformers, 
despite the added cost for both the steel and the manufacturing of the 
transformer core. Within each type of GOES, magnetic characteristics 
may vary, with producers manufacturing the same product with differing 
average core losses.
    In addition to differences in thickness, GOES is produced with 
varying levels of magnetic permeability, distinguished by the size and 
orientation precision of the grains within the steel. Conventional GOES 
has smaller but less precisely oriented grains, while high-permeability 
GOES has more precisely oriented but larger grains. High-permeability 
products allow a transformer to operate at a higher level of flux 
(flow) density than conventional products, thus permitting a 
transformer to be smaller and have lower energy operating losses.
[GRAPHIC] [TIFF OMITTED] TN18NO21.005

    High permeability GOES is also produced as a domain-refined 
(surface-treated) type that has even lower core loss at high flux 
density. Domain refinement occurs by using laser scribing, mechanical 
scribing or electrolytic etching to scribe thin lines onto the surface 
of the steel, which subdivides larger-oriented grains into smaller ones 
to produce ``domain-refined GOES'' (DR-GOES). GOES that undergoes laser 
scribing does not retain its enhanced magnetic characteristics when it 
is annealed (heat treated) to relieve internal stresses. As a result, 
laser-scribed GOES (or ``non-heat-proof GOES'') is not suitable for 
producing wound-core transformers, which require superior core-loss 
properties but must undergo heat treatment to relieve internal stresses 
(which increase core losses) accumulated from the manufacturing 
process. By contrast, domain-refined GOES produced by mechanical 
scribing or electrolytic etching (``heat-proof'' or ``permanent'' DR-
GOES'') retains its enhanced magnetic characteristics, even though 
stress-relief treatment. There is no known production of mechanically 
scribed or electrolytically-etched heat-proof GOES in the United 
States.
2. Amorphous Metal
    Amorphous metal transformer cores are an alternative to traditional 
cores made from GOES. Amorphous metal, called metglas, is an alloy of 
iron that includes boron, silicon, and phosphorous in the form of thin 
foil. Produced using rapid solidification of molten alloy (at a rate of 
about one million degrees Celsius per second), it differs from GOES in 
that it has a random rather than a crystalline structure. While more 
expensive than GOES on a per kilogram basis and more labor intensive to 
form into cores, the material has the potential to reduce costs in the 
long run for utilities over the life of the transformer. Compared to 
cores made from GOES, core losses from eddy currents can be 70-80 
percent lower in transformers with amorphous metal cores, reducing 
their operating costs and improving their energy efficiency. Amorphous 
metal is most often used in industrial and distribution transformers 
with power handling capacities in the 50 to 1000 kVA range.

D. Transformer Construction

    The typical transformer manufacturing process consists of the 
following steps:
    1. Engineering and design: Design is complex, balancing the costs 
of raw materials (copper, steel, and cooling oil), electrical losses, 
manufacturing labor hours, plant capability constraints, and shipping 
constraints.
    2. Core building: The core is the most critical component of a 
transformer, and it requires both a highly trained and skilled 
workforce and a supply of GOES.
    3. Windings production and assembly of the core and windings: 
Windings are predominantly copper and have an insulating material.
    4. Drying operations: Excess moisture must be removed from the core 
and windings because moisture can degrade the dielectric strength of 
the insulation.
    5. Tank production: A tank must be completed before the winding and 
core assembly finish the drying phase so that the core and windings do 
not reabsorb moisture.
    6. Final assembly: The final assembly must be done in a clean 
environment; even a tiny amount of dust or moisture can deteriorate the 
performance of a transformer.
    7. Testing: Testing is performed to ensure the accuracy of voltage 
ratios, verify power ratings, and determine electrical impedances.

V. Importance for Critical Infrastructure and National Security

A. Critical Energy Infrastructure

    The Cybersecurity and Infrastructure Security Agency (CISA) has 
identified 16 critical infrastructure sectors 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 security, national economic security, national 
public health or safety, or any combination thereof.\24\ One of these 
16 sectors is the Energy Sector. CISA has

[[Page 64617]]

determined that the U.S. energy infrastructure fuels the economy of the 
21st century. Without a stable energy supply, health and welfare are 
threatened, and the U.S. economy cannot function. In fact, CISA notes 
that, among the sixteen sectors, the Energy Sector is uniquely critical 
because it provides an ``enabling function'' across all critical 
infrastructure sectors. The energy infrastructure is divided into three 
interrelated segments: Electricity, oil, and natural gas. Items subject 
to this investigation form the backbone of the electricity segment.
---------------------------------------------------------------------------

    \24\ https://www.cisa.gov/critical-infrastructure-sectors.
---------------------------------------------------------------------------

    The U.S. electricity segment contains more than 9,700 power plants 
with 1,200 gigawatts capacity, sourced by coal, petroleum, natural gas, 
nuclear, hydroelectric, and renewable energy sources such as wind and 
solar.\25\ The number of power plants has increased significantly in 
recent years, due primarily to the expansion of solar and wind power 
generation. The electricity generated by the plants is processed along 
hundreds of thousands of miles of high voltage transmission lines and 
millions of miles of local distribution lines through transformers 
subject to this investigation. In addition to plant-generated power, 
there is an evolution of sorts where distributed energy resources are 
allowing energy resources such as solar, wind, and energy storage, to 
be owned and operated at the customer level. However, the vast majority 
of electric power is in plant-generated and delivered via traditional 
means to consumers.
---------------------------------------------------------------------------

    \25\ EIA, Electric Power Annual, Table 4.1.
---------------------------------------------------------------------------

    In its Energy-Sector Specific Plan, CISA notes that the failure of 
U.S. power infrastructure, and specifically LPTs, could present a 
vulnerability to the electric grid. CISA further expresses concern that 
the United States heavily depends on overseas manufacturers to meet its 
demand for LPTs and that the supply and procurement of LPTs can be 
challenging because it can take more than 12 months to replace an LPT 
due to its long and complex procurement process and the uniqueness in 
construction for the specific voltages and currents at the intended 
substation.\26\
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    \26\ https://www.cisa.gov/sites/default/files/publications/nipp-ssp-energy-2015-508.pdf.
---------------------------------------------------------------------------

    While the electrical grid, especially at the BPS level,\27\ has 
operated at a high-level of reliability, there is a growing concern 
that the ever-expanding list of threats, which could be physical and/or 
cyber-related in nature, further increases the grid's vulnerability and 
the need for enhanced security. In addition to their long manufacturing 
and acquisition lead time, LPTs pose unique vulnerabilities because of 
transformer's susceptibility to the serious and evolving threats and 
hazards. Single or multiple failures of LPTs are becoming a 
significantly greater concern to grid reliability.
---------------------------------------------------------------------------

    \27\ The North American Electric Reliability Corporation defines 
the bulk-power system to consist of all generation components and 
transmission system elements generally operating at 100 KV or 
higher. See: https://www.nerc.com/pa/Stand/Project%20201017%20Proposed%20Definition%20of%20Bulk%20Electri/bes_phase2_reference_document_20140124_llh.pdf.
---------------------------------------------------------------------------

    As a result of these concerns, several efforts by the federal 
government and electric utility industry have been initiated and are 
underway. For example, the North American Electric Reliability 
Corporation (NERC) issued the NERC-CIP-14 Standard in 2015, requiring 
transmission asset owners to apply risk assessments to identify and 
protect transmission stations and substations, as well as their 
associated primary control centers. Instability, uncontrolled 
separation, or cascading failure within an interconnected transmission 
system could result if these assets were rendered inoperable or damaged 
as a result of a physical attack.
    In addition, the Fixing America's Surface Transportation Act [Pub. 
L. No. 114-94 (FAST Act)], signed into law in December 2015, requiring 
the DOE to establish a plan for a Strategic Transformer Reserve that 
could be tapped in the event of a major disruption to the electric 
grid.\28\ DOE's responsive recommendation is that a voluntary industry-
based approach would be more feasible and effective than a national, 
Government-owned stockpile of transformers. The DOE report, however, 
noted the lack of domestic capacity to produce LPT and the extreme 
dependence on foreign suppliers, especially for high-voltage 
transmission (>345 kV).\29\
---------------------------------------------------------------------------

    \28\ https://www.congress.gov/114/plaws/publ94/PLAW-114publ94.pdf.
    \29\ DOE Transformer Reserve Study, 2017.
---------------------------------------------------------------------------

    President Trump signed Executive Order 13920 (E.O. 13920), titled 
``Securing the United States Bulk-Power System,'' on May 1, 2020.\30\ 
The President determined that the unrestricted foreign supply of BPS 
electric equipment constitutes an unusual and extraordinary threat to 
the national security, foreign policy, and economy of the United 
States.
---------------------------------------------------------------------------

    \30\ https://www.federalregister.gov/documents/2020/05/04/2020-09695/securing-the-united-states-bulk-power-system.
---------------------------------------------------------------------------

    In this Executive Order, the President declared that threats to the 
BPS by foreign adversaries constitute a national emergency. He also 
found that as it serves as the backbone of our Nation's energy 
infrastructure, the BPS is fundamental to national security, emergency 
services, critical infrastructure, and the economy. Transformers 
subject to E.O. 13920 include substation transformers, substation 
voltage regulators, and instrument transformers, which are key elements 
of the BPS. The E.O. notes that the BPS is a target of those seeking to 
commit malicious acts against the United States and its people, 
including malicious cyber activities, because a successful attack on 
the U.S. BPS would present significant risks to the economy and human 
health and safety and would render the United States less capable of 
acting in defense of itself and its allies.
    While BPS electric equipment supplied by potential adversaries 
raises immediate concerns, the Secretary of Energy has also noted that 
evolving threats facing our critical infrastructure have only served to 
highlight the supply chain risks and the need to ensure the 
availability of secure components from American companies and other 
trusted sources.\31\ DOE is currently undertaking a rulemaking effort, 
in consultation with other agencies, to implement the authorities 
delegated to the Secretary of Energy in E.O. 13920. E.O. 13920 
authorizes the Secretary of Energy to (1) prohibit any acquisition, 
importation, transfer, or installation of BPS electric equipment by any 
person or with respect to any property to which a foreign adversary or 
an associated national thereof has any interest, that poses an undue 
risk to the BPS, the security or resiliency of U.S. critical 
infrastructure or the economy, or U.S. national security; (2) establish 
and publicize criteria for recognizing particular equipment and vendors 
in the BPS electric equipment market as ``pre-qualified'' for future 
transactions and to apply these criteria to establish and publish a 
list of pre-qualified equipment and vendors; (3) in consultation with 
heads of other agencies, to identify existing BPS electric equipment in 
which a foreign adversary or associated national thereof has an 
interest that poses an undue risk to the BPS, the security or 
resiliency of U.S. critical infrastructure or the U.S. economy, or U.S. 
national security, and develop recommendations to identify, isolate, 
monitor, or replace this equipment as appropriate; and (4) establish a 
Task Force on Federal Energy Infrastructure Procurement Policies 
Related to National Security, which will focus on the coordination of 
Federal Government

[[Page 64618]]

procurement of energy infrastructure, the sharing of risk information 
and risk management practices, and the development of recommendations 
for implementation to the Federal Acquisition Regulatory Council (FAR 
Council). DOE and the Department will coordinate efforts to ensure 
consistency of rules and supporting program activities.
---------------------------------------------------------------------------

    \31\ https://www.energy.gov/articles/president-trump-signs-executive-order-securing-united-states-bulk-power-system.
---------------------------------------------------------------------------

1. Role of Transformer Manufacturers in Critical Infrastructure
    As part of its survey of industry conducted for this investigation, 
the Department requested survey recipients to provide information on 
which of the 16 critical infrastructure sectors their products support. 
Respondents indicated support for all 16 sectors, with the Energy 
Sector (not surprisingly) indicated most frequently. As mentioned 
above, the Energy Sector is unique among the 16 sectors because it 
provides an ``enabling function'' across all critical infrastructure 
sectors, and survey responses validated this fact. Other critical 
infrastructure sectors that received numerous mentions by survey 
respondents were critical manufacturing, commercial facilities, 
Government facilities, information technology, chemical sector, defense 
industrial base, and food and agriculture (see Figure V-1).
[GRAPHIC] [TIFF OMITTED] TN18NO21.006

    By product, all categories were again cited as providing support to 
critical technology sectors (see Figure V-2). Most frequently mentioned 
were dry-type transformers 16-500 kVA, followed by liquid-dielectric 
transformers 60-100 MVA, and liquid-dielectric transformers under 650 
kVA.

[[Page 64619]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.007

B. National Security/Defense Requirements

    In today's technology-dependent environment, energy requirements 
are inseparable from the Department of Defense's (DOD) mission 
requirements, whether discussing weapons platforms or the installations 
and systems that support those capabilities around the globe. As such, 
energy resilience, which enables the capabilities of weapons platforms, 
facilities, and equipment, is a critical investment that must be part 
of the DOD's research, acquisition, operations, and sustainment 
conversations.\32\
---------------------------------------------------------------------------

    \32\ Department of Defense Annual Energy Management and 
Resilience Report (AEMRR) for Fiscal Year 2018, https://www.acq.osd.mil/eie/Downloads/IE/FY%202018%20AEMR.pdf.
---------------------------------------------------------------------------

    DOD is the largest single energy-consuming entity in the United 
States, both within the Federal Government and as compared to any 
single private-sector entity. DOD operational and installation energy 
consumption represents approximately 80 percent of total Federal energy 
consumption, more than sixteen times the total energy consumption of 
the next closest Federal agency (the United States Postal Service).\33\ 
In FY 2018, DOD spent approximately $3.49 billion on installation 
energy, of which $2.5 billion was for electricity used to power, heat, 
and cool buildings.
---------------------------------------------------------------------------

    \33\ Id, p. 32.
---------------------------------------------------------------------------

    The U.S. electrical grid, primarily under the ownership and control 
of private organizations, supplies the power required to support DOD 
installations, including military bases, arsenals, and laboratories. 
This supply is a key part of the ``Defense Critical Electric 
Infrastructure,'' which is defined as any electrical infrastructure in 
the 48 contiguous States or the District of Columbia that serves a 
facility designated by the Secretary of Energy as critical to the 
defense of the United States and vulnerable to a disruption of the 
supply of electric energy provided to such a facility by an external 
provider, but that is not owned or operated by the owner or operator of 
such facility.\34\ In 1998, with the issuance of Defense Reform 
Initiative #49, the military services were directed to privatize their 
utility systems. The Department of Defense's Defense Logistics Agency 
Energy acts as the procurement agency for contracting with utilities 
for this purpose.\35\
---------------------------------------------------------------------------

    \34\ https://www.federalregister.gov/documents/2018/10/29/2018-23459/critical-electric-infrastructure-information-new-administrative-procedures.
    \35\ https://archive.defense.gov/dodreform/drids/drid49.html.
---------------------------------------------------------------------------

