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US steel tariffs spark global concern

The move by President Bush to impose massive tariffs on steel imports to protect the ailing US steel industry is one more glaring example of the gaping chasm between the rhetoric and reality of the US governments commitment to free trade.

Martin Khor


THE most stunning news on the economic front in early March was the imposition by the United States of tariffs of up to 30% on steel products.

The move raised serious concerns around the world, as the US and other developed countries have for decades campaigned that developing countries  open their markets to free trade, on the ground that this is undoubtedly good for them.

Under this theory, free trade and cheaper imports will force local industries to be more efficient.  Otherwise, the inefficient industries will close down and the retrenched workers will move to more efficient sectors.  In any case, the consumers will benefit.

In many developing countries, especially in Africa, lower tariffs led to a surge of imports that overwhelmed the local products and caused many local firms to close.  These countries did not have the capacity to switch to other sectors, nor could they attract enough foreign investments to push their industrial process forward.

They complained that the theory was not working for them, and asked for the pressures of further liberalisation to be lifted from them, as their local firms needed more time to be competitive.  However, it was to no avail. 

The developed countries, backed by the International Monetary Fund, the World Bank and the World Trade Organisation, told them to stick to the course of free trade, keep reducing their tariffs, and suffer the pain a little more, if need be.

After more than a generation of such suffering, many of these countries have still not recovered.  Instead, more industries have closed.  Yet they continue to be told to keep their tariffs low.

It is thus with some bewilderment and disillusionment that people around the world read the news that the US administration decided to raise tariffs very significantly to protect the countrys ailing steel industry.

A 30% tariff will be imposed on flat-rolled steel, tin mill and hot-rolled cold-finished bars for the first year.  This will decline to 24% and 18% in the second and third years.  Flat-rolled steel accounts for more than half the value of steel imports into the US.

For rebars, welded tubular, stainless rods and bars, the tariff will be 15% for the first year, and 12% and 9% in subsequent years.  An 8% tariff will be imposed for three years on stainless wire. For steel slabs, 5.4 million tons will be allowed duty-free, with a 30% tariff imposed above that level.

Analysts have described these not only as the most comprehensive trade protection in the history of US steel, but also as the biggest protectionist measure in the US since the Second World War.

The policy was adopted to appease the US steel industry which has been declining due to its uncompetitiveness;  31 companies have closed in recent years. 

Former President Bill Clinton had resisted pressures from the steel industry and workers to impose protectionist measures, but President George Bush is seen to have given in as part of the campaign to win seats in the Congressional elections later this year, especially in steel-producing states such as Pennsylvania, Ohio and West Virginia.

The administration also says it needs this measure to win over the public and Congress to the argument that free trade does not have adverse effects, so that it can secure fast-track authority for future trade negotiations.

Hypocrisy

However valid these arguments may be in terms of US domestic politics, people in other countries can be expected to consider the protectionist measure to be hypocritical, especially as it is made by a country that is proclaimed as the worlds free-trade leader.

If the worlds strongest economy requires such high protection for its steel industry, then what right would it have to ask much weaker economies to lift their tariffs?   The latter have much sounder grounds to protect their small and weak industries from cheap imports.

If domestic political realities can cause the US (the worlds most politically powerful and stable nation) to veer away from free trade, then what right would it have in future to insist that developing countries (which have much more fragile political systems and realities) keep liberalising their import regimes, even if this were to cause political turbulence? 

The developing countries can be expected to argue that if the US cannot stand the pain of undergoing the decline of one industry and a few hundred thousand jobs, how can they be expected to endure the far greater suffering of having large sections of their entire economy go under, with the loss of many millions of jobs?

Moreover, if the US is entitled to protect its weak industries in order for its Presidents party to win a few Congressional seats, or for the government to persuade the public that free trade is not so damaging, then arent the far weaker developing economies entitled to protect their industrial, agricultural or service sectors (at least for the time required for them to become more competitive) in order to avoid widespread social chaos, or to persuade their public that free trade is not so devastating?

These questions are bound to arise, in the context of the heated debate on the merits and demerits of trade liberalisation in particular and globalisation in general.

Not all the steel-exporting countries will be hit equally by the US measure.  Canada and Mexico are exempted, and Brazil, Argentina and Turkey will also be mainly let off.  Worst affected will be Europe, Japan, South Korea, China and Taiwan.

There can be direct and indirect effects.  Firstly, the exporters will lose some of their present market in the US.  Secondly, some of the steel that would otherwise go to the US could now move to other countries where a rise in imports could also cause problems.

The affected countries have angrily attacked the US move. The European Trade Commissioner Pascal Lamy said the US decision to go down the protectionist route is a major setback for the world trade system;  Japanese officials warned of retaliation that could include excluding US products; and Chinas Foreign Trade Ministry stated the US decision will have severe impact on normal exports and cause tremendous losses.

The US says that its measures are justified as it is allowed by WTO rules to safeguard a local industry from imports. However, the European Union, possibly backed by other affected countries, have challenged the legality of the US move in the WTOs dispute settlement system.

According to a Financial Times report: The EU believes it has a watertight case in the WTO, arguing that world trade rules forbid the introduction of defensive tariffs unless a country has suffered a sudden surge in imports. US steel imports have fallen over the past three years.

Further US protectionism?

Another concern is whether the US action on steel will be its one and only protectionist act of its type or whether it will be extended later to other sectors.

Another Financial Times article already states that most trade analysts believe that US import protection will be limited to a handful of sensitive and powerful industries, including steel, textiles and agricultural goods.

If this is true, then it is bad news for developing countries, as textiles and agriculture are two of the most important sectors for their present and potential exports.

At present, these two sectors are heavily protected in the US as well as Europe.  The major developed countries have promised to phase out their protection of textiles by 2005 whilst negotiations on agriculture are set to preoccupy the WTO for the next several years.

If US protection of steel is a foretaste of a turnaround of US trade policy, then the protection in textiles and agriculture may continue or even heighten, and perhaps other sectors may also come under the protectionist net.

That would be bad news for the global trade system and for developing countries. Thus, the events in the US need careful monitoring.

 


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