TCS Daily

Pulling Steel Wool
Over Our Eyes

By Michael Standaert - March 26, 2002 12:00 AM

BRUSSELS - President Bush gambled that his protectionist policies would gain GOP votes in the upcoming congressional elections and for his reelection bid in 2004. Now Europe is gambling that they can effectively strike back at those constituencies that Bush hoped to protect. What this all amounts to is a great pulling of the steel wool over the eyes of workers, consumers, and free market capitalism.

This week the European Commission is undergoing internal reviews of its reaction to the March 5th announcement of steel tariffs limiting imports of certain steel products "for which there is the threat of serious damage to EU industry." Under the WTO rules, it has the right to respond directly with provisional safeguard measures if it feels it is being unjustly targeted and a significant increase in imports would flood its steel industry.

The Commission expects the regulation will be approved on March 27th and enter into force sometime in April. The EU claims that, given that worldwide there are two major steel markets (EU with 26.6 million tons of imports in 2001 and U.S. with 27.6 million tons), the additional protection of the US steel market will inevitably result in gravitation of steel from the rest of the world to the EU. The diversion of steel imports was estimated by the EU to be as much as 15 million tons per year. This would be 56% of current import levels, according to the EU.

The EU is also considering targeted safeguard reactions to hit back at those states, especially in textiles, citrus, steel and specialty items. The list being drafted by the EU reportedly contains the Tropicana unit of PepsiCo in Florida, and Harley Davidson Inc. based in Wisconsin. The U.S. textile industry, grouped in the congressionally important Carolinas, is also supposedly targeted. But, because the EU has to wait for the WTO panel to review the complaint and negotiations on it, any judgment, and eventual retaliation would likely come sometime after the November elections.

Tit for Tat

"The U.S. decision to go down the route of protectionism is a major setback for the world trading system," Trade Commissioner Pascal Lamy said back on March 6th. This week, the U.S. said basically the same thing in regard to the EU safeguard tariffs. There really isn't much difference in their narrow political motivations. Perhaps both were looking to protect their shrinking steel industries from those who have learned to be cheaper and more efficient global exporters, such as in Asia.

In the original plan, Bush called for between 8 percent and 30 percent tariffs on certain types of foreign steel under a 'tariffs-and-quota's plan' which went into effect March 20th and extends three years depending on fluctuation in the industry. Any EU safeguard actions would legally have to be lifted when and if the U.S. decided to reverse its decision on tariffs. The EU provisional safeguards are set to last at least six months, under which time there will be a review of their effectiveness.

The U.S. tariffs:
  • Slab steel 30% after the first 5.4 million tons are imported. U.S. officials say foreign-made slabs cost 30 percent less than those made in the United States.

  • A 30% tariff on tin mill steel, which is the type of steel produced by Weirton Steel Corp, one of the largest employers in the state of West Virginia.

  • Cold-rolled, plate-rolled and coated sheet steel among flat steel products, 30%.

  • Hot-rolled bar and cold-finished bar, also 30%.

  • At 15%, circular welded tubular products, stainless steel bar, and stainless rod will be affected.

  • The construction product Rebar,15%.

  • Carbon and alloy fittings and flanges, heavily used in car production and opposed by the automotive industry inside the U.S., 13%.

  • Stainless steel wire, 8%.

Flat products, hot-rolled bar, cold-finished bar, rebar, certain tubular products, were all issued higher tariffs than recommended by the International Trade Commission which was investigating steel import abnormalities under the 1974 Trade Act. Though the ITC had recommended a four-year tariff barrier, this has been adjusted to three years by the Bush administration.

The EU safeguard tariffs to be imposed sometime in April:

  • Non Alloy Hot Rolled Coils 18,4

  • Non Alloy Hot Rolled Sheets and Plates 26%

  • Non Alloy Hot Rolled Narrow Strip 26%

  • Alloy Hot Rolled Flat Products 26%
  • Cold Rolled Sheets 16.3%
  • Electrical Sheets (other than GOES) 15%

  • Tin Mill Products 17.1%
  • Quarto Plates 26%
  • Wide Flats 24.8%

  • Non Alloy Merchant Bars and Light Sections 19.4%

  • Alloy Merchant Bars and Light Sections 26%
  • Rebars 14.9%
  • Stainless Steel Wire 15%

  • Fittings 15%

  • Flanges (other than stainless steel) 26%

The countries expected to be hit hardest by all the U.S. tariffs are Japan, South Korea, Russia, Ukraine and Brazil. Most of these countries will most likely now seek their own protectionist safeguard measures, or continue with protectionist practices that they had been developing for a long time. Under the EU plan measures will not apply to imports from Russia and Ukraine. Most developing countries are also exempt from the tariffs.

Restructure or Die

The value of U.S. steel imports fell last year by over 23 per cent, well below the level of 1995 and 1996 when the ITC recommended restructuring. European Union officials say their own imports are at record levels, three times those of the early nineties.

