Financial Daily from THE HINDU group of publications
Friday, Nov 21, 2003
Steel war across the Atlantic
A trade war between the EU, ready with its $2.2-billion sanctions through tariffs on select American goods, and the US is looming large and is likely to engulf other nations aggrieved over Washington's protectionism. Japan and Korea are among the Asian nations warning of retaliation.
But steel is not the only issue that has deeply divided the US and the EU though they managed to patch up to confront developing countries at Cancun to safeguard their farm support the other being the WTO ruling against the US' subsidy for American exporters.
The US had committed to the WTO that it will amend its Foreign Corporation Sales Act before the end of this year but the intended change is trapped in a broader measure of tax reform before the Congress, where legislators are insisting on a three-year phase-out of the concession.
The EU has warned it will slap tariffs on goods worth $4 billion from March next if the subsidy is not withdrawn.
On November 11, the WTO appellate body upheld the earlier dispute settlement panel's conclusions that the US steel tariffs of March 2002 to bar imports from the EU, Japan and several other nations were inconsistent with the requirements of the Safeguards Agreement because the US had failed to establish that imports had caused serious injury to domestic producers.
The EU, which was at the forefront of the complaints filed with the WTO, was allowed to impose tariffs in retaliation on goods of the value of $2.2 billion if the US did not abide by the WTO ruling. The EU plans to impose its sanctions from December 15 if by then Mr Bush does not comply with the WTO ruling.
In first reactions to the WTO appellate body's decision on steel, American officials maintained that the tariffs levied in March 2002 were legal and consistent with the WT0 rules.
There are no indications of when Mr Bush will review the matter. The US steel industry, of which several units had declared bankruptcies between l997 and 2002, did enter a phase of consolidation encouraged by the 30-18 per cent tariffs slapped by Mr Bush for a three-year period. It now wants this protection to remain in force for another 18 months.
The US International Trade Commission (ITC) in a report in September said the tariffs had a modestly negative impact on the economy and jobs. The rise in steel prices as a result of the tariffs had hit steel-users and caused loss of thousands of jobs.
Tariffs had cost the consumers $680 million while an equal amount accrued as revenue to the government, it said. Mr Bush is under pressure from both producers and steel-users, the former to continue with the protection and the latter to end the tariffs forthwith.
Mr Bush has to weigh the political implications of ignoring the plea of steel-makers in States such as Pennsylvania and Ohio, where he needs crucial support for his re-election in 2004 and, on the other, of retaining the tariffs with some modifications which will still attract sanctions by major trade partners and keep domestic steel prices high for the consuming industries.
Besides the EU, other nations such as Japan and Korea have also indicated they would retaliate against the US goods up to a value of $1.2 billion.
The EU sanctions could cover clothing, motorcycles and other metal products, citrus fruit and processed foods and furniture, especially from States which are sensitive for his re-election prospects in 2004.
With a promise of extending free trade with a series of bilateral deals and acting tough on imports of cheaper steel to help the ailing domestic steel industry, Mr Bush was able to convince the Congress and get the Trade Promotion Authority last year for a three-year period.
The authority will enable Mr Bush negotiate trade pacts and submit them to Congress which can either accept or reject them without making amendments. The undertaking given by the administration is that these pacts will take care of labour rights and environment.
Senators and representatives from the steel-producing States are urging the President not to yield to the EU "blackmail" while the US Steel Corporation and the United Steelworkers Union, one of the largest organisations, want him to keep the tariffs in place to avoid further disruption in the industry.
Conversely, a coalition of steel consuming industries is urging him to discontinue the tariffs which had hurt them and resulted in loss of jobs for thousands, and is pointing out that the threatened EU retaliation will make things worse. Steel prices soared after the tariffs were put in place and raised the cost for user industries.
Overall, prices may be lower but equipment manufacturers say certain grades of steel continue to be higher.
Analysts are debating whether the restructurings that have taken place over the last two years have more to do with the government taking over the pension obligations of the bankrupt steel mills. (Some 35 steel mills had declared bankruptcy till March 2002.) Also, recently there have been flexible labour contracts in which unions have agreed to capacity and work force reductions.
The domestic industry had earned a breathing space from the tariffs. Trade policy experts say the choices that the administration makes on steel will set the tone for the ongoing trade negotiations at bilateral and multilateral levels.
The US can show whether it values the world trading system and respects the WTO decisions or it can ignore the ruling, endure trade retaliation and sour the Doha negotiations, a policy paper from the Institute of International Economics said.
At stake is the credibility of the Bush administration, and the way it responds to the steel issue will influence the outcome of its efforts to strike bilateral and regional trade deals to secure markets for American goods and services.
Currently, it is engaged in working out a Free Trade Treaty for the Americas but has come up against Brazil's demands that the US should give up its farm subsidies and enlarge access to its market.
A summit of the Western hemisphere is scheduled to take place on November 20 and 21 in Miami (Florida) to advance the process. Global steel industry had begun a recovery in 2002 and total consumption was 783.6 million tonnes, according to UNCTAD data.
The main increase was in China where consumption rose by 7 per cent to 182 tonnes. The EU and North America consumed 140 and 132 million tonnes respectively. Most steel majors have improved their finances and stock prices of quoted companies have gone up in European markets, notably the Netherlands-based company of the Indian steel magnate, Mr Lakshmi Mittal.
With rising demand, trade circles do not rule out shortage of steel in the first quarter of next year. This may lead to a hike in steel prices. Already, in India, prices have been revised at intervals and with much of the industry now deregulated, the Government has taken the stand that prices are market-driven. But there is some concern that Indian prices are far above international prices and producers have been urged to moderate prices in the interest of end-users.
Higher prices and low interest rates have no doubt helped improve the industry's finances, especially the public sector monolith, SAIL.
India is the ninth largest steel producer in the world with an estimated output of finished steel of 35 million tonnes (public and private sectors including mini-steel plants) and consumption of 30 million tonnes in 2003.
In the face of rising demand and prices firming up, the debate on closure of excess capacity has receded to the background. Out of a near one billion tonne capacity worldwide, restructurings will result in a reduction by 120-135 million tonnes by 2005, according to OECD. Apparent consumption is expected to touch 800 million tonnes in 2003.
(The author is a former Chief News Editor of PTI.)
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