Steel prices and global trade

Robert Kuttner

July 26, 1993|By Robert Kuttner

IF YOU wonder why the creation of a fair global-trade system is so daunting, consider the case of steel. Dozens of nations, rightly or wrongly, view steelmaking as the badge of a modern industrial economy. Over the past 20 years, three dozen foreign governments have subsidized their steel industries to the tune of more than $100 billion, creating a huge worldwide steel glut.

These state-subsidized firms continue to make and sell steel, despite depressed prices, rather than have expensive mills sit idle. And much of that subsidized steel finds its way to the one large market that is unsubsidized and relatively open -- the United States.

This reality was confirmed last month when the Commerce Department, concluding a lengthy proceeding in response to complaints filed by U.S. steelmakers, determined that steel is not freely traded and ordered penalty tariffs on steel exports of 19 countries, to offset foreign subsidies. Tariffs of 20 percent to 30 percent are already in effect on four major categories of steel products, and could rise to 37 percent if the order is finalized, as expected, in early August.

Under U.S. trade law, the Commerce Department and U.S. International Trade Commission (ITC) hold a quasi-judicial proceeding, carefully weighing evidence of dumping, subsidy and injury to the domestic industry. When the ITC certifies that injury has resulted, the tariff remedy becomes final. But trade is highly political. In practice, the president often steps in and negotiates a deal, as presidents Carter and Reagan did in four previous steel-dumping and subsidy cases in the 1970s and 1980s.

In each case, the White House chose to negotiate complex market-sharing deals rather than impose tariffs, because these deals were more acceptable to trading partners that subsidize steel. Ironically, these deals, by carving up markets and rigging prices, buy temporary harmony with allies but only defer progress toward genuinely open trade. By tolerating continued subsidies, they also leave the U.S. industry vulnerable to future dumping, which is why the process keeps repeating itself.

President Clinton is now under intense pressure by Japan, Korea and the European Community to block the proposed sanctions and make a similar deal. On the eve of the recent Tokyo economic summit, the French and the Japanese threatened to block any trade accord unless Mr. Clinton reversed the Commerce Department ruling. Oddly enough, in pressuring him to relent they invoke -- what else? -- the ideal of free trade.

But after nearly 20 years of Commerce Department investigations, it is clear that free trade in steel does not exist. The only large steel producer and consumer that plays more or less by free trade rules is the United States.

After more than a decade of painful restructuring, in which steel xTC capacity was both reduced and modernized, the United States is now the world's low-cost producer of most categories of steel. Yet American steelmakers don't get to fully exploit these advantages, at home or in world markets, because their competitors are subsidized and sheltered.

Other major producers either refuse steel imports, or subsidize their domestic production, or both. The European Community is also restructuring its steel industry. But unlike the U.S. industry, European steel has benefited from more than $40 billion worth of government subsidies just since 1980, which artificially lowers the price of European steel in the U.S. market.

The Japanese government no longer subsidizes steel significantly, but it continues to restrict steel imports. This gives its domestic producers a higher than free-market price at home, which in effect subsidizes Japanese lower-priced steel exports to the world market.

According to testimony to the ITC, the European and Japanese steelmakers also have a sweetheart arrangement to carve up markets, known as the "East of Burma" understanding. Under the deal, European and Japanese steelmakers stay out of each other's home markets and limit Japanese steel exports to East Asia and European ones to a zone that stretches from Europe to Burma.

America's professed policy is to promote free trade. But here is a product that is cartelized, state-subsidized and often sold below true cost -- the antithesis of free trade. If the U.S. government turns a blind eye to that reality, foreign steel that is not freely traded will continue encroaching on U.S. markets. American steelmakers, who invested more than $30 billion of private capital to make their industry competitive, will be denied the fair fruits of their entrepreneurship.

Assuming that the ITC upholds the steel tariffs and issues a final order next month, President Clinton should let the order stand. The tariffs should be eliminated only as part of a general deal to end or sharply curtail subsidies and market-rigging in steel. The Europeans have indicated a desire to negotiate an overall steel accord; keeping stiff penalty tariffs for now would strengthen the U.S. negotiating position.

It is hard to grasp the paradox that tariffs, in this case, are a necessary step toward freer trade, just as arming is sometimes necessary to keep the peace. Free trade, like peace, is a wonderful ideal. But if we unilaterally disarm our trade policy, we will have neither the industries we need to prosper nor the open trading system we want as a matter of principle.

Robert Kuttner writes a regular column on economic affairs.

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