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Monday, Mar 18, 2002

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Global steel industry scrambles to adjust

C. Gopinath

THE `infant industry' argument is a mainstay in trade theory. The reasoning is that developing countries may have to step in and protect a feeble and growing industry from competitive onslaught through tariffs. But where do we look for justification when a developed country protects a mature industry? That is what happened when the US President, Mr George Bush, announced a set of tariffs and quotas last week that are due to take effect on March 20. The objective is to protect the domestic steel industry for three years while giving it time to restructure. Mr Bush's announcement has set the cat among the pigeons of the global steel industry.

The first step in the US process was when the steel manufacturers complained to the government about the `dumping' or low prices of imports. About 26 domestic steel-makers had sought bankruptcy protection and more were likely to suffer. The US government referred the complaints to the US International Trade Commission. On December 7, 2001 the Commission recommended tariffs on 16 product lines ranging from 5 per cent to 40 per cent.

The next stage in the battle was the international summit in Paris attended by 40 steel-producing nations at the end of December 2001. Countries such as Japan, Ukraine, and the EU agreed to push for cuts to their capacity, provided the US drops its threat of levying tariffs. But the US position was that the capacity cuts were necessary for the long term survival of the industry and the tariffs, if levied, were to help the US get over a short-term problem of low-priced steel imports. Moreover, it is a moot point whether the cuts agreed to by government representatives would be honoured in full by private manufacturers within each country.

Finally, the US government announced in the first week of March a series of measures that provides for a combination of tariffs and quotas on imported steel. The tariffs range from 8 per cent to 30 per cent across a range of products that include stainless steel wire, flat rolled steel, slabs, etc. and are valid for three years. Nafta partners Mexico and Canada are exempt, as are many developing countries (including India), Argentina, South Africa and Thailand. China, Japan, EU, Taiwan and South Korea will bear the brunt of the restrictions. About $8 billion worth of imports from Europe, South Korea, Japan and others, accounting for about 10 per cent of global trade, is expected to be affected.

The theoretical arguments about the benefits from free trade, often referred to as `gains from trade' arise from the increase in total volume of goods and services available for consumption on account of freer trade. But the opposition to free trade comes from producers due to increased competition and loss of jobs as industries are forced to restructure.

The same split was visible in the US, as opposition to the proposed regulations came from manufacturers within the US. Makers of auto parts, steel furniture, and heavy equipment have been fighting against tariffs as they benefit from lower prices for the steel they use. Called the Consuming Industries Trade Action Coalition, they have been arguing that many thousands of more jobs will be affected in the steel-using industries, against the 160,000 jobs now under threat in the steel-making industry.

Turbulent industry

The steel industry around the world has been turbulent for some time now. It is estimated that worldwide steel capacity is about one billion tonnes, of which, at an average of 84 per cent utilisation, about 840 million tonnes is actually produced. Steel demand is at about 800 million tonnes, resulting in a glut in the world market and causing prices to fall.

Technological factors cause some of the turbulence. For example, mini-mills based on electric arc furnaces and using steel scrap have proved to be more cost-effective than the large integrated mills that make steel from iron ore. However, large sunk costs have made it difficult for old and integrated mills to either exit or restructure. Strong labour unions have not helped the situation. Moreover, governments around the world have been helping out their steel industries for some time now.

In the US itself, tariffs were levied in 1976 and in the 1990s but observers complain that the steel manufacturers did not take advantage of those temporary benefits to restructure. Also, the different segments within the industry, based on the nature of technologies used and product-specialisation, are affected differently. For instance, the efficient mills within the US will benefit a lot from the protection and make even more money.

Different countries have responded to the US announcement in different ways. The Turkish President made a strong case during a visit to Washington a few weeks before the announcement and managed to get onto the list of exempt countries. The Australians had meetings with the US authorities immediately after the announcement and struck deals to have almost all tariffs on imports from Australia waived. The response from the EU is still awaited. Mr Pascal Lamy, the EU Trade Commissioner has been blowing hot.

The EU faces several options. It can impose tariffs on other countries if it sees a surge in imports. It can seek to retaliate against the US by imposing tariffs on a different set of imports from the US. Or it may counter by putting pressure on another dispute where the WTO has ruled in favour of the EU but the US has not taken any corrective action. This pertains to the tax exemption given to US companies which set up separate Foreign Sales Organisations that is seen as equivalent to a subsidy. It has long been argued that when regions form their own trading areas with preferential tariffs, they lead to trade diversion.

That is, rather than a net increase in trading volume and lower prices for consumers, the pattern of trade gets diverted with possibly higher prices but definitely a less optimum allocation of global resources. A similar result may be seen in the global steel industry due to selective regulations and protection by some countries.

The countries hit by the US regulations — China, South Korea and Brazil — may divert supplies to the EU market, worsening the problems there. Currently, those countries do not face any EU quotas. Similarly, Central European countries that were mostly exempted from the US regulations may face an increase in supplies from the Czech Republic, Ukraine, Russia and Romania. Companies have been responding to the current situation in other ways too. For example, USX-US Steel Corp. and Bethlehem Steel, two large US manufacturers in the US are in talks to merge.

Another grouping may be Usinor SA of France, Aceralia Corp. of Spain, and Arbed of Luxembourg, which would become the world's biggest, with a capacity of 50 million tonnes. LTV Corp., a US steelmaker now under bankruptcy protection, has asked for permission to liquidate and shut down altogether. Finally, we should not forget the non-economic consideration that appears to have played a large part in the US decision — local politics.

Mr Bush's narrow victory in the presidential election came due to favourable votes in West Virginia, a steel-dependent State, and the President would not want to be seen as ungrateful!

Moreover, Senate elections are due in November and six Republican candidates are facing tough battles in the States of Pennsylvania, West Virginia, and Ohio, all of which have major steel manufacturers.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. Feedback can be sent to

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