"Imports are not the cause of U.S. difficulties and the measures announced (March 5th) will not only not provide a solution but aggravate matters," Lamy said. "I fear today's short-sighted move will end any hope of finding an internationally agreed solution at the OECD to overcapacity problems faced by the world steel industry, and will not rein in global subsidies."

The plan exempts NAFTA partners, Mexico and Canada (though Canada was recently slapped with a lumber tariff, hitting imports of wood with a nearly 16 percent anti-dumping penalty that the National Lumber and Building Materials Dealers Association estimates would add $1,500 to the cost of a new American home), as well as many developing nations under WTO agreements, and does not address the $10 billion bailout sought by the U.S. steel unions for retired steelworkers and their health care costs which was.

This has been pointed to by analysts as one of the major hurdles confronting U.S. steel restructuring. These legacy costs were provided by employers in the past when steel was king and they are now saddled on the shoulders of today's steel workers. The U.S. steelworkers won't get a bailout, and foreign steelworkers may see a $10 billion a year decrease in profits due to the tariffs according to some analysts, meaning workers not just in the U.S., but worldwide, will lose out.

It is interesting to note that not many have brought up the fact that many workers in EU countries are heavily subsidized by government health care plans, pension and welfare plans which are paid through taxes, while in the U.S., with no national health care plan, many of those costs are passed on to business health plans, and to the workers' insurance plans themselves. Though this varies from country to country in the EU, with various government pension and private plans intermingling, the burden is still greater in the U.S., which has little in the way of these worker safeguards.

Consumers in the U.S may also be hit by rises in prices on products such as houses, appliances, and cars. Some studies saying a family of four would pay up to $283 more a year on certain goods.

The Bush administration's decision to impose tariffs on steel imports has been tailored as a compromise designed to insure the U.S. industry remains afloat while downplaying reaction from overseas and from U.S. manufacturers that rely on cheap steel. The U.S. steel industry was hoping for tariffs of around 40 percent as well as implementations to unburden them from the heavy costs of pensions and health care for retired workers incurred during the last few decades.

The largest U.S. steel company, U.S. Steel, had reportedly offered to buy four companies that had filed for bankruptcy protection if the government picked up the costs. That didn't happen and most likely will not now.

"An integral part of our commitment to free trade is our commitment to enforcing trade laws to make sure that America's industries and workers compete on a level playing field," the White House spun earlier in March.

Since 1998, 31 U.S. steel industry companies have declared bankruptcy, making it politically difficult to ignore the issue in constituencies that Bush has relied upon in the past. Though this is not in the usual sense a partisan issues, as top Democrats Tom Daschle and Dick Gephardt came out in support of the tariff proposal.

"The global steel industry has been rife with government intervention, subsidies and protection," U.S. Trade Representative Robert B. Zoellick said Tuesday. "These unfair practices have hurt the U.S. steel industry because our market has been much more open than others."

But the EU adamantly denies that steel has been heavily subsidized, protected and dumped, saying that the U.S. should undergo the same 'painful restructuring' that European steel has seen in the last two decades. Now pressed, they have taken the complaints to the WTO talks and crafted their own retaliatory sanctions to protect their own markets.

The Bush proposal aims to reduce an excess in steel making capacity, eliminate subsidies and 'market-distorting practices' and instigate an ITC investigation into injury toward the U.S. market by increased imports. Many European commentators have argued that the overcapacity problem and the burden of legacy costs should not be piled on their backs with the tariffs. They have also pointed toward high production costs in the larger, more protected steel companies, while the smaller more innovative and flexible ones have had gains in the past decade.

At the last OECD meeting, countries identified 117 million tons in cuts in global excess steel capacity, which according to the White House consists of half of the estimated excess world capacity.

Real Losers

The influential British weekly the Economist reported early in March that the Bush tariff gamble would "wreck relations with trading partners round the world, from Kazakhstan to South Korea. The transatlantic trade relationship that was so crucial to the launch of the Doha trade round would be badly damaged. A fight at the World Trade Organization over the legality of American tariffs would be inevitable." Where the truth lies is more difficult to tell and probably lies within each of the nation's constituencies.

"I take this action to give our domestic steel industry an opportunity to adjust to surges in foreign imports, recognizing the harm from 50 years of foreign government intervention in the global steel market," Bush said.

How political all this has become in the wake of the Enron affair is hard to tell, though speculation about Bush wanting to preserve his base in key states and seem like he is protecting workers has been rampant in the European press, especially since his top political advisor Karl Rove was highly involved in the final crafting of the tariff plan, though he reportedly pushed for higher tariffs than were initiated. Also factored in can be the thousands of U.S. steel workers took to Washington a week ago to vocalize their grievances about their precarious situation. Those images easily play across the media and reach hearts and minds more easily than numbers and straight talk.

The real losers are the workers, the taxpayers, the belief in global free markets and eventually the consumers. The steel companies in the U.S. will have a softened restructuring, though they will still have to restructure.

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