    The Department of Defense operates 500 installations worldwide, 
with nearly 300,000 buildings covering 1.9 billion square feet. Energy 
needed to power these fixed installations accounts for nearly 30 
percent of DoD's total energy use, and the installations rely 
extensively on transformers of various power handling capacities to 
distribute electricity at the appropriate voltage level.\36\
---------------------------------------------------------------------------

    \36\ DOD AEMMR.
---------------------------------------------------------------------------

    As noted above, DOD relies primarily on commercial power to support 
its installations. Commercial power supplies can be threatened by a 
variety of events, ranging from natural hazards and physical attacks on 
infrastructure (including transformers), to cyber-attacks on networks 
and Supervisory Control and Data Acquisition (SCADA) systems. 
Disruption of power could affect critical DOD missions involving power 
projection, defense of the

[[Page 64620]]

homeland, or operations conducted at installations in the United States 
directly supporting warfighting missions overseas.
    DOD's efforts to improve the energy resilience of its installations 
mainly focuses on backup power generation to compensate when the 
commercial grid experiences a disruption. However, emergency power 
generation assets are ineffective if the surrounding distribution 
system is unable to convey power between the generation asset and final 
point of use. Therefore, DOD may also pursue upgrading distribution 
system equipment, including transformers and power lines, as a 
standalone solution if backup generation is already adequate or as an 
integrated solution when new backup power generation assets are 
implemented.
    In addition to their vital role in the electricity grid to supply 
power to military installations, transformers also play an essential 
role in supporting military operations. Sophisticated military 
equipment, such as missiles, fighter jets, and naval vessels, rely on 
transformers of various types and capacities to provide the correct 
voltage within subsystems. Additional military applications include 
tactical displays and field operations equipment such as mobile power 
supplies and reconnaissance equipment. In addition to reliability and 
durability, military transformers must meet defense specifications (Mil 
Spec) and often must be designed and manufactured to withstand extreme 
environmental conditions, such as high humidity, salt spray, sand, high 
altitude, shock, and vibration. Military transformers may be specially 
encapsulated to withstand these types of harsh conditions.
    [TEXT REDACTED].
    Due to its importance for certain defense applications, the Defense 
Logistics Agency (DLA) has included GOES among its requests for 
inclusion in the National Defense Stockpile. In their Fiscal Year 2019 
Report to Congress on Stockpile Requirements, DLA Strategic Materials 
identified a potential shortfall for GOES of approximately [TEXT 
REDACTED]. Per the Strategic and Critical Materials Stock Piling Act 
(50 U.S.C. 98 et seq. Sec 14 (b)), shortfalls are estimated under 
national emergency planning assumptions consisting of ``a military 
conflict scenario consistent with the scenario used by the Secretary of 
Defense in budgeting and defense planning purposes.'' In other words, 
shortfall amounts are calculated based on surge requirements for the 
military engaging in conflict, taking into consideration weapons and 
munitions lost and expended during the conflict in an environment of 
reduced foreign availability of supplies of strategic and critical 
materials. If United States' sole domestic source of GOES were to cease 
production, DLA's estimated shortfalls would be larger. DLA Strategic 
Materials recommended a [TEXT REDACTED]. The stockpile recommendation 
is lower than the estimated requirement due to competing stockpile 
needs and budget constraints.
    In the industry survey conducted as part of this investigation, the 
Department queried participants as to whether their products were 
provided, directly or indirectly, for U.S. defense systems, 
installations, or known defense end-uses. The majority of survey 
respondents were unable to provide specific information in this regard 
because most defense-related sales are indirect; instead, respondents 
noted that their products (especially liquid-dielectric transformers) 
are used to provide power in the national grid that supplies power to 
military bases. Most of those that responded to the question with 
specifics reported that only a small percentage of sales, about 1-3 
percent, involved defense-related uses. Moreover, in most cases, this 
was just an estimate, as survey respondents typically did not have 
insight into the ultimate end use of their products.
    However, some survey respondents were able to provide precise 
information on defense and military uses for their products. These 
respondents supported every branch of the military, as well as the 
Department of Energy/National Labs, the DLA, the State Department, 
NASA, the Department of Defense's Missile Defense Agency, and the U.S. 
Intelligence Community.

[[Page 64621]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.008

    Based on survey responses, dry-type transformers (particularly of 
higher power handling capacities) are suitable for inside installations 
and thus play an important role in direct defense applications such as 
onboard radars, missiles, ships, and aircraft.

[[Page 64622]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.009

    No respondent attributed sales of voltage regulators, non-oriented 
electrical steel, liquid-dielectric transformer 60,000-100,000 kVA, or 
liquid-dielectric transformer over 100,000 kVA to direct defense 
industrial base support.
    [TEXT REDACTED].
    [TEXT REDACTED].\37\ [TEXT REDACTED].
---------------------------------------------------------------------------

    \37\ https://new.abb.com/news/detail/64657/abb-completes-divestment-of-power-grids-to-hitachi.
---------------------------------------------------------------------------

VI. United States' and Global Markets for GOES, Transformers and 
Transformer Components

A. GOES Market

    The market for GOES is dominated by transformers, particularly 
LPTs, which can weigh over 400 tons, and GOES constitutes a significant 
portion of this weight. Although large transformers by sheer size 
incorporate more GOES by weight, the market for them is small in terms 
of units. In contrast, smaller transformers, such as distribution 
transformers, utilize less GOES by weight, but they are sold in much 
greater volumes and so also provide a significant market for GOES.
    A recent report by a market research firm estimated that the global 
market for GOES will reach $20.8 billion by 2025, with a compounded 
annual growth rate (CAGR) of 5.8 percent. The average annual growth 
rate in the United States is estimated to be 4.6 percent over the next 
five years (adjusted downward from 5.7 percent due to the impacts of 
COVID-19); the market in China will grow at 9.5 percent.\38\
---------------------------------------------------------------------------

    \38\ https://www.reportlinker.com/p05798466/Global-Electrical-Steel-Industry.html?utm_source=GNW.
---------------------------------------------------------------------------

    AK Steel is the sole remaining U.S. supplier of GOES. Another 
domestic producer, Allegheny Technologies, Inc. (ATI) stopped 
production of GOES in 2016. However, industry reports indicate that Big 
River Steel (Osceola, AR), a manufacturer of non-grain oriented steel, 
intends to produce high quality GOES in the future, including high 
permeability grades (such as Hi-B).\39\
---------------------------------------------------------------------------

    \39\ https://bigriversteel.com/products/electrical/.
---------------------------------------------------------------------------

    Outside of the United States, there are 13 manufacturers of GOES, 
as listed in Figure VI-1.

[[Page 64623]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.010

    [TEXT REDACTED].\41\
---------------------------------------------------------------------------

    \40\ http://www.corpin.cz/en/arcelorgosteel.html.
    \41\ [TEXT REDACTED]
---------------------------------------------------------------------------

    A limited number of these global suppliers, such as those from 
Japan and South Korea, are capable of producing the high permeability 
GOES that the market is demanding in response to current DOE standards. 
China is the world's largest producer of GOES but much of its 
production is consumed internally, and Chinese firms have not dominated 
export markets.
    [TEXT REDACTED]

[[Page 64624]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.011

    For GOES <600 Mm in width, the total trade in 2019 was $437.6 
million, much smaller than GOES >=600 Mm in width, and the major 
players were mainly Europen countries.

[[Page 64625]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.012

B. Transformer Laminations and Cores

    Most of the major global transformer companies produce laminations 
and cores for internal consumption, although manufacture of these items 
does not necessarily occur in the same facility in which they are 
consumed. However, there are also companies that manufacture these 
products for transformer producers. Lamination and core manufacturers 
tend to be small companies that produce specialized products, and there 
is little information available on them as a distinct industry sector.
    Based on data available from GTAA, the biggest players in the world 
export market for the category including transformer parts (laminations 
and cores but also products not subject to this investigation) \42\ is 
China, including Hong Kong. In 2019, of the total $11.3 billion of 
trade of transformer parts, China exported $2.8 billion and Hong Kong 
exported $2.3 billion; together, China and Hong Kong accounted for 44.9 
percent of the total trade. Germany was second, with exports of $924.4 
million. Although Canada and Mexico are the main sources for U.S. 
imports of transformer cores and laminations, neither country is 
significant actors in global exports: Mexico ranked 8th with $283.5 
million and Canada ranked 12th with $184.0 million.
---------------------------------------------------------------------------

    \42\ Note: At the 6 digit HTS level for which global trade data 
are available, this category (8504.90) includes parts and components 
unrelated to transformers (e.g., parts of static converters and 
inductors). There is no way to determine how much of this trade is 
transformer laminations and cores. Therefore, this information 
should be considered indicative of general trading patterns only.

---------------------------------------------------------------------------

[[Page 64626]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.013

    The leading destination for China's exports of transformer parts 
was the United States with $282.4 million total imports in 2019, 
followed by India with $256.9 million. The leading destination for Hong 
Kong's exports of transformer parts during the same year was also the 
United States with $152.6 million, followed by Germany with $77.9 
million.

C. Global and U.S. Transformers Market

    [TEXT REDACTED]. Typical customers are companies in electricity 
generation, transmission, and distribution industries. End-use 
customers also include energy-intensive industries such as mining, 
chemical manufacturing, and steel and pulp/paper mills, as well as 
large commercial facilities.
    The global transformer industry has undergone numerous mergers, 
acquisitions, consolidations over the past several decades, resulting 
in fewer, larger players that offer a wider product range and are able 
to benefit from economies of scale. During the consolidation process, 
many manufacturers moved their production offshore (e.g., Mexico, 
India, Colombia), taking advantage of lower labor costs, lower labor 
and environmental standards, and access to local markets with rapidly 
increasing demands for electricity.\43\ Mexico, in particular, has 
become a significant player in transformer manufacturing; among the 
global transformer manufacturers with production facilities in Mexico 
[TEXT REDACTED].
---------------------------------------------------------------------------

    \43\ Large Power Transformers and the U.S. Electric Grid, DOE, 
2014.
---------------------------------------------------------------------------

    In addition to these large global players, in the United States 
there are a number of smaller companies that manufacture transformers 
of various power-handling capacities. These include [TEXT REDACTED].
    In its most recent market assessment, Global Market Insights 
estimated the global transformer market to reach $80 billion by 2024, 
assuming a CAGR of 6.5 percent. Key markets for transformers are those 
with rising electricity demands and investments in power distribution 
infrastructure--namely, the Asia/Pacific region, Africa, and the Middle 
East. The greatest market potential is in emerging markets such as 
these; 15 percent of the world's population does not yet have access to 
electricity.\44\
---------------------------------------------------------------------------

    \44\ Draws from http://www.firstresearch.com/industry-research/Transformer-Manufacturing.html (Dun & Bradstreet).
---------------------------------------------------------------------------

    In contrast, the U.S. market is mature, and demand for transformers 
is largely based on upgrades and replacements of aging infrastructure, 
including efforts to install smart grids to increase energy efficiency. 
The average transformer in the United States is 38 years old, with 70 
percent of U.S. transformers older than 25 years.\45\ New transformers 
are also needed to distribute electricity from the growing number of 
renewable energy generation plants. With over 9,000 power plants, 1.2 
terawatts of power generating capacity, and 360,000 miles of high 
voltage transmission lines, the United States remains one of the 
largest markets for transformers.
---------------------------------------------------------------------------

    \45\ DOE LPT Study, 2014 update.
---------------------------------------------------------------------------

    Trade data available through GTA show the major players by country 
in export markets for transformers of various power handling 
capacities. While only available at broad (6 digit HTS) product 
categories, these data are useful to show the relative global export 
market sizes and which countries dominate exports in each broad 
segment.
    Among all transformer categories, the product with the greatest 
value of world exports is the liquid-dielectric transformers with a 
handling capacity of

[[Page 64627]]

more than 10,000 kVA (HTS 8504.23). This category includes large power 
transformers, as well as medium sized power transformers and larger 
distribution transformers. It accounted for nearly 45 percent of total 
world trade in transformers, based on average annual value of global 
exports over the 2014-2019 period. In this category, China is the top 
exporter with an average annual export value of $893.9 million, 
followed by South Korea with $635.9 million, and Germany with $371.8 
million.
    For liquid-dielectric transformers with smaller power handling 
capacities (distribution transformers, HTS 8504.21 and 8504.22), as 
well as mid-sized dry-type transformers (HTS 8504.32 and 8504.33), 
Mexico is a major exporter. Virtually all of Mexico's transformer 
exports are destined for the United States.
[GRAPHIC] [TIFF OMITTED] TN18NO21.014


[[Page 64628]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.015

D. United States Transformers Market

    In the United States, there are about 250 establishments involved 
in transformer manufacturing (including units of companies with 
multiple locations), with a combined annual revenue of about $5 billion 
according to Global Market Insights. The National Electrical Equipment 
Manufacturers Association (NEMA) is the major sector-specific trade 
association that represents companies in this industry. NEMA states 
that there are over two dozen companies and over 15,000 employees 
involved in transformer manufacturing in the United States.\46\
---------------------------------------------------------------------------

    \46\ NEMA Public Comments.
---------------------------------------------------------------------------

    Transformer manufacturing is most highly concentrated in 
Mississippi, Wisconsin, Virginia, North Carolina, and California. The 
industry is highly regulated by local, state, and federal agencies for 
environmental protection reasons, as well as to ensure workplace 
safety. DOE sets energy efficiency standards for distribution 
transformers,

[[Page 64629]]

with the standards last increased to achieve stricter efficiency in 
2016.\47\
---------------------------------------------------------------------------

    \47\ https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing.
---------------------------------------------------------------------------

    The industry is made up of large companies, such as GE 
(headquartered in the United States but with most transformer 
manufacturing facilities abroad) and ABB (now called Hitachi ABB Power 
Grids), which offer a variety of transformer products to utilities and 
industrial customers. In addition, there are numerous small companies 
that manufacture specialty transformers and niche products to 
industrial and consumer products customers. However, the 50 largest 
companies account for 90 percent of industry revenue.\48\
---------------------------------------------------------------------------

    \48\ https://www.researchandmarkets.com/reports/4376152/transformer-manufacturing.
---------------------------------------------------------------------------

    According to the Census Bureau, in 2018 (the most recent year for 
which data are available), the U.S. power, distribution, and specialty 
transformer manufacturing industry employed 19,227 people, operated in 
285 locations, and totaled $6.15 billion in revenue. The Census Bureau 
classifies data using the North American Industry Classification System 
(NAICS) codes. Because the NAICS code representing power, distribution, 
and specialty transformer manufacturing is broader and more inclusive 
than the scope of this investigation, the data below should be 
interpreted to represent industry trends.
[GRAPHIC] [TIFF OMITTED] TN18NO21.016


