Why risk alliances to bail out Big Steel?

January 28, 2002|By David H. Feldman

WILLIAMSBURG, Va. - The Bush administration asked the U.S. International Trade Commission in June for a finding that steel imports harm the domestic industry.

Although the worst of the import bulge had passed, continuing financial difficulties at major producers put pressure on the administration to act. Just before Christmas, the ITC dutifully complied. Its proposed "remedies" include tariffs of up to 40 percent and discriminatory country-by-country quotas. Mr. Bush is in the uncomfortable position of having gotten exactly what he wanted.

Under Section 201 of U.S. trade law, a finding of significant harm to the domestic industry permits the president to impose sanctions even if foreign business practices violate no U.S. laws.

The commissioners have proposed differing remedies that vary by product category (16 in this case). The president is free to modify the ITC's recommendations.

A quick look at the sources of U.S. steel imports suggests why we face a political minefield in determining how to proceed. By tonnage, the two leading steel exporters to the United States are our NAFTA partners Canada and Mexico. By value, the leading exporters are Canada, Japan and Germany. From here, things go downhill fast.

While British and American jets worked together in Iraq and Afghanistan, British steel producers have cause to worry. They are major exporters in three categories. France, Belgium and the Netherlands are players in one or more products. Poor Italy is the top exporter of two. Even Turkey, whose airbase at Incirlik is so useful, sends us significant quantities in two categories. Then there is our new coalition partner, Russia, which together with other members of the former Soviet Union is a leading exporter in five.

Other important exporters include developing nations such as Brazil, whose financial system is shaky, and China, whose relations with the United States are on the mend. As the world manages the recession, and the war on terrorism progresses, fanning the flames of trade conflict is unlikely to win many friends.

How we apply these "safeguard" trade barriers takes us into a very murky area of international law.

For instance, NAFTA allows us to exempt Mexico and Canada from sanctions unless they rank among the top five foreign suppliers of a particular steel product. Yet several commissioners chose to exempt them despite their importance as suppliers. If the president chooses to spare our close neighbors, the brunt of U.S. sanctions will be borne by others.

Moreover, to the extent that Mexico and Canada can increase their shipments at the expense of, say, Britain and Russia, we magnify the harm done to other close allies or potential friends.

But the World Trade Organization has ruled that if a product is counted in an ITC determination of injury, then all nations that sell that product must be subject to the same remedy. This reflects the WTO's commitment to nondiscrimination in trade.

The European Union already has said it thinks the ITC's conclusions were not soundly based and broke WTO rules. The EU also has let us know that its recent commitment to reduce steel output is null and void if the United States enacts these punitive tariffs.

The world steel industry suffers from permanent overproduction, so low steel prices are an ongoing threat to the solvency of America's older large-scale integrated mills. These are the firms that face high costs of pension, health and severance benefits promised to current and retired workers.

As any steelworker will tell you, Enron is not the only firm whose bankruptcy would leave employees holding a retirement bag full of worthless IOUs. But this fact does not justify expanded trade protection when far better alternatives exist for protecting workers and safeguarding America's vital foreign policy interests.

Mr. Bush has until next month to decide whether to implement these high tariffs that will raise consumer prices for all Americans. With his new political strength, he should defuse this trade time bomb before it damages steel-using American firms, harms U.S. foreign relations and becomes an unwelcome distraction at the new round of WTO trade liberalization talks.

David H. Feldman is an economics professor at the College of William & Mary.

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