Situational Paper

US President George W. Bush has imposed tariffs of up to 30 percent on most of the country’s imported steel, with an underlying objective to restructure its ailing steel industry damaged due to surges in subsidised steel imports. The decision follows the US International Trade Commission Report (ITC) confirming injuries to US steel industry. The decision has met strong reaction globally, and the European Union, Japan, South Korea and China have joined to file a complaint in the WTO. The EU has also slapped retaliatory safeguards on US imports - thus marking the beginning of a trade war.¹ The introduction of tariffs marks an apparent turn in US trade policy, which until now had preached the virtues of open trade. This trade policy decision would have long-term implications for the US economic, political and foreign policy interests. The question arises that does it herald the beginning of a protracted global trade dispute that will trigger a chain reaction of protection measures within other countries? The decision can have wider implications for the WTO itself, as it comes just as negotiations get under way on the new trade rounds agreed at Doha in November 2001.

A Unilateral Decision

The US has regarded the ‘massive foreign steel over capacity’ as a fundamental cause of the American steel crisis. Steel over-capacity has been a global problem for years and has resulted in lower steel prices, especially in the former Soviet Union and Asia. It was in the aftermath of the 1997 East Asian Crisis, when cheaper steel was excessively imported into the US that led to reduction in US steel prices until 1998. However, a unilateral action for a global problem is not justifiable. In fact, the decision that had come only ten days before the OECD preparatory talks held on March 14-15, 2002 on capacity cutting of the global steel output, illustrates US indifferent attitude towards multilateral negotiations.² The high level talks were initiated in 2001 led by the US with 40 countries taking part. President Bush’s decision is another illustration that US unilateralism is increasingly being reasserted not only in its trade policy, but many other foreign policy decisions as well.

What really justifies the decision?

• The US is of the view that its action is consistent with the WTO Safeguard (SG) Agreement. The Agreement under Article 2 allows ‘temporary emergency safeguards’ with respect to surged imports of particular products which cause or threaten to cause, serious injury to the domestic industry.³ The agreement further articulates that there should be a ‘factual basis’ for determination of a serious injury. The facts provided by the US International Trade Commission (ITC) investigation Committee have been rejected by the EU, being contrary to the true picture. This is the ground on which the EU has challenged the US action in the WTO joined by Japan, China, South Korea and Brazil. Duties are imposed when imports have ‘recently surged’. While the term ‘recent’, has been left vague by the WTO without specifying the time period, both the US and the EU are interpreting it differently.⁴  For EU, the term ‘recent’ denotes a period of one or two years, but the US measures the time period from 1997 when its steel imports surged for one year. However, using the EU interpretation, in the case of the US, steel imports have decreased from 34 million tonnes in 1998 to 25 million tonnes in 2001. US steel imports have been on constant decline since 1999, with 20% decline only in 2001 - thus undercutting the US justification for the safeguards.⁵ However, the final jurisdiction rests with the WTO dispute panel, thereby setting a precedent for future disputes of this kind.

• The US has used the SG agreement to protect its steel industry from ‘surged’ or ‘dumped’ imports, and has not resorted to simply using the Antidumping and Countervailing duty measures available under the US law as it has been using in the past. However, the option for such remedial measures has been kept open.⁶ There is a long list of US antidumping measures against steel imports from Japan, such as the one imposed in the 1980s.

• Under the SG agreement, the safeguard measures are applied on a Most Favoured Nation (MFN) basis - i.e., without discrimination among the member countries and only with the exception of small developing countries. Therefore, the US exemption to Canada and Mexico on the basis of its free trade area partners (NAFTA) is contrary to the MFN provision of the agreement.

• Article xxiv of the GATT 1994 Agreement, regarding Regional Trading Arrangement (RTA) is silent on the issue. Perhaps, the issue may be taken up in the negotiations on the RTAs under the Doha Round that whether the safeguard relaxation to the Free Trade Partners is discriminatory or not.

• While the US has regarded the imposition of EU’s retaliatory safeguards prior to the WTO ruling on the issue as ‘illegal and unjustified’, as specified in the SG Agreement, the latter claims that the agreement allows for immediate protection in ‘critical circumstances’ i.e. with a sudden rise in imports. However, the US is again considering challenging the EU measures in the WTO claiming those as illegal – which would be another step forward towards a Trans-Atlantic trade war.