[[Page 64630]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.017

BILLING CODE 3510-33-C
    Imports account for about 35 percent of the U.S. market for 
transformers (of all power handling capacities combined); primary 
sources of imports are Mexico, Canada, South Korea, and China. About 10 
percent of U.S. production is exported, mainly to Mexico and Canada.
    With regard to specific subsectors of the transformer industry, 
there are few companies worldwide that manufacture LPTs; in the United 
States, as previously discussed, there are six manufacturers but their 
capability is limited. Distribution transformers are produced by a 
greater number of companies, including U.S. manufacturers.
    DOE has gathered extensive information about the distribution 
transformer market as a result of the energy conservation standards 
that the Energy Efficiency and Renewable Energy (EERE) Office is 
required to set under the Energy Conservation and Policy Act of 1975, 
as amended. DOE determined that there is significant domestic 
manufacturing of these products, finding that 75 percent of the 
employees who work for manufacturers that provide medium-voltage dry-
type transformers are located domestically.\49\
---------------------------------------------------------------------------

    \49\ DOE, EERE, Technical Support Document (TSD), Ch. 12, 
Manufacturer Impact Analysis, filed in Docket No. ERE-2010-BT-STD-
0048 (Apr. 2013), at 12-48.
---------------------------------------------------------------------------

    The Edison Electric Institute (EEI), which represents investor-
owned electric companies that provide power to about 220 million 
Americans, estimates that its members have procured about four million 
transformers, at a total cost of more than $20 billion, over the last 
five years. The vast majority of these were distribution transformers. 
EEI estimates that investments in the grid will continue at similar 
levels in the coming years. EEI members also reported that transformers 
were sourced both domestically and internationally, with a majority of 
the reported distribution transformer purchases sourced 
domestically.\50\
---------------------------------------------------------------------------

    \50\ EEI et al. Public Comments.
---------------------------------------------------------------------------

VII. U.S. Production Capabilities, Industry Health and Competitiveness, 
and the Impact of Imports on National Security for Transformer 
Component Manufacturers

A. Introduction

    This chapter evaluates the state of U.S. production capabilities, 
industry health and competitiveness, and the impact of imports on 
national security for GOES, transformer lamination, and transformer 
core manufacturers. In particular, it presents data on U.S. GOES 
production, as well as production of key transformer components 
primarily composed of GOES: Transformer laminations, stacked cores, and 
wound cores.

B. Grain-Oriented Electrical Steel

    GOES is a highly specialized, technically challenging product that 
requires dedicated equipment, advanced manufacturing process know-how, 
and well-trained, experienced employees. This product is absolutely 
critical to the performance of transformers, as it is the key material 
used in transformer cores, which constitutes the primary market for 
GOES.
    AK Steel is the only domestic producer of GOES.\51\ The company, 
then known as Armco Steel, invented and introduced GOES products to the

[[Page 64631]]

market in 1926.\52\ Another manufacturer, Allegheny Ludlum, a 
subsidiary of Allegheny Technologies, Inc. (ATI), ceased manufacturing 
of GOES in 2016, with a loss of 350 jobs. [TEXT REDACTED] \53\
---------------------------------------------------------------------------

    \51\ Paul J. Bough, ``ATI to Permanently Close Midland, Bagdad 
Metal Plants,'' Pittsburgh Business Times, October 25, 2016, https://www.bizjournals.com/pittsburgh/news/2016/10/25/ati-to-permanently-close-midland-bagdad-metals.html. Another U.S. company, Big River 
Inc. (Osceola, Arkansas) has indicated an intention to enter the 
GOES market. The company currently produces a wide variety of non-
grain oriented steels for motor laminations. It has invested in 
plant equipment and infrastructure to expand production to include 
high permeability grain-oriented electrical steels. It also has 
expressed interest in utilizing the facility at which Orb Steel 
formerly manufactured grain oriented electrical steel in the United 
Kingdom (owned by Tata of India, which is attempting to sell the 
plant). However, the company's production capacity and product range 
is unknown at this time so cannot be counted as domestic production 
capability.
    \52\ https://www.aksteel.com/our-products/electrical-steel/grain-oriented-electrical-steels.
    \53\ [TEXT REDACTED].
---------------------------------------------------------------------------

    AK Steel melts, rolls, and finishes electrical steel at its Butler 
Works facility in Butler, Pennsylvania (which employs about 1,300 
employees; this plant also processes other rolled steel products 
including Non-Grain Oriented Electrical Steel) and finishes electrical 
steel at its Zanesville Works plant in Zanesville, Ohio (which employs 
about 100 employees). However, electrical steel represents only a small 
percentage of AK Steel's business, accounting for [TEXT REDACTED] of 
revenues (the automotive industry is AK Steel's primary customer). AK 
Steel was acquired by Cleveland Cliffs Inc., the nation's largest 
producer of iron ore pellets, in March 2020.\54\
---------------------------------------------------------------------------

    \54\ http://www.clevelandcliffs.com/English/news-center/news-releases/news-releases-details/2020/Cleveland-Cliffs-Completes-Acquisition-of-AK-Steel/default.aspx.
---------------------------------------------------------------------------

    While still a leader in the domestic market, AK Steel's electrical 
steel operations are in poor financial condition, in part due to years 
of pressure from lower-cost foreign imports. In his testimony before 
the Congressional Steel Caucus in March 2020, Lourenco Goncalves, the 
President & CEO of Cleveland Cliffs, warned that the company would be 
forced to close the Butler and Zanesville facilities, both of which are 
unprofitable, unless the U.S. Government were to take action to limit 
imports of GOES in the form of transformer laminations and cores.\55\ 
If AK Steel's GOES operations were to close, the United States would 
lack the ability to produce transformers of any power handling capacity 
without relying on foreign sources for the key material that is 
essential to their operation and efficiency.
---------------------------------------------------------------------------

    \55\ http://www.butlereagle.com/article/20200306/NEWS12/200309971.
---------------------------------------------------------------------------

    The charts below present the current status of AK Steel specific to 
several important industry measures.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
           [TEXT REDACTED].\56\     [TEXT REDACTED] \57\     [TEXT REDACTED]
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
           [TEXT REDACTED].\58\
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \56\ [TEXT REDACTED].
    \57\ [TEXT REDACTED].
    \58\ [TEXT REDACTED].
---------------------------------------------------------------------------

    [TEXT REDACTED].59 60 [TEXT REDACTED] \61\ [TEXT 
REDACTED].\62\ [TEXT REDACTED].
---------------------------------------------------------------------------

    \59\ U.S. Department of Commerce, Bureau of Industry and 
Security, Section 232 Investigation on Impact on National Security 
of Imports of Steel, 2017.
    \60\ [TEXT REDACTED].
    \61\ Ibid.
    \62\ Ibid.
---------------------------------------------------------------------------

    [TEXT REDACTED]. As a result of its inadequate investment, AK Steel 
says it will not be able to innovate in order to keep pace with the 
latest production technology or be able to meet increasingly stringent 
DOE efficiency standards. AK Steel states (and transformer companies 
validate) that the company can make high-permeability GOES products 
that have very low losses and are highly efficient. However, if the DOE 
increases its efficiency standards to require more high-permeability 
GOES, AK Steel would likely need to invest in more capacity to meet 
U.S. demand. Under current market conditions and pricing, AK Steel 
claims it cannot justify investments to achieve such additional 
capacity.\63\
---------------------------------------------------------------------------

    \63\ AK Steel Public Comments.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------


------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

1. U.S. GOES Production, Consumption and Import Penetration
    [TEXT REDACTED].

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    The United States imported about 27,000 metric tons of GOES in 
2019, for which Japan and Korea were the main sources. Imports of GOES 
in 2019 were dramatically lower than in 2018 (down 56 percent), a 
result of 25 percent tariffs imposed on imported GOES from most 
locations (Steel 232 tariffs). However, the steel tariffs did not 
achieve the intended result of increased production and consumption of 
domestic GOES.
BILLING CODE 3510-33-P

[[Page 64632]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.018


[[Page 64633]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.019


[[Page 64634]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.020

    Thus, based on production and trade data for GOES (presented in 
Table VII-11), imports accounted for less than 20 percent of domestic 
consumption (on a tonnage basis) in 2019. This is down from a high of 
37 percent in 2017, prior to imposition of the steel tariffs. On a 
value basis, penetration is even lower, at 13 percent. These simple 
calculations do not present an accurate picture of the dependence of 
the domestic transformer industry on imported GOES, however, as will be 
discussed in the section analyzing suppliers to U.S. transformer 
manufacturers provided in the BIS industry survey.
2. Analysis of BIS Survey Supplier Data: GOES
    The Department's industry survey provided additional data and 
insight on domestic consumption of GOES. Thirty-nine survey respondents 
reported that they directly sourced GOES and provided details on their 
suppliers and purchases. The aggregated amount of GOES that they 
procured on an annual basis was relatively stable between 2015 and 
2019, [TEXT REDACTED]. This figure is roughly consistent with estimates 
for domestic GOES demand. Moreover, the total amount supplied by AK 
Steel as reported by survey respondents is consistent with that 
company's GOES production data. This data indicates that the 
Department's survey accurately captured most of the market.
    The survey respondents reported obtaining GOES from a wide variety 
of global suppliers. Purchases were made from suppliers in Japan, 
China, Mexico, Germany, Russia, Canada, France, Brazil, Poland, and 
South Korea, as well as the United States. In addition to the steel 
mills that produce GOES sheets in coils, some respondents included in 
their responses information on purchases from suppliers that provide 
GOES in slightly more processed forms. These suppliers typically start 
their production with electrical steel sourced from a steel mill 
producing electrical steel and perform additional processing such as 
cutting, slitting, stamping, and/or coating. In this regard, the line 
between GOES and transformer laminations is seemingly quite indistinct, 
as other survey recipients recorded purchases from these same suppliers 
under the ``laminations'' category.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    Four GOES suppliers accounted for 93 percent of purchases by the 
survey population in 2019. [TEXT REDACTED]. The remainder of the market 
shifted considerably among other players, with the most significant 
development the exit of ATI (Allegheny Ludlum) from the market in 2016. 
[TEXT REDACTED].

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    [TEXT REDACTED].
    [TEXT REDACTED].
    [TEXT REDACTED].
    [TEXT REDACTED].
3. Sufficient Quantity and Quality of Domestic GOES
    A number of transformer companies have indicated, through their 
public comments, through the Section 232 steel tariff exclusion 
process, and through survey responses, that the sole domestic source of 
GOES (AK Steel) lacks the capacity to meet the domestic demand for the 
full range of GOES products. U.S. consumption of GOES is estimated at 
approximately 220,000 metric tons per year, [TEXT REDACTED].\64\ 
However, AK Steel's stated capacity does not take into consideration 
the production of variable grades of GOES. For example, much of the 
company's production is of conventional grades of GOES (M class); its 
production capacity for higher grades is limited.
---------------------------------------------------------------------------

    \64\ Core Coalition Public Comments.
---------------------------------------------------------------------------

    In its public comments, the Core Coalition noted that although AK 
Steel is widely recognized in the industry as a supplier of high-
quality GOES. However, it is a high-cost supplier compared to foreign 
sources, which the Core Coalition attributes to the company's lack of 
capital investment and its continued use of obsolete production 
equipment and processes. AK Steel notes that the Department's

[[Page 64635]]

antidumping investigations have found that foreign GOES manufacturers 
sell at unfair prices (dumping) or are subsidized by their governments. 
The European Union has found AK Steel practices dumping.
    In addition, AK Steel does not manufacture or offer an intermediate 
grade of GOES, called MOH, which is widely available from suppliers in 
South Korea, Japan, and China. While AK offers a higher grade GOES that 
can be used instead of MOH, it is more expensive and is not optimal for 
use in certain standard-issue transformers where GOES price weighs more 
heavily than energy efficiency in sourcing decisions.
    Another concern expressed by domestic transformer manufacturers is 
the maximum width of AK's Steel's product. The company does not produce 
steel wide enough (>932mm) to form the laminations and cores of larger 
transformers. According to the technical specifications on AK Steel's 
website, the maximum width of its domain-refined products (TRAN-COR) is 
920mm.\65\ While two pieces of steel can be patched together, this 
process leads to increased production costs and loss of efficiencies in 
the core.\66\
---------------------------------------------------------------------------

    \65\ https://www.aksteel.eu/files/downloads/TRAN-COR_H_%20Grain_Oriented_Electrical_Steel.pdf.
    \66\ Public comments of Domestic Transformer Producers.
---------------------------------------------------------------------------

    Many transformer companies submitting public comments during the 
investigation indicated that AK Steel's lack of capital investment over 
many years has affected the company's ability to supply the highest 
grades of steel grades that steel transformer manufacturers prefer to 
use in the cores of distribution transformers subject to DOE energy 
standards. In addition, in general, utility companies are increasingly 
seeking to install transformers with high efficiency/lower losses (that 
tend to require higher grades of GOES) that reduce costs and are 
environmentally friendly. For example, European and Asian manufacturers 
offer a high permeability GOES called HI-B (originally developed by 
Nippon Steel of Japan but licensed the technology to other 
companies).\67\
---------------------------------------------------------------------------

    \67\ Public comments of Domestic Transformer Producers.
---------------------------------------------------------------------------

    A summarized list of concerns with AK Steel's capabilities and 
capacity expressed through the public comments process is provided in 
the table below.

