The Hindu Business Line : Steel tariffs: Pitting US against half the world

For developing countries such as India and Brazil, the steel sector is pivotal to growth. If it slumps due to the vicissitudes of international trade, these countries would be seriously hurt. There is thus an asymmetry in the role of the steel industry in the US vis-à-vis the developing countries. The strategists who resorted to tariffs, however, did not provide for this, says K. Subramanian.

IN MARCH 2002, when the Bush administration decided to clamp down 30 per cent tariff on a range of steel items, it was a political gamble. The US Trade Representative, Mr Robert Zoellick, a self-confessed free trader, had no hesitation in defending it. It was a temporary measure and they had the right under WTO rules to safeguard an injured industry, he contended.

The game was to secure a few more seats in the Senate in the mid-term polls to be able to get through the fast track or, what came be to be known later as the Trade Promotion Authority. The TPA, it was argued, would strengthen the hands of the administration in negotiating trade agreements within or outside the WTO.

The administration did get the crumbs and pass the Bill, but with a wafer-thin margin. Many wondered whether the support, even of Republican senators, would last or lead to approvals for future trade agreements. The move was frenetic and did not reckon that the strategy was self-destructive.

There were reports that while the economists in the US administration had misgivings over imposition of tariffs, the political caucus upstaged the agenda. As later developments indicated, the tariffs did not advance the interests of the US steel industry. They did not promote the cause of free trade.

The US lost its credibility as a champion of free trade. Coupled with the imposition of whopping farm subsidies in May 2002, it widened the chasm between the EU and the US. More painfully, it created an unbridgeable gulf between the developing and developed countries and finally to the collapse in Cancun. They would however blame the developing countries for the fiasco.

The farm and steel subsidies provoked anger among big Latin American countries — Argentina and Brazil — and stalled the negotiations attached to the Free Trade Agreement of the Americas (FTAA). The Summit at Miami ended abruptly a day earlier on November 20 without an agreement.

Its end, as the New York Times (November 22, 2003) puts it, "means the ambitious effort to create a mammoth free trade area throughout North and South America by 2005, begun with such fanfare nine years ago, runs the risk of being downsized to a point of irrelevance."

The Miami draft leaves the FTAA maimed and provides, at best, some scope for the US for bilateral FTAs with smaller countries such as Bolivia, Colombia, the Dominican Republic, Ecuador, Panama and Peru. The time-frame for a final FTAA is early 2005, by which time the TPA would have expired! Thus ends the political wisdom of strategists in the Bush administration.

Even as a strategy, the political advisers did not anticipate is global fallout. As Mr Pascal Lamy, EU Trade Commissioner, puts it, the US was pitted against half of the world, which wanted the tariffs to be terminated. It had added a new dimension to the disputes in the WTO.

In the past, in most WTO disputes, the battlelines were drawn between the EU and the US or the US/EU and one of the Latin American or Asian countries, say, Mexico, Brazil or India. By selectively excluding developing countries, the US had hoped to split the ranks.

To its dismay, it brought about a newer alignment within the WTO. Furthermore, selective exclusion of countries was itself viewed as a violation of WTO regulations on safeguards.

No doubt, the EU was at the forefront, but those ranged on its side were Japan, South Korea, China, Switzerland, Norway, New Zealand and Brazil.

Significantly, China, Switzerland and Norway resorted to the WTO dispute proceedings for the first time. The panel records suggest that China, though a newcomer, defended its case well and was not bogged down by the `arcane' procedures of the WTO.

The new alignment has important implications for the enforcement of sanctions. Till now, invariably, the disputes were between the EU and the US. With the backslapping cordiality between Mr Zoellick and Mr Pascal Lamy, it was possible to engage in dilatory dialogues and `settle' them, as in the banana dispute. They could even `manage' them, as in foreign sales corporations (FSC) or genetically modified food (GMF) disputes.

But there may not be scope for such a solution in dealing with the steel dispute. The dispute is of vital concern to many other countries. Even if the EU softens its stand, others such as China, Brazil and South Korea may not.

When the Appellate Body (AB) announced its unanimous decision on November 10, the EC, Japan, China, Switzerland, Norway, New Zealand and Brazil issued a joint statement welcoming it. Moreover, all, except Brazil issued separate statements specifying commodities chosen by them to `re-balance' trade.

The US should not have been surprised either by their vehemence or the items chosen by them for retaliation. They mirror, in reverse, the same strategy adopted by the US President, Mr George Bush, while imposing steel tariffs.