Implications for Global Trade

The most likely impact of the steel dispute will be on the current trade negotiation under the Doha Round, thus making the successful conclusion of the round in 2004 more complicated, as the EU, US and Japan are the major trade negotiators within the WTO. In addition, the US action will most likely be used as a counter argument against demands for liberalisation of their domestic markets. Similarly, it would also extenuate the developing countries from opening their markets further, as required under the WTO.

Implications for the Trans-Atlantic Alliance

The European Union is being hit the hardest by the US safeguard measures not only in terms of decrease in exports to the US ($ 2.0 billions), but is also faced with an immediate threat of steel products diverted from the US market. The extent of possible trade diversion is estimated at 15 million tonnes per year with consequent job losses of 270,000.⁷  In view of the threat of import diversion and the US refusal for $2.5 billion compensation as demanded by the EU, the latter has imposed counter sanctions on fifteen categories of steel imports for six months.⁸  In addition, sanctions on the US textile and citrus imports are also in the pipeline. Inclusion of citrus and textile in the list of EU sanctions is expected to hit the US where it hurts, by affecting states which are critical to President Bush’s re-election such as North and South Carolina and Florida.⁹ Given the hard-line attitudes of both sides and existence of other bilateral trade disputes, there is a likelihood that the Trans-Atlantic trade war on the steel issue will expand further.

Further strains have been added to the relationship by US policy towards the EU and other countries such as Japan, over the compensation issue. Facing the threat of an anti-US coalition within the WTO, the US is pursuing a policy of isolating the EU. While the US has arrogantly refused to pay any compensation as demanded by the EU in the Geneva Consultations, held on March 19, it has agreed to discuss a $60 billion compensation demanded by Japan, failing which Japan has threatened to impose safeguard measures. While, Japan is quiet hopeful of the compensation on a large segment of its steel exports and other consumer product exports to the US, the US has threatened the EU of a retaliatory chain reaction, if the latter opted for retaliatory safeguards.¹⁰ A similar policy has been adopted by the US towards countries like Brazil whereby the US trade Representative has threatened Brazil of losing American foreign investment against any possible retaliation to the US exports.

Historically, the US and the EU have maintained a degree of restraint in dealing with their bilateral affairs, thus avoiding the risk of economic conflicts spilling over into the political arena. Even during the post-cold war period, the EU not only restrained from imposing retaliatory tariffs over trade issues, such as US illegal export subsidies, but also cooperated over launching the Doha Round of the WTO. The US action can be taken as a turning point for the Trans-Atlantic alliance, not only economically but politically as well. The US policy could have far reaching implications for wider EU-US cooperation, and is indicative of a more independent EU aspiring for enhanced global political role in future. The EU’s recent unequivocal stance on President Bush’s statement on Iran, Iraq and North Korea forming an ‘axis of evil’ is a case in point. There are growing apprehensions within the European allies of the US, for supporting US ambitions in its purported war against terrorism, which has been increasingly regarded as a unilateral action on the part of the US. Britain, the closest ally of the US anti-terrorism coalition is facing divisions within its Parliament over the US plans to attack Iraq.

US Domestic Politics

The US decision cannot be interpreted simply as just a trade policy issue, but it is complexed with domestic politics, such as the union power of US steel workers and connected to the Fast Track Authority (FTA). The decision has undermined President Bush’s free trade agenda in a bargain to secure Republican’s votes for Fast Track Authority, suspended since 1994.¹¹ President Bush and most of the Republicans are from Pennsylvania, West Virginia and Ohio, where most of the steel workers live, and obtaining their votes for congressional elections in November 2002 and the next presidential elections (2004) is one of the underlying factors. Steel workers, in their recent protests in Washington, have promised to remember the decision in the next elections.¹² However, the safeguard action may provide just enough of a winning margin for few Republican congressmen in these states equally divided between Republicans and Democrats, but there are other issues in the elections besides steel. Republican positions on the minimum wage, striker replacement, health care and tax cuts may be critical in union votes in favour of the Democrats. Furthermore, the FTA is not the end but the first step towards fulfilment of President Bush’s free trade agenda. The FTA will be rendered useless as the steel issue will not only complicate, but also may threaten the US trade negotiations with the EU, Latin America and Japan.