[[Page 64636]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.021


[[Page 64637]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.022

    [TEXT REDACTED].\68\
---------------------------------------------------------------------------

    \68\ Joe Paladino Technical Advisor, DOE Office of Electricity, 
in written comments to BIS submitted on 9/21/202.
---------------------------------------------------------------------------

    A number of transformer manufacturers indicated that the sole 
domestic source of GOES does not offer the full range of efficient 
GOES, with the result that the manufacturers must seek foreign 
suppliers. For example, transformer manufacturers indicated that they 
are unable to obtain permanent, heat resistant domain-refined grain 
oriented steel (PDR GOES) from the sole domestic manufacturer.\69\ DOE 
energy efficiency standards for distribution transformers that came 
into effect in 2016 have reduced demand for lower-permeability, 
conventional grades of GOES, and increased the demand for high grades, 
such as PDR-GOES. PDR-GOES is capable of being annealed after core 
production while retaining its domain-refined properties, which is 
important for use in wound cores often used in distribution 
transformers.\70\ Nippon Steel of Japan is recognized as the primary 
source of this product.
---------------------------------------------------------------------------

    \69\ For example, in its public comments, Central Moloney, a 
domestic manufacturer of distribution transformers, expressed 
concern over the quality of AK Steel's GOES. They said that the 
company's manufacturing equipment and processes are antiquated, and 
it lacks the capability to produce electrical steel that it prefers 
to use to meet DOE efficiency standards for distribution 
transformers--namely Permanent Domain-Refined GOES (PDR). In 
addition, tariff exclusion requests from Sumitomo, ABB, Eaton/
Cooper, and SPX cited lack of domestic capabilities.
    \70\ https://Agmetalminer.com/tag/grain-oriented-electrical-steel/.
---------------------------------------------------------------------------

    [TEXT REDACTED]. However, while there is some degree of 
interchangeability among different grades of GOES in transformer core 
construction, doing so could result in higher core losses/decreased 
efficiencies and/or require a larger size transformer. As a result, 
using non-permanent DR-GOES in lieu of PDR-GOES could affect the 
competitive position of the transformer manufacturer when bidding for 
contracts.\71\
---------------------------------------------------------------------------

    \71\ See, e.g., SPX Exclusion Request.
---------------------------------------------------------------------------

    This apparent deficiency in U.S. production capabilities for GOES 
with superior magnetic qualities helps explain continued imports of 
GOES (especially from Japan) despite the additional cost due imposition 
of tariffs. In fact, the Department has granted some requests for 
exclusion from the 25 percent tariffs on imported steel due to lack of 
domestic capability of the particular product grade. Additionally, some 
imports of GOES from South Korea and Brazil continue to be economical 
because the Section 232 remedy resulted in a quota, rather than tariffs 
for steel from those countries.
    While just a rough estimate, the average unit value by country 
(based on value imports divided by unit imports) is broadly 
illustrative of the varying grades of GOES from different suppliers. 
Other than the United Kingdom, which is not a major source of GOES 
imports, GOES imported from Japan has an average unit value 
significantly higher than from other sources. This suggests that Japan 
is the source of the highest grades GOES imported into the United 
States.

[[Page 64638]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.023

BILLING CODE 3510-33-C

C. Laminations and Cores

    Transformer lamination and core producers make up the primary 
customer base for GOES suppliers. There are very few companies in the 
United States that manufacture only transformer laminations and cores; 
some major transformer companies produce laminations and cores for in-
house use in their transformers. Manufacture of these critical 
transformer components requires expensive, specialized equipment which 
can only produce laminations within a specific size range. This limits 
the ability of independent companies to offer laminations in the varied 
sizes required across transformer product categories. Over the past few 
years, there has been a marked decline in domestic manufacturing of 
laminations and cores (by both transformer companies and independent 
producers), and a movement of production offshore (especially to Canada 
and Mexico). A corollary to the movement of lamination and core 
manufacture out of the United States is the loss of a potential 
domestic market for AK Steel's GOES.
    Because electrical steel accounts for such a large percentage of 
the cost of transformer laminations and cores (averaging about 60 
percent for the surveyed companies), the 25 percent import tariff 
raised material costs and decreased transformer manufacturers' ability 
to compete. The CEO of one of the remaining domestic producers of these 
items, Orchid Monroe LLC (Wisconsin), stated that imported laminations 
and cores often cost less than the price at which its company can 
procure domestic electrical steel, without any processing or 
manufacturing costs included.\72\
---------------------------------------------------------------------------

    \72\ Public Comments from Gordon Bibby, Orchid Monroe LLC.
---------------------------------------------------------------------------

    Global transformer companies with multiple facilities have adapted 
to changes in raw material prices by shifting their lamination and/or 
core production or sourcing offshore in order to continue to utilize 
foreign-origin GOES without the price premium for domestically produced 
GOES. Smaller companies that specialize in these products either moved 
their operations offshore or ceased production.
    The trend toward moving lamination production offshore occurred 
prior to the Section 232 steel tariffs, but the situation worsened 
after their imposition. The expansion of core-making capacity in Canada 
and Mexico began in the mid-2010s, at which time the United States had 
initiated antidumping investigations on GOES from many foreign sources. 
In the antidumping investigations conducted by the Department, many 
foreign suppliers of GOES were found to be selling at less than fair 
value, or in the case of China, with the benefit of government 
subsidies. However, the International Trade Commission did not find 
material injury to U.S. industry was not found, no duties were 
imposed.\73\ Despite this, partly to avoid potential duties, 
transformer and transformer component manufacturers began to shift 
production offshore where they are able to use foreign origin GOES 
without the risk of increasing costs due to the imposition of duties.
---------------------------------------------------------------------------

    \73\ See Grain-Oriented Electrical Steel from Germany, Japan, 
and Poland, Inv. Nos. 731-TA-1233, 1234, and 1236, USITC Pub. 4491 
(Sep. 2014), at 2.
---------------------------------------------------------------------------

    Another factor in the movement of core and lamination toward 
offshore outsourcing was the new DOE energy efficiency standards for 
distribution transformers that were implemented in 2016. To meet these 
standards, transformer companies had to redesign their products, 
including the choice of electrical steel and core construction. [TEXT 
REDACTED].\74\ [TEXT REDACTED].\75\
---------------------------------------------------------------------------

    \74\ [TEXT REDACTED].
    \75\ [TEXT REDACTED].
---------------------------------------------------------------------------

    As a result, there are very few remaining domestic producers of 
laminations and cores. The Department's survey included responses from 
10 small businesses in the United States that reported production of 
laminations, stacked core, and/or wound cores using GOES. The table 
below presents the state of transformer lamination and core 
manufacturing in the United States by these non-captive producers.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    [TEXT REDACTED]. Moreover, analysis of these companies' financial 
reports reveals additional weaknesses.

[[Page 64639]]

Respondents were assigned a comprehensive financial risk score by the 
Department, which incorporated yearly scores and trends in financial 
health. Based on this scorecard, respondents were categorized as low/
neutral risk, moderate/elevated risk, or high/severe risk.\76\
---------------------------------------------------------------------------

    \76\ For how BIS assessed financial health, see note [45], 
infra.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    All of the companies noted in their survey responses that they face 
serious negative impacts from foreign competition. Three of the 10 have 
shut down their domestic operations in recent years [TEXT REDACTED]. A 
fifth company has reduced its capacity in an attempt to return to 
profitability. The five companies remaining have had to increasingly 
rely on niche markets, including aerospace and defense, to counter the 
loss of demand from other customers (which have either shifted sourcing 
or are themselves impacted by foreign competition).
    Among the domestic laminations and core manufacturers that have 
been negatively affected is [TEXT REDACTED].
    [TEXT REDACTED].
    [TEXT REDACTED].
    As mentioned above, in addition to these specialized manufacturers, 
several transformer companies produce laminations and/or cores in the 
United States for their own internal consumption. [TEXT REDACTED]. 
These captive producers, too, have changed production and sources for 
laminations and cores, either completely or partially outsourcing. 
[TEXT REDACTED].
    [TEXT REDACTED]. The new company (80 percent owned by Hitachi and 
20 percent by ABB) is called Hitachi ABB Power Grids.\77\ Although 
Hitachi's long-term plans for the facility are unknown, the sale may 
impact domestic production of laminations and cores.
---------------------------------------------------------------------------

    \77\ http://www.hitachi.com/New/cnews/month/2020/07/f_200701.pdf.
---------------------------------------------------------------------------

1. Lamination Suppliers
    The lack of domestic production capability is validated by the 
lamination and core supplier data provided by survey recipients. 
Twenty-two survey participants reported sourcing stacked laminations 
for use in transformer cores. They sourced laminations from suppliers 
in a variety of countries, including the United States, South Korea, 
Mexico, Canada, Turkey, Italy, and India.
    In 2019, laminations with a total value of $40.2 million were 
sourced by surveyed companies.\78\ Of this $40.2 million, less than 12 
percent came from domestic suppliers, while 88 percent were from 
foreign sources. [TEXT REDACTED].
---------------------------------------------------------------------------

    \78\ This figure exceeds the value of imports of laminations 
(HTS 8504.90.9634) according U.S. Census trade statistics, which was 
$33 million in 2019; purchases in an annual period and export 
shipments in an annual period do not necessarily match.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

[TEXT REDACTED].\79\ [TEXT REDACTED]. In addition to these two 
companies, survey respondents reported several other suppliers from 
Mexico along with minor suppliers located in South Korea, Italy, 
Turkey, India, and China.
---------------------------------------------------------------------------

    \79\ https://magneticsmag.com/jfe-gains-foothold-in-na-with-acquisition-of-cogent-power-from-tata-steel/.
---------------------------------------------------------------------------

    It is clear from respondents' replies to the supplier question that 
there is an ambiguity between what is considered GOES and what is 
considered a lamination; data from the survey show that 60 percent of 
the value of laminations is accounted for by the cost of GOES. Among 
the suppliers listed, as noted earlier, there is overlap between the 
two categories. [TEXT REDACTED].
2. Stacked Core Suppliers
    Outside of captive production by several transformer manufacturers, 
16 transformer companies participating in the Department's survey 
procured a total of $114.7 million worth of stacked cores in 2019. 
Their suppliers were located in Canada, Mexico, Italy, and China, as 
well as the United States. Of the $114.7 million total, [TEXT 
REDACTED]. The other leading core suppliers were [TEXT REDACTED]. As 
with the lamination sector, this would mean that foreign fabricated 
cores could account for over 80 percent of the future market.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    As noted above, Cogent Power was recently purchased by JFE Shoji. 
This Japanese steel trading company also acquired an unspecified 
interest in another leading source of stacked cores, [TEXT REDACTED].
    [TEXT REDACTED], several Chinese companies were minor suppliers of 
stacked cores.
3. Wound Core Suppliers
    Twenty-nine respondents to the Department's survey indicated that 
they procured wound cores for use in manufacturing transformers during 
the 2015-2019 period. The total value of the wound cores that these 
companies purchased increased markedly in the last three years of the 
time period, from $132 million in 2017 to $410 million in 2019. The 
increase may be because wound cores are often used in distribution 
transformers that are subject to the DOE energy efficiency standards. 
PDR-GOES, which is not produced in the United States, is desirable for 
use in wound cores because it is capable of withstanding the annealing 
process.
    By far the leading source of wound cores for the survey sample was 
[TEXT REDACTED].
    [TEXT REDACTED] mentioned that make up the other 25 percent of 
consumption are domestic companies that have shut down their U.S. 
facilities since 2019.
4. U.S. Imports of Laminations and Cores
    U.S. import statistics affirm the Department's survey data with 
regard to the dominant role that foreign sources play in the United 
States domestic transformer market. The dramatic increase in imports of 
these products, particularly from Canada has resulted in the 
displacement of U.S. production of transformer components.
BILLING CODE 3510-33-P

[[Page 64640]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.024


[[Page 64641]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.025

    U.S. imports of transformer laminations rose from $18 million in 
2017 to $33 million in 2019, with most of the increase due to imports 
from Canada. For stacked and wound transformer cores, imports rose from 
$22 million in 2015 to $167 million in 2019--a 650 percent increase--
with Canada and Mexico accounting for more than 95 percent of the total 
imported. Data for the first six months of 2020 indicate that the trend 
toward increased imports is continuing. As domestic demand for 
laminations and cores has not increased, this surge in imports 
represents displaced domestic production.
    The United States-Mexico-Canada Agreement (USMCA) establishes a 
country of origin (COO) rule for transformers and transformer 
components, including laminations and cores. These rules of origin, 
which will come into force in five years (2025), will consider 
transformer laminations and cores as derived from the country in

[[Page 64642]]

which the electrical steel from which they are made was produced, based 
on the high percentage of these products' value that is accounted for 
by the electrical steel. As Canada and Mexico have no electrical steel 
production, those cores will not be considered products of either 
Mexico or Canada when full implementation of USMCA is achieved.\80\ 
However, even when this new requirement for preferential treatment 
comes into effect, it will likely not discourage the production of 
these items in Canada or Mexico (using foreign GOES) for export to the 
United States, because that the general, most-favored-nation U.S. 
tariff rate on imports of these items is zero.
---------------------------------------------------------------------------

    \80\ https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/04-Rules-of-Origin.pdf.
---------------------------------------------------------------------------

5. Consumption of GOES Contained in Transformer Cores
    Due to the movement offshore of lamination and core production, 
U.S. imports of these products must also be considered as part of U.S. 
GOES consumption that is not captured in the trade statistics for GOES. 
In 2019, the United States imported an estimated 68,000 metric tons of 
GOES in the form of transformer laminations and cores.\81\
---------------------------------------------------------------------------

    \81\ Trade data for cores are not collected by weight, but 
rather by units. Estimate of the weight of lamination and core 
imports is based on the estimates provided by the Core Coalition in 
its public comments.
---------------------------------------------------------------------------

    [TEXT REDACTED]. Based on these figures, the import penetration for 
GOES was approximately 44 percent in 2019. (Note: this number could 
include double counting from U.S. exports of GOES that is then imported 
into the United States in the form of cores, but this is likely minimal 
because Canada was not a major destination for U.S. GOES exports or a 
major source of Canadian imports).
    A public comment by the Core Coalition estimates that total U.S. 
core imports, in kilograms, will be much higher in 2020 than in 2019 
(due primarily to an anticipated increase in imports of wound cores; 
trade data from the first half of 2020 validates this). Based on the 
Coalition's estimate of 2020 core imports of 96,000 metric tons, and 
assuming steady U.S. GOES production and export and import levels, 
import penetration is estimated to reach over 50 percent this year.
6. Dominance of Suppliers for Laminations and Cores
    As discussed, Canada and Mexico are by far the leading suppliers of 
components for U.S. transformer manufacturers. [TEXT REDACTED].
    [TEXT REDACTED]. Until 2019, Cogent was owned by Tata of India, 
which also owned Orb Steel, which may explain why Orb was a major 
supplier to Cogent. Now that Cogent is owned by JFE Shoji, it is likely 
that JFE Steel will emerge as one of its major suppliers.
    [TEXT REDACTED].
7. Consumption of GOES Imported in Finished Transformers
    Despite the grim results that the inclusion of the GOES-derivative 
products discussed above presents, the complete picture with regard to 
the true dependency of the U.S. electricity grid on foreign sources for 
GOES, laminations, and cores remains incomplete until the impact of 
finished transformers is included. Given that transformers have a high 
percentage value of GOES, domestic GOES production (and transformer 
production) is adversely impacted by imports of complete transformers. 
The vast majority of imported transformers contain cores composed of 
foreign-origin GOES. In 2019, the United States imported a total $2.56 
billion worth of transformers (of all power handling capacities), 
representing about 35 percent of the market (per Global Insights/D&B). 
For LPT (which by nature of their size contain the most GOES by 
weight), imports accounted for over 80 percent of the domestic market.
8. Source of GOES for Mexico and Canada
    Corresponding to the migration of core and lamination production to 
Canada and Mexico from the United States was an increase in imports by 
these countries of GOES. As neither Canada nor Mexico have domestic 
GOES production capability, both needed to increase their imports of 
GOES in order to increase core and lamination production. The table 
below shows total imports of GOES by Canada and Mexico over the past 
ten years. Both are substantial consumers of GOES. The table shows that 
imports of GOES has been rising substantially over the ten year period, 
particularly between 2014 and 2016. For both countries, imports of GOES 
declined significantly in 2019 from 2018 levels, but are still higher 
than earlier in the decade.