The US political strategists had also misjudged ground realities when they chose steel for protection. Against available studies on the malaise in the steel industry, the Bush administration rushed to impose tariffs, as the only remedy though there was no immediate threat to the industry.

Both the WTO Panel and the Appellate Body devote several pages to establish that the US' arguments such as on "unseen developments" or "increased imports" causing serious injury to the industry were inconsistent with the requirements of the articles of WTO.

This is not to deny that the US steel industry did face difficulties globally. A good part of the US steel industry could not face competition from newer mills within the US or producers from Asia, Latin America and the CIS, all of which had the advantages of newer technologies, lower labour costs and no `legacy' costs such as pension or medicare.

In the background of relentless growth of sophisticated sectors — read, New Economy — the steel industry commanded a low premium and came to occupy a lower position.

For developing countries such as India and Brazil, the steel sector is pivotal to growth. If it slumps due to the vicissitudes of international trade, these countries would be seriously hurt.

There is thus an asymmetry in the role of the steel industry in the US vis-à-vis the developing countries. The strategists who resorted to tariffs did not provide for this.

Moreover, countries such as the US, which preach the virtues of globalisation and harp on the need for shedding or restructuring of uneconomic segments, were unwilling to adopt the same logic when it came to their domestic industries. They were unwilling to shift them to cheaper (cost-effective) locations and resorted to tariffs.

Between the announcement of the Appellate Body award and its enforcement will fall the shadow. Sanctions would be due for enforcement after December 10. However, two major issues have to be resolved. One relates to the WTO procedures and the right of members to rebalance or retaliate. The other is whether the Bush administration will abide by the decision of AB and rescind the tariffs. Both are fraught with imponderables.

The US may continue to question the Appellate Body's decision. When the Appellate Body gave its ruling, a spokesman for the US Trade Representative's office said the US still believed the steel tariffs were legal and disagreed with the ruling. There could be attempts to delay implementation on this score.

The other larger issue relates to WTO procedures and the unilateral right of members to `rebalance' without further WTO authorisation and the grace period to be allowed. The implications of Articles 8 and 14 of the Safeguards Agreement are untested and unclear.

There is a strong neo-conservative lobby in the US that is critical of the working of WTO panels. On July 30, the Congress' General Accounting Office (GAO) brought out a study suggesting that the US has faced "substantially more challenges" in the world forum and is more likely to lose rulings than other countries and is far more likely to face the highest penalties.

There are legal analysts who criticise the panels for their amateurishness and for not following precedents. Some have expressed unhappiness that the negotiations within the WTO on reforming the dispute-panel process have stalled. If the Bush administration is recalcitrant, it has many escape routes to evade delay compliance with the WTO rulings.

On the economic front, the administration perhaps expected that the slowdown in the economy was temporary and it would lift within a year or so. Perhaps, it had fixed the time limit of 18 months to reconsider the tariffs with this idea in view. Sadly, this turnaround has not come about.

The International Trade Commission (ITC) released a report in September 2003 suggesting that the US economy had suffered under the tariffs. It reported that steel consuming manufacturers were shifting procurement and production plans to overseas firms and placed the US jobs and investments in jeopardy.

Messrs Gary Clyde Hufbauer and Ben Goodrich in their paper for the Institute for International Economics (Policy Brief No 10, October 2003) suggest that steel-users shed jobs at a slightly faster rate in the year than steel producers. They concluded that "the safeguards are unambiguously a drag on the US economy."

These findings have gone unnoticed by policy-makers. To add to the muddle, there are other developments. There is growing fear in the US of jobs getting lost in a big way to outsourcing in cheaper locations such as China and India. Attempts by the US authorities to twist the arms of Asian countries to revalue their currencies, China in particular, has met with failure. Added to the elections, this gloomy syndrome has inflamed protectionist frenzy. There was evidence of this recently when the US imposed quotas on textile imports from China.

China has, no doubt, protested in a muted way. It may well be the beginning of a new trade war. Or is it a warning to the EU and others that they should not fiddle with sanctions and retaliations against the US? The dispute would drag on well into 2005.

There is evidence that the US is relying less and less on the WTO and moving into bilateral free-trade agreements. FTAs incorporate all the conditions that the US wants or cherishes. There is also evidence that Washington is engaged in trading in trade and not freeing trade, and playing one developing country against another. Under legislation that allowed US participation in the WTO, the Congress has to vote in 2005 on whether to stay in the WTO. If the Bush administration comes back to power in the elections, it is unlikely that it would opt to stay. This is a gloomy scenario indeed.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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