Case Study - The Politics Of Trade In Steel

Case Study: The Politics of Trade in Steel

Do you believe the Bush administration was correct in imposing tariffs in March 2002 on a wide range of steel imports?

At the time President Bush decided to impose temporary tariffs on steel imports, 16 steel manufacturers were operating under bankruptcy and a total of 30 had declared bankruptcy over the prior few years. U.S. steel producers were losing market share to foreign steelmakers in large part due to subsidies and other trade issues. Bush and his Cabinet chose to implement the tariffs because of "the need to speed up negotiations to reduce the world's huge overcapacity in steel production" (Editors BW Online, 2002, para. 5).The tariffs were the largest trade-protection grant since President Regan had taken similar steps to shore up the steel industry. President Clinton had ordered a study that was done in 2000 with the resulting information "the U.S. [steel] industry was the victim of foreign subsidies and other unfair trade practices" (Editors BW Online, para.7) . Commerce Secretary Donald L. Evans noted that tariffs were needed in order to manage Europe, South Korea and Japan, who were the worst in regard to excess capacity. Conversely, White House Economic Adviser, Lawrence B. Lindley, cautioned that raising tariffs would only make U.S. manufacturers less competitive because it would raise prices, and Secretary of State Colin Powell noted that this move would alienate coalition partners of the war on terrorism.

The EU retaliated on March 27, 2002, by imposing similar tariffs on steel imports to attempt to prevent a flood of steel imports into the EU. EU President Romano Prodi urged President Bush not to proceed with his "protectionist measures" (Editors CNN.com, 2002).

Intended to last for three years, President Bush ended the tariffs on December 4, 2003, one month after the World Trade Organization's court declared the tariffs to be a violation of global trade laws. U.S. trade Representative, Robert Zoelleck declared the tariffs had accomplished their mission and President Bush noted that "Productivity is high, business investment is rising ... the economic stimulus package ... is working" (Lehrer, 2003, para. 7). Zoelleck noted that during the tariff period the steel industry was provided the time it needed to restructure operations so as to "make the industry more competitive" (Lehrer, para. 9). However, statistics show that during the tariff period of 21 months, both production and employment in the U.S. steel industry continued to decline. The American Iron and Steel Institute and the International Iron and Steel Institute reported that "U.S. production was down 6.7% between October 2002 and October 2003, despite the increased tariffs" (Ackman-1, 2003, para. 7). Despite the fact that steel imports were down, which was one of the goals of the tariffs, "In September 2003, U.S. Steel production was down ... 15% [from] September 2002" (Ackman-2, 2003, para. 4).

Was President Bush correct in implementing the tariffs? I believe it was the only action he could have taken under the circumstances. He had to do something to give the U.S. steel industry the opportunity, however slim, to revive itself. Even though the move incensed the international market, Bush was primarily accountable to U.S. interests and steel had been a staple of the U.S. economy for many years. Unfortunately, I believe the respite was too little, too late and I personally attribute much of the problem to the actions and dominance of union control in the U.S. steel industry. As the WTO noted, "the decline in the U.S. steel industry is a decades-long phenomenon" (Ackman-2, 2003, para. 5).

Who are the main beneficiaries of protective tariffs such as those imposed on steel imports? Who are the losers?

As far back as the 1800s, "Tariff revenues were the main source of revenue to the federal government" (Editors EcEdWeb, 2006, para. 1). This remains important today, as Hill notes "While the principal objective of most tariffs is to protect domestic producers and employees against foreign competition, they also raise revenue for the government" (Hill, 2004, p. 181). Additionally, high protective tariffs reduce competition and allow for the creation of large business trusts, so big business is also a beneficiary of protective tariffs. Conversely, both consumers and businesses are losers when protective tariffs are enacted. The price of consumer goods goes up because the cost of producing them increases when businesses lose the advantage of cheaper imports.

Does the World Trade Organization in this case represent a loss of U.S. national sovereignty? Why do you think the WTO sided with the European Union?

I do not think the WTO represented a loss of U.S. national sovereignty in this instance. Rather, I believe it represents a level of global cooperation in trade. President Bush and his advisers had to know what the reaction would be from the WTO and other countries as well. However, Bush had to respond to interests in the U.S. that were both politically and economically critical. I believe he gambled on the fact that it would take the WTO some time to reach concurrence on a position and actions to be taken. This would give him time for the tariffs to try and shore up the declining steel industry in the U.S, or at least provide the impression that he was doing his best for the steel industry. It seems to me that the WTO was siding not specifically with the EU, but taking a position relative to global trading, which is the whole purpose of the WTO. Note the following from the Business Roundtable:

80% of the global economy is outside of the United States

Exports = more than 25% of U.S. economic growth in past decade

10% of U.S. jobs depend on exports

10% increase in U.S. exports results in a 6.9% increase in U.S. employment

The United States has prevailed in 44 of the 47 cases it filed under the WTO (Editors, Business Roundtable, 2006). Obviously the U.S. benefits from global trade by cooperating with the WTO.

If all tariffs on international trade in steel were removed, and subsidies to steel exporters around the world were banned, who would this benefit? Who would lose from such action?

Under economic theory, if all tariffs on international trade in steel were removed and subsidies to steel exporters were banned, the market should drive the success or failure of all steel producers. Those producers who could provide the best value at the lowest cost would survive and those who could not