[[Page 64643]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.026

    The leading sources of GOES imports in Canada in 2019 were Japan 
and South Korea, but China and Russia were also sources. Note that the 
United Kingdom was also a major supplier to Canada throughout the 
period. There was one producer of GOES in the United Kingdom, Orb Steel 
(owned by Tata of India), which, as previously discussed, shut down 
production in 2019. One of Canada's leading transformer lamination and 
core manufacturers, Cogent Power, was, at the time, also owned by Tata 
and this might explain why the United Kingdom was such a major 
supplier. As discussed above, JFE Shoji recently acquired Cogent Power. 
In the case of Mexico, Japan was the leading supplier in 2019, with 
China and Russia ranked second and third. Imports of GOES from the 
United States declined to virtually zero in Mexico in 2019. In the case 
of Canada, 2019 imports of GOES from the United States accounted for 
less than three percent of the total (2,609 metric tons of 97,889 total 
metric tons), compared to about a third of imports as recently as 2015 
(23,210 metric tons out of 68,929 total metric tons).

[[Page 64644]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.027

    Moreover, transformer components produced in Mexico and Canada were 
largely destined for the U.S. market. Virtually all of Mexico's exports 
of transformer components were to the United States (>99 percent), as 
were over 90 percent of Canada's exports of these items.\82\ Mexico, 
also a significant manufacturing center for transformers, had domestic 
GOES requirements. However, here again, the United States is the 
primary destination for Mexico's transformer production so the GOES 
contained in them is also part of U.S. GOES consumption. Based on the 
data and statistics on Mexican and Canadian imports of GOES, some 
transformers in the United States likely contain GOES originating from 
China and Russia.
---------------------------------------------------------------------------

    \82\ Global Trade Atlas.
    [GRAPHIC] [TIFF OMITTED] TN18NO21.028
    
9. Amorphous Metal
    While not technically subject to this investigation, amorphous 
metal (also known as metallic glass or metglas) competes with GOES as a 
material for transformer cores in certain power handling categories. 
Demand for amorphous metal cores increased as a result of the 2016 
distribution transformer efficiency standards. As is the case with 
GOES, there is only one domestic source for amorphous metal ribbon--
Metglas, Inc., based in Conway, South Carolina, which is a subsidiary 
of Hitachi Metals of Japan. In 1999, AlliedSignal bought Honeywell and 
took on the Honeywell name. In 2003, Hitachi Metals of Japan bought 
Metglas from Honeywell.
    Just as AK Steel (then Armco Steel) invented GOES, Metglas 
pioneered amorphous metal in the 1970s (when the company was known as 
AlliedSignal). The first commercial transformer using the product in 
its core was installed in the United States in 1982; and commercial 
production of transformer core alloy began in 1989.\83\
---------------------------------------------------------------------------

    \83\ https://metglas.com.
---------------------------------------------------------------------------

    While more expensive than GOES on a per kilogram basis, and more 
labor intensive to form into cores, the material has the potential to 
reduce costs in the long run for utilities over the life of the 
transformer due to lower core losses. The production technology has 
been widely adopted in developing countries, including China and India. 
As producing transformers cores using metglas is more labor intensive, 
it is more economical in countries with low labor costs. There are 
about 600,000 amorphous metal transformers installed in the United 
States, compared to over 1 million in China and 1.3 million in 
India.\84\
---------------------------------------------------------------------------

    \84\ Ibid.
---------------------------------------------------------------------------

    Metglas's patent on the production technology has expired; Metglas' 
competitive strength is its proprietary production process. The company 
has accused former employees of divulging

[[Page 64645]]

confidential information to Chinese competitors and in 2017 filed a 
case under Section 337 of the Tariff Act of 1930 (investigations 
conducted by the International Trade Commission involving patent 
infringement or intellectual property theft in imported goods) against 
five Chinese companies. The case was suspended without prejudice. 
Metglas has lost 50 percent of its employees due its inability to 
compete with imports from China that have flooded the world market. 
Metglas alleges that the same avoidance of tariffs that occurred with 
GOES is happening on amorphous metal; in other words, that imported 
metal goes to Canada and Mexico, where it is made into cores that are 
shipped to the United States.
    Despite this trend in imported amorphous metal cores (the trade 
statistics for which are combined with GOES cores), in June 2020, 
Metglas announced the commercial launch of its own amorphous metal 
transformer core business. The company now has in-house capability to 
produce distribution transformer cores using its amorphous alloy.
    The use of amorphous metals in future innovations of the electric 
grid is an area of research interest to the Department of Energy/
National Labs. The National Labs have partnered with Metglas to supply 
the metal ribbon to support this research; loss of domestic capability 
to imports would leave the U.S. Government dependent on foreign 
suppliers for this promising research.

VIII. U.S. Production Capabilities, Industry Health and 
Competitiveness, and the Impact of Imports on National Security for 
Transformers

A. Introduction/Summary

    As discussed in Chapter V, LPTs are a critical component of the 
BPS. Distribution transformers and smaller power transformers are used 
extensively and play an essential role in the electrical grid of the 
United States in providing power to commercial and residential 
customers. In addition to their essential role in the electrical grid, 
distribution transformers, smaller power transformers, and, in 
particular, dry-type transformers that can be used indoors play a vital 
role in other critical infrastructure sectors such as manufacturing, 
hospitals, and in weapons systems. However, they are not considered to 
be part of the BPS, the security of which is subject to the 
Presidential Bulk Power Executive Order.
    The Department's survey included 36 companies with domestic 
manufacturing of transformers of various types and power handling 
capacities, from 1 kVA to over 100,000 kVA. Table VIII-1 below lists 
these survey participants, as well as the type(s) of transformers that 
they manufacture. The survey responses indicate that companies tend to 
produce either liquid-dielectric transformer or dry-type transformers, 
although some major producers manufacture both types.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    Aggregated data on U.S. production of transformers in various power 
handling capacities by survey participants are presented in Figure 
VIII-1. Note that most companies produce transformers in multiple 
categories. In all, the transformer companies participating in the 
Department's survey employed 15,238 production workers in the United 
States and had total transformer sales of $4.42 billion in 2019.
    Over the five-year period covered by the survey, domestic 
production in each transformer product category was been relatively 
steady. Survey data indicated that the smaller the transformer in terms 
of power handling capacity, the greater the volume of production, with 
over one million liquid dielectric transformers with under 650 kVA 
capacity produced in 2019, compared to just 137 of the largest power 
transformers (>100,000 kVA).

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

Figure VIII-3 (below) illustrates the import penetration of a range of 
transformers of various power handling capacities, using the 
calculation (apparent consumption = domestic production + imports-
exports). These import penetration figures are based on unit production 
of transformers as reported by respondents to the Department's survey, 
as well as export and import statistics from the U.S. Census Bureau. 
Note that actual domestic production is likely higher than listed 
because the Department's survey did not capture all producers (while 
the major players in each sector participated in the survey, it is 
possible that smaller manufacturers did not). This implies that the 
import penetration levels in the table are overstated, further 
verifying the conclusion that, with the exception of the largest 
transformers, import penetration in liquid dielectric transformer 
categories remains relatively low and domestic production is robust.
    In comparison, dry-type transformers have higher levels of imports. 
However, particularly for the small dry transformer category (under <16 
kVA), the Department's survey may represent an incomplete sample of the 
industry. Millions of these small transformers are produced (and 
imported) on an annual basis. Due to the lack of sufficient data on 
U.S. production of dry transformers, a reasonable estimate of import 
penetration is not possible.

[[Page 64646]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.029

    The remainder of this section presents industry data and evaluates 
the status of the domestic industry, as well as the impact of imports, 
by grouping the transformer industry in general categories: 
Distribution transformers and small power transformers (liquid 
dielectric transformers with a power handling capacity up to 10,000 
kVA); small and medium power transformers (with power handling capacity 
of 10,000-100,000 kVA); LPT (100,000 kVA and up); dry-type and other 
transformers (1 kVA-500 kVA); and voltage regulators.

B. Distribution and Small Power Transformers (Up to 10,000 kVA)

    There were 19 survey respondents reporting domestic production of 
small power transformers (up to 10,000 kVA) during the 2015-2019 
period. Companies in this sector employed more than 10,000 production 
workers and sold more than a million transformer units, with a total 
value of $2.5 billion, in 2019.\85\
---------------------------------------------------------------------------

    \85\ Note that there is overlap with employment in other 
transformer categories as some survey recipients participate in 
multiple sectors.
---------------------------------------------------------------------------

    [TEXT REDACTED].
    The data received via the Department's survey is largely consistent 
with DOE's 2009 market study, which identified that, from a 
manufacturing point of view, the six largest companies operating in the 
liquid-immersed distribution transformer market at that time were (in 
alphabetical order): [TEXT REDACTED]. Together, these six companies 
represented more than 80 percent of the sales revenue of liquid-
immersed distribution transformers in the United States (up to 2,500 
kVA) in 2009. [TEXT REDACTED].
[GRAPHIC] [TIFF OMITTED] TN18NO21.030


[[Page 64647]]


    [TEXT REDACTED].

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    [TEXT REDACTED].

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TN18NO21.031

    Both dollar sales and unit sales of transformers in this category 
have risen consistently over the past five years. The average price of 
transformers in this category was $55,000. A slight majority of these 
transformers use cores comprised of GOES (as opposed to other core 
materials, such as metglas), and on average GOES accounted for about 20 
percent of the cost of each transformer.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    Figure VIII-X assesses the financial status of the major players in 
this industry segment. The four market leaders all ranked as 
``moderate/elevated risk'' based on the Department's financial risk 
metric.
    Overall, the companies manufacturing distribution transformers and 
small power transformers did not devote a high level of funding to 
research and development (R&D), as compared to R&D spending in other 
industry sectors. In total, the 19 companies spent about $650 million 
on R&D each year between 2015-2019, with one company--[TEXT REDACTED]. 
In part, the low level of R&D spending is because transformers are a 
mature technology. Other factors include the relatively poor financial 
status of domestic manufacturers.
    Capital investment by the companies in this industry subsector 
showed a similar pattern: Capital expenditures ranged between $560 and 
$660 million per year, with [TEXT REDACTED]. The relatively low levels 
of capital investment is likely due to the factors listed above, 
including the maturity of the technology and the financial status of 
domestic manufacturers.
1. Apparent Consumption and Import Penetration
    U.S. imports of distribution and small power transformers have 
remained consistent over the past ten years, averaging about 200,000 
units and $500 million per year. Imports in 2019 were slightly above 
the long-term average, and imports for the first part of 2020 are 
significantly higher than during the same period in 2019. Mexico is by 
far the largest source of these imports, accounting for over 80 percent 
of the units in 2019. Many major global transformer companies have 
manufacturing facilities in Mexico [TEXT REDACTED], taking advantage of 
lower labor costs and duty-free access to the U.S. market. The 
significant suppliers of transformers of this power handling capacity 
located outside of Mexico are in Canada and China. However, imports 
from China have declined in recent years from 2013-2014 levels (likely 
due to the tariffs on many imports from China imposed in recent years), 
with an increase in the first part of 2020. Imports from Canada 
remained steady throughout the period.

[[Page 64648]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.032


[[Page 64649]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.033

    Based on sales information provided through survey responses and 
Census import and export statistics, import penetration was about 18 
percent for this industry segment (liquid dielectric transformers up to 
10,000 kVA) in 2019. Based on production data for transformers in these 
power handling capacities from the survey, import penetration was 20.6 
percent.
2. Reliance on Foreign Sources for Transformer Components
    Despite the relatively low level of the market for finished 
transformers accounted for by imports, domestic transformer producers 
rely heavily upon foreign sources for critical components. Using 
imported laminations and cores contributes to their competitiveness by 
reducing costs. Many of them never had or no longer have in-house 
capability to manufacture transformer cores. Even those that do have 
this capability have either begun to source some of these items from 
abroad in order to stay competitive or have eliminated in-house 
production all together. For the major companies in this industry 
segment:
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].

C. Medium Power Transformers (10,000 kVA-100,000 kVA)

    Ten survey respondents indicated that they domestically produced 
transformers with power handling capacities between 10,000kVA and 
100,000 kVA. The sales price of transformers in this broad category 
averaged about $500,000. About 90 percent of these transformers used 
GOES in their cores, and the cost of GOES accounted for about 13 
percent of transformer production costs.
    Total domestic employment in this industry segment was about 7,200 
production workers. [TEXT REDACTED].
    Survey participants had sales of transformers in this size range of 
about 1,700 units valued at $969 million in 2019. [TEXT REDACTED].

[[Page 64650]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.034

    [TEXT REDACTED].

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------


[[Page 64651]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.035

[GRAPHIC] [TIFF OMITTED] TN18NO21.036


[[Page 64652]]


------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    A measure of the financial performance of the top firms in the 
medium power transformer category is presented in Figure VIII-20. In 
general, the market leaders are financially healthy based on the 
Department's metrics, with the exception of Hyundai. [TEXT REDACTED].
    In total, the ten companies with production of transformers in this 
segment spent $45 million on R&D in 2019. Of this total, four 
companies--[TEXT REDACTED].
[GRAPHIC] [TIFF OMITTED] TN18NO21.037

    Aggregated capital expenditures for the ten companies are presented 
below. [TEXT REDACTED].

[[Page 64653]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.038

1. Apparent Consumption and Import Penetration
    Imports of transformers in the medium power handling capacity range 
have increased over the past three years and are on track to exceed 
$400 million in 2020, on the basis of data from the first six months of 
the year. On a unit basis, imports show a similar trend, exceeding 600 
units per year. Mexico and South Korea are by far the largest sources 
of imported transformers in this subsector.

[[Page 64654]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.039


[[Page 64655]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.040

Based on production as reported on the Department's survey and Census 
Bureau-based import statistics, import penetration in this industry 
segment was 28 percent on both a unit and value basis.
    As with other transformer categories, companies that produce 
transformers between 10,000 and 100,000 kVA rely heavily on imports for 
key components. The company snapshots show leading suppliers for the 
essential items--GOES, laminations, and/or cores.

