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K. Subramanian

IT IS generally assumed that in the US, the Republicans are free-trade votaries and the Democrats, protectionists. This is not factually right though. There are times when Republicans turn protectionists and Democrats espouse free trade; trade policy is often the creature of political expediency.

During the Presidential elections in 2000, the Republicans appeared to be the evangelists of free trade. Later, while speaking at the Council of Americas in May 2001, the US President, Mr George W. Bush, said, "When we negotiate for open markets we are providing new hope for the world's poor... and when we promote open trade we are promoting freedom." The US Trade Representative, Mr Robert Zoellick, also upholds this faith more than anyone else in the Bush team. He believes that global economic integration is bound up with democracy, freedom, prosperity and security. In alliance with another free-trade tsar, Mr Pascal Lamy of the EU, he was to open and move global trade forward. Unfortunately — as the past has shown — the route to free trade is often tricky. Even as the steel crisis emerged on the horizon, there were the wars over bananas, beef and foreign sales corporations.

In its early months, the Bush administration seemed indifferent to the crisis in the steel industry. But it would not have failed to notice the legislative pressures — orchestrated by the steel caucus — building up in the Congress. In the Presidential election, Mr Bush won in West Virginia and narrowly lost in Pennsylvania, two leading steel producing states. During the campaign, the Republicans had vowed to do more for the industry than what the Clinton regime did.

The Clinton administration's policy was based on a July 2000 report, which resulted in a six-pronged strategy. The plan was to intervene constructively and assist the industry with due regard the obligations under the WTO and to the partners in international trade. Also, the plan was to resist attempts by the Congress to impose restrictions on steel imports.

By and large, the unions and the industry appeared to favour Mr Clinton's action plan, which included the Emergency Loan Guarantee Act of 1999 — establishing a $1-billion loan programme for steel producers. The data showed that imports had declined since the crisis year of 1998. By mid-1999 there were reports that the White House was taking new initiatives to help the industry, but was not in support of trade law changes. What were the trade law changes sought by the Congress?

Several Bills were tabled and all of them sought to impose, in some form or the other, restrictions on steel imports. There was a Bill on additional anti-dumping duties and another on a three-month ban on imports from Japan, Russia, South Korea and Brazil. But the most radical Bill was the one proposed by Senator Viclovsky, which sought to restrict imports to the 36-month average preceding July 1997. In its revised version (HR 975), the Bill sought to reduce the volume of imports and establish a steel import and monitoring program. The Senate finally rejected the Bill on June 22, 1999. The Clinton administration stood firm and warded off attempts to restrict steel imports through tariffs/quotas. However, a day before demitting office, Mr Clinton referred the matter of protection to the ITC, arguing the steel industry was facing a `new crisis.'

The Bush administration could not have remained passive when 18 domestic companies had filed for bankruptcy since 1998. Steel majors were crying for action. Busloads of steel workers were to organise a rally on June 6, 2001, at Capitol Hill, seeking relief for the thousands of jobs lost and from the threats of additional job losses owing to imports. On June 4, Mr Bush threw in the sponge and referred the issue to the ITC. He threatened to impose restraints on steel imports to protect US producers under Section 201 and called for international negotiations to curb overcapacity and to end government subsidies.

Many analysts and commentators saw this as the fall of an angel. The Financial Times, in its editorial, stated: "His threat to curb steel imports and demand for international talks on cutting overcapacity and subsidies are a cave-in to special interest lobbying and an admission that he has lost control of the trade agenda to the protectionist forces in Congress."

But Mr Zoellick was unrepentant and said at an APEC meeting in Shanghai: "It is useful for (other countries) to recognise that while we want to promote liberalisation, we are going to have to deal with issues like steel which affect all our economies."

The US Commerce Secretary, Mr Donald Evans, while addressing a rally by the steelworkers' union, assured them of full protection until the problem was fixed.

What seemed to have spurred the Bush administration into action was the `power shift' in the Senate with the defection of Mr Jefferson. Democrats who came to control the Senate were determined to use their power to order an ITC enquiry, if the administration did not. Mr Bush robbed them of political mileage by pre-empting their move and making a reference to the ITC on June 4.

By this, Mr Bush sought to achieve several objectives — the main one being to help the industry through national action and setting a stage for international negotiations in reducing overcapacity. But the more immediate agenda was to get the support of Senators and Representatives of steel districts for the Trade Promotion Authority (TPA), authorising the President to conclude trade agreements without prior Congressional approval. The Congress had denied this power to the Clinton administration, but Mr Bush hoped that the steel caucus would switch sides because of his support to the industry. The TPA Bill was to come before the House in early March 2002. The reference to the ITC would surely stall the Revitalisation Bill pending in the House.

Though the whole strategy appeared to be cleverly drawn up, it lacked credibility; some even accused it of containing the seeds of self-destruction. On support for the TPA, it was unlikely that the Democrats would barter away Senate control for crumbs. There was no evidence that, in the context of US-EU relations, the fallout would have been beneficial to US interests. There was a greater risk of trade war intensifying at a time when the US economy was in recession.

The strategy was flawed for another reason too. This US postures vitiated the negotiations — conducted under the shadow of the ITC — with the OECD High Level Steel Group.

Thus, the stage was set for a decision on the ITC recommendations. Under the statute, the decision had to be taken within 60 days, that is, before June 6. By the very act of initial reference to the ITC, the administration had revealed its hand in the later actions.

In the absence of any success on the OECD front, the administration had nothing to show to appease the steel companies and workers. Nor could the Bush administration reject the ITC and deny that it had harboured the hope of gaining political mileage when taking the initial step. The final decision, which had to be announced on March 5, was a wholly protective one. (Attempts are, however, now being made to defend it in terms of US laws and international trade rules and to clothe it in free trade verbiage.)

The EU decided within a day to refer the issue to the WTO for arbitration. Moreover, it also decided to defend its interests by imposing tariffs on 316 US products, estimated at around $2 billion. This would hurt the steel constituencies and neutralise the political gains Bush sought to derive by his steel policy.

There are truly wider implications as well. An article in Financial Times (March 18) raised the larger question of the future US-EU strategic relationship and the links between economic and political co-operation. "The recent decision of the US to impose punitive tariffs on steel is not only illegal, hugely damaging and inexcusably protectionist, it also threatens wider EU-US co-operation..." An immediate victim may well be the WTO itself and the course of a number of issues envisaged in Doha.

(Concluded)

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

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