Domestic Steel Industry

Although decreasing domestic prices have led 30% of the US steel capacity to file bankruptcy, imports however, are not the root cause of the US steel industry’s problem. In fact, large integrated steel companies, which make steel from iron and coal, are at a great competitive disadvantage vis-a-vis domestic mini mills, which recycle steel from scrap. Mini mills have lower fixed costs and labour costs, and are generally much more flexible than traditional integrated mills. Steel import restrictions, without structural adjustment will no longer be able to sustain the in-competitive mills. Particularly, without reduction in pension and healthcare costs for integrated mills, mini mills will seize even bigger profits, thereby accentuating the destruction of the traditional steel sector.

Competition is the fulcrum of the market economy, in which only the fittest firms can survive – an idea that has been strongly propagated by the US. But structural adjustments also mean the efficient allocation of resources, which by definition, will inevitably lead to bankruptcy or winding up of at least some in-competitive firms and consequent job losses, which the US government has to bear with. The European steel industry has passed through a major restructuring in the 1970s and 1980s, whereby countries like Sweden had to bear huge social and economic costs in terms of cushioning the effects of restructuring. Hence, the US traditional steel workers are deluding themselves if they believe that tariffs are a long-term guarantee of their jobs.

While the US safeguards have been generally criticised, many arguments have been offered to defend the US position including security reasons. One of the arguments given in support of the US action is that, the US needed to save its steel companies, as closing down of domestic industry would make the country’s war preparation abundantly dependent on the steel imports. However, the fact that the US domestic steel production covers 78% of its total steel consumption and there is no threat of dependency as such, the argument becomes absolutely redundant.

Although the decision regards various tariffs as ‘without placing undue burden on steel consumers’, increased domestic prices are going to have an impact on people and businesses in many direct and indirect ways. This holds true, particularly for steel consumers, such as the car industry and the end users of these steel products if the impact is passed on further to car buyers by increasing vehicle prices. Vehicle and construction industries also have a considerable political clout which perhaps has been ignored altogether, while implementing the decision.

Conclusion

Overall, the imposition of safeguards by the US is going to have major implications for global economy, its bilateral trade relations with its trading partner, besides repercussions for domestic business and politics. The action can possibly set a chain of retaliatory actions and protectionist measures, thus giving a blow to the global free trade agenda. The economic strains between the US and its European allies can have far-reaching political implications, especially in the post-cold war period in the absence of common strategic objectives. Domestically, while it can earn favours to the President Bush in the next elections, simultaneously, there is a possibility that affected segments within the US could create problems as well.

Farzana Noshab

Comparative Statements of US and EU Positions on the Steel Issues

Source: www.europa.eu.int/comm/trade/goods/stell/pr_270302.html

References

1. ‘EU Adopts Temporary Measures…..US Protectionism’, Press Release, March 27, 2002. www.europa.eu.int.

2. http//:www.oecd.org

3. WTO Agreement on Safeguards at www. wto.org

4. This is not the only ambiguity as the WTO agreements have many more such ambiguities which, according to the Guy de Jonquiers of American Enterprise Institute, is something created deliberately, which he calls as ‘constructive ambiguity’. It implies that the loopholes were left deliberately by the developed countries with an underlying objective of their future utility.

5. Various issues of Financial Times, March 5-12, 2002.

6. ‘Presidential Action’, at www.ustr.gov/sectors/industry/steel201/background.htm

7. www.europa.int.eu

8. According to the EU, it already has the evidence of increase in imports due to steel diversion since the US has imposed safeguards.
9. The citrus sanctions are mostly going to affect the State of Florida whose governor is Jeb Bush, brother of President Bush.
10. The US is Ready to Discuss Japan’s call for Steel Payout’, Financial Times, March 20, 2002. ‘Japan to file Complaint on US Steel Tariffs’, at www.english.peoplesdaily.com.cn, March 9, 2002.
11. Fast Track Authority is granted by the US Congress to the US President to negotiate free trade agreements.
12. ‘Politics of Steel’, March 6, 2002, at www. bbc.co.uk.

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