D. Dry-Type Transformers

    Of all of the transformer categories covered by this investigation, 
dry transformers had the greatest direct

[[Page 64656]]

usage in defense applications. This is because this type of transformer 
is designed for safe usage indoors (including on ships and aircraft), 
as it poses fewer environmental and fire risks than do oil-immersed 
transformers. However, defense applications represent only a small 
percentage of sales of these types of transformers, which are also used 
extensively in the electrical grid, as well as in a multitude of 
industrial and commercial applications.
    The Department's survey data capture input from the predominant 
players in the dry-type transformer category, but are less complete 
than for other industry sub-segments. Particularly for the smallest 
dry-type transformers (under <16kVA), production (and imports) is in 
the millions of units, and the survey did not fully capture this. 
Despite this, the survey provided useful information on industry trends 
and competitiveness issues.
    Twenty-one survey participants with just over 9,000 production 
workers sold 1.8 million dry transformers of various power handling 
capacities between 2015 and 2019. However, production in the United 
States was about half of this unit total because most of the major 
players have both domestic and overseas production facilities and 
distribute the product from both in the United States. Total sales by 
these respondents were about $700 million, with the average transformer 
price about $13,000. In aggregate, about half of these dry-type 
transformers require GOES in their cores, according to the survey 
respondents; when it was used, it accounted for about 25 percent of the 
cost of the transformer.
    Six respondents represent about 97 percent of dry-type transformer 
sales (of all capacities) by value from 2015-2019. [TEXT REDACTED]. 
Note that these sales values include transformers manufactured outside 
the United States, as reported by several of the survey recipients.
[GRAPHIC] [TIFF OMITTED] TN18NO21.041


[[Page 64657]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.042

    As indicated above, imports play a major role in the dry 
transformer sector. Countries with low cost labor--including China, 
Indonesia, and Mexico--are major sources of imported dry-type 
transformers. On a unit basis, more than half of dry-type transformer 
imports originate in China.

[[Page 64658]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.043


[[Page 64659]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.044

    During the time period, dry-type transformers in the 1-16 kVA range 
were both produced domestically and imported by the millions. Leading 
domestic producers, including [TEXT REDACTED], together accounted for 
over 80 percent of the production volume by survey participants in 
2019. [TEXT REDACTED]. The average sales price was just $20. [TEXT 
REDACTED]. The primary application for these transformers is in 
industrial settings for power distribution.
    [TEXT REDACTED].
    While it was not possible to determine import penetration levels 
due to lack of data on U.S. production, based on official trade 
statistics, imports of dry-type transformers in the 1-16 kVA range have 
a significant market presence. In this sector, Mexico and China are the 
leading suppliers, with China accounting for much of the volume (over 
million units) and Mexico

[[Page 64660]]

much of the value of total imports (due to varying sizes and prices of 
transformers). As mentioned, a number of the U.S. companies in 
participating this sector have overseas production facilities and 
contribute to the import volume.
[GRAPHIC] [TIFF OMITTED] TN18NO21.045

    In the 16-500 kVA dry-type transformer category, the leading 
domestic producers were [TEXT REDACTED]. These transformers were 
produced domestically in the tens of thousands of units, are valued in 
the $2,500 to $25,000 range, and are used in electric power 
distribution for commercial and industrial customers. GOES is used in 
almost all transformers in this range, and accounts for up to 50 
percent of production costs.
    Manufacturers in this industry sector manufacture distribution 
transformers that are subject to the DOE Energy Efficiency Standards 
that took effect in 2016. The new standards increased manufacturers' 
demand for higher grades of GOES in order to remain competitive in the 
bidding process. Business decisions to remain competitive after the 
introduction of the DOE standards also increased demand for the 
quantity of GOES, as well as laminations, and cores, from global 
suppliers. For example, [TEXT REDACTED].
    [TEXT REDACTED].
    Statistics on imports of dry-type transformers between 16 and 500 
kVA are presented in Table VIII-33 below. Once again, China and Mexico 
are the major sources for imports, with India and France also supplying 
substantial numbers. Based on survey data, it appears that transformers 
in this broad category that are manufactured in the United States have 
a higher unit value than imports.

[[Page 64661]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.046

    In the largest dry-type transformer category (>500kVA), the 
domestic industry leaders are [TEXT REDACTED].
    The average value of Federal Pacific's transformers in this size 
range was $23,000. They are used for electrical power delivery to 
industrial, commercial, and residential customers. High-quality GOES is 
required in order to meet DOE energy efficiency standards for this 
product, and accounts for 50 percent of the cost of the transformers. 
[TEXT REDACTED].
    As with the other dry-type transformer categories, imports are 
significant and the major sources are China, Mexico, and India. Imports 
in 2015 were significantly greater than in other years, due to high 
import levels that year reported from China and India. In 2019 and the 
first six months of 2020, Mexico was by far the leading supplier.

[[Page 64662]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.047

E. Large Power Transformers

    LPTs are the transformers most critical to the BPS and the critical 
energy infrastructure of the United States. They are used to ``step-
up'' power at the power generation site for long-distance transmission, 
and then to ``step-down'' the power to the levels that are needed for 
industrial, commercial, military and household consumers. Because they 
serve the greatest number of customers, the failure or destruction of 
just a single LPT can have a large impact on U.S. economic, public 
health, and security interests. Moreover, long procurement lead times 
and limited availability of spare LPTs and the parts thereof have 
serious implications for the resiliency of critical infrastructure.
    [TEXT REDACTED].\86\ Power transformers fell into the highest 
category for both criticality and supply chain vulnerability. In terms 
of criticality, transformers are complex, vulnerable to failure, have a 
significant impact on the BPS in the case of failure, and have a 
lengthy replacement time. The Market Study also found transformers pose 
a high risk in the supply chain, as suppliers are dominated by foreign-
owned companies, with a minimum of four years required to establish 
domestic manufacturing capability.
---------------------------------------------------------------------------

    \86\ [TEXT REDACTED].
---------------------------------------------------------------------------

    The U.S. market for LPTs is less than 1,000 units per year; their 
average lifespan is 30 to 40 years and relatively few are needed 
because they serve large populations. Despite the relatively small 
quantities produced and purchased annually, there is a sizable market 
for LPTs because each has a value in the millions of dollars. Moreover, 
because of their enormous size (up to 400 tons), these LPTs account for 
a significant percentage of consumption of GOES by weight.
1. Domestic Production Capacity
    The Department's survey gathered detailed industry data on all 
domestic manufacturers of LPTs (here defined as those with greater than 
100 MVA power handling capacity, HTS 8504.23.0080). While most of these 
manufacturers of LPTs also make liquid transformers of lesser power 
handling capacities, manufacturers of smaller power transformers cannot 
easily produce larger units, as they typically do not have the 
necessary equipment, such as large overhead cranes and annealing 
equipment, to produce LPTs.
    In 2019, seven companies manufactured LPTs of 100 MVA or more in 
the United States: [TEXT REDACTED]. In 2020, Mitsubishi sold its 
Memphis transformer facility, and no longer manufactures LPTs (or any 
transformers) in the United States. Hyosung (HICO) of Korea purchased 
the facility and intends to manufacture transformers there, including 
LPTs, but as of the date of this report had not begun production.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                          [TEXT REDACTED] \87\
------------------------------------------------------------------------

    Domestic production of LPTs has been fairly steady over the past 
five years, albeit at a low level of about 130 units per year (see 
Figure VIII-35). [TEXT REDACTED].
---------------------------------------------------------------------------

    \87\ [TEXT REDACTED].

---------------------------------------------------------------------------

[[Page 64663]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.048

    In 2019, [TEXT REDACTED]. Whereas most domestic producers of LPTs 
also manufacture transformers of lesser power handling capacities in 
the same facility, [TEXT REDACTED].
    In terms of LPT sales, the trend is similar to production, with 
total sales averaging around $250 million per year (Figure VIII-36). 
[TEXT REDACTED]. Export sales of U.S.-produced large transformers are 
negligible, with none reported in 2019 by the domestic manufacturers.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------


[[Page 64664]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.049

    Overall domestic production capacity of LPTs remains inadequate to 
meet domestic demand, particularly with regard to the extra high 
voltage (EHV) transformers (those with >345 kV voltage rating) that are 
vital for long distance electricity transmission. While accounting for 
only a small percentage of units, EHV transformers are the most 
critical to the security and reliability of the electrical grid, 
because they handle over 60 percent of all electricity in the 
country.\88\ The loss of Mitsubishi Electric Power (MEPPI) as a 
domestic manufacturer is significant in this regard, as their facility 
produced EVH transformers.
---------------------------------------------------------------------------

    \88\ Public Comments submitted by the Government of Canada, July 
2, 2020.
---------------------------------------------------------------------------

    Only three companies--[TEXT REDACTED].

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    The domestic industry is in a constant state of flux--due to plant 
closures, company exits and entrances, and acquisitions--that affects 
production capacity. As noted above, Mitsubishi ceased production at 
its facility in Memphis, with a loss of 200 jobs. HICO (Korea) 
purchased this facility and plans to invest $103 million in the plant 
and hire 131 workers by 2021, but at present the facility is not 
operational. Another company that had briefly produced LPTs in the 
United States, Portugal-based EFACEC, sold its plant in Rincon, Georgia 
to Virginia Transformer in 2014.
    In addition, ABB shuttered its St. Louis LPT manufacturing facility 
in late 2018, with a loss of 250 jobs; it also laid off 177 workers at 
its South Boston, VA plant that primarily produces smaller transformers 
and has limited capacity to produce LPTs. Some of the production 
formerly done in the United States will be performed at ABB's Varennes, 
Quebec plant, which is reportedly Canada's largest LPT manufacturing 
facility. ABB is also reportedly adding to its transformer production 
capabilities in India and China.\89\
---------------------------------------------------------------------------

    \89\ STLtoday. Nov. 6, 2017. https://www.stltoday.com/business/local/abb-to-discontinue-production-in-st-louis-120-jobs-lost/article_c18fe08f-ab76-5e02-87d7-e4ea49c1d358.html.
---------------------------------------------------------------------------

    Moreover, ABB's Power Grids business--including transformers--was 
sold to Hitachi of Japan in 2018 for $11 billion (with the deal due to 
close in mid-2020).\90\ Hitachi has not indicated its plans for ABB's 
U.S. operations, which are substantial (including distribution 
transformer production). If Hitachi decides not to continue operations 
once it finalizes the purchase of ABB's U.S operations, the impact will 
be significant; ABB claims that it was the manufacturer for 70 percent 
of the power transformers installed in the U.S. electric grid 
(including those made by Westinghouse's Transmission and Distribution 
Division, which ABB acquired in 1989).
---------------------------------------------------------------------------

    \90\ Powermag.com, Dec. 17, 2018. https://www.powermag.com/hitachi-acquires-abb-power-grids-business-in-11-billion-deal/.
---------------------------------------------------------------------------

2. Apparent Consumption and Import Penetration
    As noted above, domestic demand for the mature LPTs market is 
relatively stable from year to year and is largely based on the 
replacement and modernization of aging equipment. Given the limited 
production and capacity of domestic manufacturers, the majority of 
demand is met through imports.

[[Page 64665]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.050


[[Page 64666]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.051

BILLING CODE 3510-33-C
    Consistent with stable demand, the level of imports of LPTs was 
been relatively steady between 2015-2019 at between 500 and 700 units 
annually. Total value of U.S. imports of these items in 2019 was $617 
million. The leading sources for LPTs (>100 MVA) into the United States 
in 2019 (by unit) were Mexico, where several global transformer 
manufacturers have manufacturing facilities (202 units); Austria, where 
[TEXT REDACTED]. These four countries accounted for 70 percent of U.S. 
imports by unit in 2019. On a value basis, the leading supplier was 
Austria with $188 million out of total U.S. imports of $620 million, 
which implies that the LPTs from Austria are on average more expensive 
than those from Mexico.
    One notable trend is that imports from Korea fell from a high of 
128 units in 2016 to 67 in 2019, replaced by

[[Page 64667]]

production at Hyundai's U.S. facilities, which was not subject to 
tariffs. In addition, while not among the top five sources in 2019, 
China also supplied some LPTs for the U.S. electric grid. Although 
imports from China have declined from high of 47 units in 2015, 31 
units were imported from China in the first six months of 2020, a 
number only behind Mexico and Austria. This is significant, as the 
President's emergency declaration and Bulk Power Executive Order is 
particularly concerned with possible vulnerabilities in the critical 
energy infrastructure due to sourcing from potential adversaries such 
as Russia and China.
    Based on the level of imports compared to domestic production, it 
is clear that the U.S. BPS is heavily dependent on imported LPTs, which 
are among the most critical elements in the BPS. The U.S. dependency on 
foreign sources for LPTs has persisted for at least a decade; there has 
been little net change in total U.S. production capacity during this 
timeframe, with new investments offset by plant closures.
    U.S. apparent consumption of LPTs was 750 units in 2019 (domestic 
production of 137 + imports of 617 - exports of 4 units). Thus, the 
import penetration level is over 82 percent. On a value basis, import 
penetration is slightly lower--about 73 percent based on apparent 
consumption of $851 million (domestic sales of $234 million, plus 
imports of $620 million, less exports of $2.6 million). The dependence 
of the U.S. electric grid on imported LPTs negatively affects the 
domestic GOES industry because imported transformers most often utilize 
foreign-origin GOES.
    In contrast to the inadequate domestic production capacity for LPTs 
in the United States, China has abundant production capabilities. With 
Chinese demand for LPTs comparable to that of the United States, China 
has at least 30 LPT manufacturers. China's top three manufacturers can 
each produce double the total U.S. production capacity.\91\
---------------------------------------------------------------------------

    \91\ DOE LPT Report, 2014.
---------------------------------------------------------------------------

    As noted above, the grim state of domestic manufacturing capability 
for LPTs has persisted for more than a decade. In 2011, the ITC 
completed its antidumping investigation into imports of LPT from Korea. 
The investigation presented a detailed analysis of the state of the 
domestic industry at that time.\92\ In 2010, there were six domestic 
manufacturers of LPTs, who were operating at an average capacity 
utilization rate of just 39.9 percent. Imports accounted for 85 percent 
of apparent consumption (based on the total power handling capacity of 
units sold) or 81 percent of apparent consumption (value basis). The 
ITC found that the domestic industry was materially injured by the 
imports of LPTs from Korea that were being sold at less than fair 
value, which led to the imposition of tariffs.
---------------------------------------------------------------------------

    \92\ https://www.usitc.gov/publications/701_731/Pub4256.pdf.
---------------------------------------------------------------------------

    In 2012, with an update in 2014, DOE also issued reports 
highlighting the deficiencies in domestic LPT industry. DOE's reports 
drew upon on ITC's industry data, but analyzed the information from the 
perspective of the implications for the nation's critical energy 
infrastructure rather than unfair trade practice issues. In its 
reports, DOE expressed concern over the lack of domestic production 
capabilities for large power transformers. DOE's 2014 update noted that 
some foreign investment in U.S. manufacturing facilities (e.g., by 
EFACEC, Hyundai, and Mitsubishi), as well as expansions by U.S. firms 
(SPX), contributed to a slight increase in domestic production capacity 
in the mid 2010's but that production still fell far short of domestic 
demand). Of the three foreign companies noted in DOE's report, only 
Hyundai still manufactures domestically and overall domestic production 
capacity has not increased.
    In September 2018, five years after the imposition of antidumping 
duties on imports from Korea, the ITC reassessed the status of the 
domestic industry.\93\ Since its initial report in 2011, the ITC noted 
a number of changes, both positive and negative, in domestic capacity/
production (e.g., facilities closed, bought by other companies, 
opened). The ITC also examined the health of the domestic LPT industry 
compared to five years earlier (in 2013) and found that on all 
measures, the industry had deteriorated. Although the ITC withheld 
specific data from the public report, the report stated that 
employment, wages, sales, shipments, market share, and financial 
performance had all declined.
---------------------------------------------------------------------------

    \93\ ITC, ``Large Power Transformers from Korea,'' Investigation 
No. 731-TA-1189, September, 2018, pp. 30-31. See Appendix F for 
additional information.
---------------------------------------------------------------------------

3. Reliance on Imported Key Components
    Lack of domestic production capability for LPTs is exacerbated by 
the fact that most domestic manufacturers rely on imports for key 
transformer components, including electrical steel, laminations, and 
cores. In fact, none of the remaining domestic LPT manufacturers source 
laminations or cores from U.S. suppliers, which highlights the lack of 
domestic capability in this area. Imported laminations and cores rely 
on almost exclusively non-U.S. GOES, which is significant because GOES, 
along with the copper used in the windings, accounts for a significant 
percentage of the cost of an LPT (up to 25 percent). GOES also accounts 
for between 75 percent and 90 percent of the cost of laminations, and 
50-60 percent of the cost of transformer cores, based on the 
Department's survey data. As a result, price volatility and global 
market conditions for GOES continue to have an impact on the 
manufacturing and procurement strategies of LPT producers.
    Specific company sourcing decisions, based on company responses 
detailed in the Department's survey, are as follows:
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
4. Other Issues Affecting LPT Manufacturers
    Most of the domestic manufacturers of LPTs reported difficulty in 
hiring qualified workers, with more than 90 days required to source and 
train new employees. The companies reported experiencing a shortage of 
skilled production workers (e.g., testers, welders, and winders), field 
technicians, and design engineers. In addition, the workforce is aging, 
and it is difficult to attract younger workers to this industry and to 
the geographical regions in which the companies are located.
    Several of the companies also reported being negatively impacted by 
foreign competition, particularly from South Korea and Mexico. Despite 
the successful antidumping investigation that resulted in the 
imposition of import duties, domestic transformer manufacturers stated 
that they continue to be disadvantaged due to the protection/
subsidization of South Korean manufacturers by their government. 
Specific to Mexico, domestic producers cited the low cost labor there 
as to their detriment. In addition, some domestic transformer companies 
that make laminations and cores in-house reported adverse effects vis-
[agrave]-vis their foreign competitors as a result of the Section 232 
tariffs on GOES.

F. Voltage Regulators

    Six companies responding to the Department's survey indicated 
domestic

[[Page 64668]]

production of voltage regulators; most of these companies also produce 
liquid dielectric transformers in the United States. [TEXT REDACTED]. 
It is a major player in many of the other transformer categories, but 
the production of these products takes place in at offshore locations. 
[TEXT REDACTED].
    The top four companies, which accounted for over 95 percent of 
reported production, were [TEXT REDACTED]. Imports of voltage 
regulators have fallen slightly in recent years, to $81 million in 
2019. The leading sources of imports were Canada, Germany, the United 
Kingdom, and Mexico.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
                             [TEXT REDACTED]
------------------------------------------------------------------------

    Import statistics do not appear to represent the voltage regulator 
segment of this investigation well. The large volume of imports (with 
low average unit values) captured by the Harmonized Tariff Schedule 
category under which voltage regulators fall (HTS 9032.89.4000 \94\) 
includes many products unrelated to this investigation. Therefore, 
import penetration levels cannot be calculated. However, as mentioned, 
the manufacturers of voltage regulators are all major players in the 
other transformer categories that are addressed in this report.
---------------------------------------------------------------------------

    \94\ Automatic voltage and voltage-current regulators, other 
than designed for use in a, 12, or 24 V system.
---------------------------------------------------------------------------

BILLING CODE 3510-33-P
[GRAPHIC] [TIFF OMITTED] TN18NO21.052


[[Page 64669]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.053


[[Page 64670]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.054

IX. Competitiveness and Labor Issues

A. Competitiveness

    Recipients of the Department's survey were asked to identify and 
rank the top five challenges or issues affecting their global 
competitiveness position from a list of more than thirty options. In 
general, there was little difference in responses among the respondents 
by specific transformer-related product sector. The most commonly 
identified primary challenge to their competitiveness reported was 
either trade disputes/tariffs or foreign competition. Seventy-six 
percent of respondents identified trade disputes/tariffs as a 
challenge, including 24 percent of respondents that noted it as the 
number one issue affecting their company's competitiveness. Similarly, 
72 percent of respondents identified foreign competition as a 
challenge. Labor availability/cost was the third most commonly 
identified challenge and will be addressed in more detail in section B 
of this chapter.

[[Page 64671]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.055

1. Transformer Components
    While mentioned by a majority of survey recipients across product 
categories, foreign competition is a particularly significant problem 
for the transformer cores and laminations sector. Of the survey 
respondents who produce laminations and cores for incorporation into 
transformers, 91 percent indicated that foreign competition is a major 
challenge. These responses are consistent with import data which show 
that imports of laminations increased 57 percent and imports of cores 
increased 61 percent between 2018 and 2019.\95\
---------------------------------------------------------------------------

    \95\ [TEXT REDACTED].
---------------------------------------------------------------------------

    Almost all of the domestic transformer lamination and core 
producers participating the in Department's survey took the opportunity 
to provide specific commentary on competitiveness issues. In 
particular, they were asked to describe how their competitiveness has 
been affected and to provide any recommendations specific to the U.S. 
Government's response, including steps to mitigate the challenges that 
they face (Survey question 10 D). All the respondents in this sector 
presented similar information on the issues affecting their 
competitiveness but had different approaches and suggestions to address 
them. While many recommended imposing tariffs on downstream transformer 
components and finished transformers, others recommended removing the 
tariffs on imported GOES.
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED].
     [TEXT REDACTED] to preserve what is left of the U.S. 
transformer industry.
    While the domestic manufacturers of laminations and cores have been 
negatively affected by imports, some transformer companies that 
purchase these components for incorporation into transformers 
benefitted during the same time period. In particular, increased 
competition in the lamination and core sector was beneficial to their 
competitiveness, as it led to reduced costs for these items.
2. Distribution, Small & Medium Power Transformers and Dry-Type 
Transformers
    As compared to survey respondents from the transformer core and 
laminations sector, while increasing foreign competition was also a 
significant challenge for distribution, small and medium power, and 
dry-type transformer producers, a larger number of this group of survey 
respondents indicated labor-related issues as their number one concern. 
Labor challenges were listed by 17 out of the 19 distribution and 
small-power transformer manufacturers, and by nine out of ten medium-
power transformer manufacturers. With regard to dry-type transformers, 
seventy percent of manufacturers indicated trade disputes/tariffs were 
challenges. Similarly, 60 percent and 55 percent of respondents in this 
group regarded foreign competition and labor availability/costs as 
challenges, respectively.
    With regard to competitiveness issues, several of the transformer 
companies expressed strong opposition to the expansion of tariffs to 
downstream

[[Page 64672]]

products because such an expansion would harm their competitiveness by 
increasing their costs and disrupting their supply chain.) Instead, 
they recommended the elimination of existing tariffs on GOES [TEXT 
REDACTED]. However, other transformer companies, facing the same 
competitive pressures due to rising material costs, recommended 
extending the tariffs to include complete transformers [TEXT REDACTED].
3. Large Power Transformers
    For the manufacturers of LPTs, foreign competition was again the 
leading problem. All seven survey participants in this industry sector 
expressed this concern. The domestic producers were particularly 
concerned about competition from South Korea, where companies benefit 
from subsidies and protection by the South Korean Government. Increased 
competition from Mexico was also identified as a challenge. Other 
frequently mentioned issues affecting the competitiveness of large 
power transformer manufacturers were trade disputes/tariffs 
(specifically the increased production costs due to GOES tariffs), 
labor availability/costs, and aging equipment, facilities, or 
infrastructure.
4. Changes in Competition
    In addition to identifying specific factors affecting them, survey 
respondents were asked to indicate whether or not there had been a 
significant change since 2018 with regard to foreign competition in any 
of the product categories subject to this investigation and whether the 
change was positive, negative, or neutral. Not surprisingly, 
respondents reported that significant increases in import competition 
are most prevalent in the wound cores, stacked laminations, and stacked 
cores product categories (i.e., the product categories of which GOES is 
the primary input).
[GRAPHIC] [TIFF OMITTED] TN18NO21.056

    An overwhelming majority of the respondents that indicated an 
increase in import competition also indicated that the increase in 
competition had a negative effect on their organizations. However, as 
mentioned above, some transformer manufacturers have benefitted from 
increased competition, specifically in the component sector from which 
they source.

[[Page 64673]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.057

    The countries most often listed as the source of increased foreign 
competition were Canada, China, Japan, and Mexico. For wound cores, 
Japan was mentioned most frequently, followed by Canada and Mexico. In 
contrast, Japan was not mentioned as a source of competition for 
laminations; Canada was most often mentioned, followed by China and 
Mexico. For stacked cores, import competition was identified as coming 
from Canada, China, Mexico, and Japan.

[[Page 64674]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.058


[[Page 64675]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.059

B. Labor

    In addition to questions about the labor-related issues affecting 
competitiveness, survey recipients were asked specific questions 
related to their workforce. On average, survey respondents that 
manufactured transformers or transformer components in the United 
States indicated that labor accounted for 36 percent of their costs, 
with a range between 1 percent and 83 percent.
    Eighty-nine percent of survey respondents reported having had 
difficulties in finding qualified or experienced workers, including 66 
percent that identified the problem as an ongoing issue. This is 
significant, as transformer manufacturing requires specialized skills 
including welding, coil winding, and transformer testing. Survey 
respondents indicated that U.S. high schools do not offer programs that 
train young people for skills such as these. Transformer manufacturers 
also experienced difficulties in hiring employees with certain 
educational backgrounds or training, including manufacturing engineers, 
power electrical engineers, quality control, and electrical design 
engineers. Several respondents mentioned that few universities offer 
training in these areas.
    Survey respondents reported an aging workforce and trouble 
attracting and retaining younger workers. Seventy-eight percent of 
respondents that identified anticipated future workforce issues 
regarded the possibility of a significant portion of their workforce 
retiring as a challenge affecting their company. The location of the 
production facilities in remote and/or less desirable/economically 
challenged areas was cited by nearly 80 percent of survey respondents 
as a factor inhibiting attracting qualified labor.

[[Page 64676]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.060


[[Page 64677]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.061


[[Page 64678]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.062


[[Page 64679]]


[GRAPHIC] [TIFF OMITTED] TN18NO21.063

C. COVID-19 Impact

    This investigation and the industry survey associated with it were 
conducted during the time of the COVID-19 pandemic in the United 
States. The Department included questions on the survey related to 
COVID-19, as situations such as a global pandemic can disrupt supply 
chains and production. If they persist, these disruptions may have 
implications on the ability of the industry to support critical 
national security and energy infrastructure needs.
    Survey respondents were queried on specific ways the pandemic 
impacted their organization and their responses are listed in the 
tables below (note that respondents could list multiple impacts/
responses). Only three respondents indicated that they experienced no 
impact from COVID-19. Of the remaining respondents, 79 percent 
indicated that the pandemic reduced their organization's sales, 
including 38 percent that noted reduced sales as the primary 
coronavirus-related impact. Similarly, 63 percent and 58 percent of 
respondents, respectively, experienced foreign and domestic supplier 
manufacturing delays.

[[Page 64680]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.064

    As reported, foreign supplier delays as a result of the Covid-19 
pandemic were most prevalent among transformer manufacturers. Of the 
transformer manufactures that experienced foreign supplier delays, 50 
percent manufacture dry-type/other transformers 1-16 KVA. An additional 
43 percent and 40 percent of respondents that experienced foreign 
supplier delays manufacture liquid-dielectric transformers 650-
10,000KVA and dry-type/other Transformers 16-500KVA, respectively. 
However, only one wound core manufacturer reported that COVID-19 
resulted in foreign supplier manufacturing delays; such delays were not 
reported by any lamination or stacked core manufacturers. These 
percentages generally correspond to the numbers of each type of 
manufacturer participating in the survey, they do not indicate that 
foreign supplier delays or other impacts were concentrated in any 
particular sector.
    The most common response to the pandemic was to allow non-
production line workers to work remotely, with 76 percent of 
respondents increasing online/remote work capabilities, including 63 
percent of respondents that classified it as a short-term solution. 
Similarly, 45 percent and 44 percent of respondents increased their 
inventories and supplier redundancy, respectively. Five respondents 
indicated that their organizations took no action in response to the 
COVID-19 pandemic.

[[Page 64681]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.065

    Thirty-five respondents indicated that their organizations took no 
long-term actions in response to the pandemic. Of the respondents that 
took long-term action, 52 percent indicated that they increased 
supplier redundancy. Similarly, 23 percent of respondents increased 
their use of U.S. suppliers and reduced their use of suppliers in 
China.

[[Page 64682]]

[GRAPHIC] [TIFF OMITTED] TN18NO21.066

BILLING CODE 3510-33-C

X. Findings and Recommendations

A. Findings

1. Grain-Oriented Electric Steel
    As was determined by the 2017 Section 232 Investigation on the 
Impact of Imports of Steel on the National Security, GOES is critical 
to the national security. The United States must maintain a secure 
supply and robust production capacity for GOES, which was found to be 
harmed by imports brought on by unfair trade practices and 
artificially-induced global excess capacity. GOES is essential to the 
production and function of transformers of all power handling 
capacities that form the backbone of the U.S. electrical grid. 
Sufficient domestic production capacity for GOES is necessary in order 
to ensure the ability of the United States to address threats facing 
our critical energy infrastructure.
    This investigation finds that imports of downstream GOES products, 
namely laminations for incorporation into transformers, and stacked and 
wound cores for incorporation into transformers, have negatively 
affected domestic GOES production, as these key transformer components 
are the primary market for GOES. The value of U.S. imports of 
laminations has more than doubled from $15 million in 2015 to $33 
million in 2019. Core imports were $22 million in 2015 and soared to 
$167 million in 2019. Together, Mexico and Canada account for more than 
95 percent of these imports. As domestic demand for transformers has 
not increased, increased imports of laminations and cores represent 
displaced domestic production, and hence, domestic consumption of GOES.
    There is only one remaining domestic producer of GOES (AK Steel), 
at which capacity utilization stands at [TEXT REDACTED] in 2019 due to 
loss of the domestic market to imported laminations and cores. At this 
capacity utilization level, the company cannot operate profitably and 
there is a risk it will cease GOES production altogether. Moreover, 
poor profitability over a number of years has impeded and will impede 
the ability of the sole U.S. manufacturer of GOES to invest in modern 
capital equipment necessary for it to produce sufficient quantities and 
qualities of GOES to meet domestic demand.
2. Transformer Laminations and Stacked and Wound Cores
    The large increase in imports of transformer laminations and cores 
has not only hindered domestic GOES production, but also leaves the 
United States with a lack of sufficient capacity to produce these items 
that are essential to modern, efficient transformers. The United States 
transformer industry has become highly dependent on foreign sources for 
laminations and cores, and imports have displaced domestic production, 
leaving domestic capacity to manufacture them insufficient and in some 
cases is in danger of closing down. While the majority of imports of 
these items come from Canada and Mexico, neither country has indigenous 
production capability for the GOES which is the main material in them. 
Therefore, imports of transformer laminations and cores contain 
foreign-origin GOES, including some from potentially unreliable 
suppliers in China and Russia. Lack of domestic capacity and dependence 
on imports for these transformer components puts at risk the ability to 
maintain and repair the existing electric grid in the face of 
increasingly emboldened foreign adversaries.

[[Page 64683]]

3. Large Power Transformers
    This investigation further finds that imports of LPT (those with 
power handling capacities of 100 MVA and above), pose a dual threat to 
the national security by constraining U.S. GOES production, as well as 
materially harming domestic LPT production. In this sector, imports 
account for over 80 percent of consumption, and the five remaining 
U.S.-based manufacturers are operating at less than 40 percent of 
capacity. Domestic production capability, even if operating at full 
capacity, falls far short of the ability to meet demand. Of particular 
concern is lack of domestic capacity with regard to extra high voltage 
transformers (those with >345 kV voltage rating) that are vital for 
long distance electricity transmission. This excessive level of foreign 
dependence on imported LPT, which are uniquely critical to the BPS, 
puts the resiliency of the critical energy infrastructure at risk. The 
global pandemic of 2020 has shown U.S. vulnerability to supply-chain 
shocks and has highlighted the need to ensure the availability of key 
equipment and major subcomponents thereof from American companies.
    The Secretary therefore finds that laminations for incorporation 
into transformers, stacked and wound cores for incorporation into 
transformers, and LPT are being imported into the United States in such 
quantities and under such circumstances as to threaten to impair U.S. 
national security.
    Because electricity, and therefore transformers, are vital to the 
nation's national defense and economy, the United States must maintain 
sufficient capacity to produce GOES, transformer laminations and cores, 
and LPT that can be drawn upon to address sudden disruptions or outages 
in the electric grid, be they due to natural disasters, physical 
strikes or cyberattacks. Moreover, extreme reliance on foreign sources 
for these essential items leaves the United States vulnerable to 
disruptions in the supply chain, whether due to interruptions in 
transportation routes, production processes (e.g., pandemics, civil 
unrest, work stoppages) or foreign government economic sanctions.
    With regard to other electrical transformers (dry-type and liquid 
dielectric transformers with less than 100 MVA power handling capacity) 
and transformer regulators that were also subject to this 
investigation, the Secretary does not find that these items are being 
imported in such quantities or under such circumstances as to threaten 
to impair the national security at this time.
    Overall, domestic production of these products is sufficient to 
support critical infrastructure and national security requirements, and 
U.S. firms remain competitive. However, domestic manufacturers of these 
products were found to be highly dependent on imported transformer 
laminations and cores and the foreign-origin GOES contained in them. 
Robust domestic production capability for these subcomponents, 
including GOES, will minimize supply chain risks for manufacture of 
these transformers and transformer regulators and support critical 
infrastructure requirements across all levels of the distribution 
system.

B. Options

    The following are seven non-mutually exclusive options to address 
the threats to United States national security posed by imports that 
the Secretary identified in this investigation. A discussion of the 
potential benefits and drawbacks of each option follows.

1. 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
2. Impose tariffs or quotas on imports of some or all of the products 
subject to this investigation
3. Provide direct production subsidies or R&D, capital expenditure 
loans, or other financial incentives to support domestic production of 
subject products.
4. Impose domestic content requirements for transformers
5. Establish a Stockpile for some or all of the subject products
6. Change the Harmonized Tariff classification for laminations and 
cores to the steel HTS category rather than the transformer category
7. Establish a working group to provide further recommendations
1. Negotiate With Canada and Mexico
    As this investigation found, Canada and Mexico are the leading 
sources of imports of products subject to this investigation. Imports 
of transformer laminations and transformer cores from Canada have 
increased dramatically since 2015, and with imports from Mexico, 
account for over 95% of U.S. imports of these products. In addition, 
Mexico has a substantial transformer manufacturing industry, and is the 
leading source for LPT for the U.S. electrical grid.
    Mexico, and especially Canada, are close allies and trading 
partners. Per agreement, Canada is considered part of the U.S. Defense 
and Technology Base. In addition, both countries have highly 
interconnected electrical grids with the United States and cooperate on 
ways to ensure the resiliency and address threats to the North American 
BPS. Neither country has production capability for GOES that is a key 
material supporting equipment in the electrical grid. It is therefore 
not only in the security interests of the United States to maintain a 
source of GOES, but also in the interests of Canada and Mexico as well.
    Thus, negotiate with Canada and Mexico to address the threats to 
the North American security posed by the potential loss of U.S. GOES 
production. Seek through negotiations to increase consumption by 
Mexican and Canadian transformer and transformer component 
manufacturing sectors of U.S. GOES and sub-assemblies. This option may 
include purchasing agreements with both countries, as well as voluntary 
agreements limiting imports from select countries. This option is 
expected to be budget neutral and ensures continued cooperation on 
behalf of all parties through the USMCA and other bi- and multi-lateral 
treaties.
    Under this agreement, a purchasing agreement will increase the 
demand and production for domestic GOES. A purchasing agreement would 
guarantee a United States market share in both the Canadian and Mexican 
transformer manufacturing sectors. Canadian and Mexico primarily export 
their transformers and transformer components to the United States. A 
purchasing agreement will ensure that domestically consumed 
transformers will rely on United States GOES production despite their 
manufacture in Canada and Mexico. Should a purchasing agreement not be 
feasible, voluntary trade restrictions may be another option.
    A voluntary trade agreement to limit the import of GOES from China 
and Russia by Canada and/or Mexico could encourage demand for U.S. 
GOES. To complement Executive Order 13920 (E.O. 13920 or Bulk Power 
Executive Order), limiting GOES, laminations, and core imports from 
China and Russia will ensure greater security for United States, 
Canadian, and Mexican BPS. The Secretary of Commerce recommends 
pursuing both a purchasing agreement and a voluntary limitation on 
imports from China and Russia.
2. Tariff/Quota/Tariff-Rate-Quota Duties
    Extend proclamation 9705 to the following HTS codes: 8504.90.9634, 
8504.90.9638, and 8504.90.9642. Should

[[Page 64684]]

this option be selected, a 25 percent global tariff rate will be 
applied to imports of laminations and cores (both stacked and wound) 
for incorporation into electric transformers. This will result in 
positive tariff revenues and has the potential to reduce the import of 
laminations and cores (stacked and wound). The alternative is to issue 
a new global tariff rate on laminations and cores (stacked and wound) 
and set it to 100 percent. This rate was requested by the domestic GOES 
producer as they believe it will incentivize both domestic GOES 
consumption and lamination and core (stacked and wound) production. In 
the short term, this does not address the shortcomings of domestic GOES 
production with regard to all grades of GOES.
    Applying a quota, or tariff-rate-quota will negatively impact the 
transformer industry and could be contrary to national security 
interests as that sector is also vital. Given that the dependency of 
the U.S. transformer industry on imported laminations and cores 
(stacked and wound) for incorporation into transformers, applying a 
tariff rate to only laminations and cores (stacked and wound) will 
negatively impact the industry by raising input costs. Transformer 
manufacturers are likely to offshore their domestic production 
facilities in order to avoid the increased costs. In addition, 
offshoring domestic transformer production will likely decrease the 
demand for domestic GOES in the longer term, as transformer 
manufacturers can procure cheaper imports elsewhere.
3. Production Subsidies, R&D, Capital Expenditure Loans, or Other 
Financial Incentives
    Issue a capital expenditure grant or loan to the domestic GOES 
manufacture to upgrade facilities in order to reduce operating costs 
and increase production capacity for high grade GOES. This option is 
the most direct way to address shortcomings identified in this 
investigation with regard to domestic the GOES industrial capabilities 
and has the potential to increase the competitiveness of domestic GOES 
in both U.S. and foreign markets in the medium to long term. Any 
production subsidy should consider and account for the different grades 
of GOES to ensure that subsidies are in fact making domestic GOES price 
competitive with imports across all grades. In addition, a production 
subsidy should have a clear termination date in order to avoid 
overreliance on financial assistance.
    Production subsidies however are not solely limited to the existing 
domestic GOES manufacturer. New entrants could take advantage of such 
subsidies in order to better compete on price while increasing their 
production capacities. As production subsidies are directly targeted 
towards GOES manufacturers, downstream costs are not expected to 
increase.
    This option is expected to be budget negative in the short run, 
however, it has the potential to be budget neutral, or positive in the 
long run. Budget neutrality or positivity can be achieved by preferable 
interest rates or combining a capital expenditure loan with a strategic 
stockpile option (which can be liquidated at a future date for profit). 
This option is not expected to explicitly increase the costs for 
electrical steel or transformer-related products.
    Improving the domestic GOES manufacturer's facilities are expected 
to reduce operating costs. More importantly, upgrading their machinery 
can increase capacity for certain GOES grades which would address 
concerns raised by industry. New entrants into the market may also take 
advantage of a production subsidy or capital expenditure loan to 
subsidize their startup costs and encourage future domestic GOES demand 
and competition. A capital expenditure loan is more preferable than a 
production subsidy as it has set terms which expire. Special attention, 
however, will need to be given to the underlying factors which will 
support this option.
    In order for a capital expenditure loan to succeed in reducing 
operating costs, demand for domestic GOES has to increase. Should 
demand not increase, there is no guarantee that the loan can be 
recouped. In addition, low-priced imports may pose a threat as there is 
no guarantee that after the facilities are upgraded, they will be able 
to compete with imports on price. Further review into regulations and 
other agreements may be necessary to further reduce domestic operating 
costs. The Secretary of Commerce recommends combining the capital 
expenditure loan with establishing a strategic stockpile to ensure 
long-term budget positivity.
4. Enact Domestic Content Requirements
    Enact a domestic content requirement through the Defense Federal 
Acquisition Regulations (DFAR) and Federal Acquisition Regulations 
(FAR) to require that all electric transformers purchased by the U.S. 
government are compliant with the Buy American Act. This option is 
expected to increase demand for domestic GOES, which will in turn 
increase demand for transformers produced domestically. This option is 
expected to be budget neutral and will not explicitly increase the cost 
of GOES or transformer-related products. Special provisions will have 
to be implemented in order to avoid explicitly increasing costs.
    The main drawback of this option is that direct Department of 
Defense and U.S. Government purchases of transformers account for only 
a small percentage of transformer production, and so will have limited 
impact on domestic GOES production unless the domestic content 
requirement can be extended to purchases of transformers by public and 
private utility companies that make up the majority of the market.
5. Establish a Strategic Stockpile of GOES
    Establish a strategic stockpile of domestic GOES and subsequent 
transformer-related products to satisfy U.S. defense and essential 
civilian transformer demand in case of a national emergency. In fact, 
the Defense Logistics Agency is seeking funding for inclusion of GOES 
in the National Stockpile. This option is expected to be budget 
negative in the short run, however, it can be budget neutral or 
positive in the long run. This option will ensure that the domestic 
GOES producer retains business in order to support the stockpile in the 
short run.
    In the long run, a strategic stockpile on its own does not 
guarantee success for the domestic GOES producer. Should the stockpile 
be comprised of GOES, a domestic lamination and core (stacked and 
wound) industry is necessary in order to process the GOES. Should the 
stockpile include both GOES and laminations and cores (stacked and 
wound), multiple gauges and specified products will need to be 
stockpiled to ensure ample coverage. The risk of stockpiling outdated 
or mismatched GOES also increases as new developments and efficiency 
standards are implemented. Long lead times may further complicate the 
stockpiling process in order to balance current U.S. demand and 
stockpile demand.
6. Reclassify the Lamination and Cores HTS Codes
    Reclassify the HTS codes for laminations and cores (stacked and 
wound) from chapter 85 to chapter 72. This option is expected to be 
budget positive as reclassifying the HTS codes to 72 would mean that 
proclamation 9705 (which imposes tariffs/quotas on steel imports) would 
apply to laminations and cores (stacked and wound). This option is 
similar to extending proclamation 9705 to laminations and cores 
(stacked and wound) (the Tariff/Quota option)

[[Page 64685]]

however, it is a more permanent shift as HTS codes will have to be re-
harmonized. This would forgo the need to apply tariffs on downstream 
transformer products.
    Reclassifying the HTS codes for laminations and cores (stacked and 
wound) can prove challenging given the re-harmonization efforts 
required. Given that a 25 percent tariff rate is guaranteed, downstream 
product costs are expected to increase. This option does not guarantee 
new entrants into the market as transformer manufacturing will likely 
offshore in order to avoid the increased costs.
7. Establish a Working Group To Provide Further Recommendations
    Establish a working group comprised of the Department of Defense, 
Department of Energy, Department of Homeland Security, Department of 
State, Department of Commerce, and industry stakeholders to conduct 
further negotiations and research in order to recommend further 
options. This option is expected to be budget neutral and will not 
explicitly increase costs across the industry. It will also encourage 
further dialogue at the USG and industry level in order to recommend 
other solutions and provide more specific actions.
    Establishing a working group, however, does not address the 
immediate threat of imports of electrical steel, transformer 
laminations and cores, or LPT. As a consequence of this, the domestic 
GOES manufacturer will likely continue to face financial hardships, and 
new entrants into the market are unlikely. The United States will 
continue to be threatened by imports and have insufficient capacity to 
produce transformer laminations, cores, and LPT.

Matthew S. Borman,
Deputy Assistant Secretary for Export Administration.
[FR Doc. 2021-24958 Filed 11-17-21; 8:45 am]
BILLING CODE 3510-33-P