Makings of a trade war

The U.S. curbs on import of steel into the country constitute the first major threat to the World Trade Organisation regime. The move, coupled with resistance to it from the U.S.' trading partners, spells competitive protectionism.

WHEN President George Bush announced on March 5 that the United States would impose tariffs of up to 30 per cent on imports of steel, the decision was not entirely unexpected. The U.S. steel industry had been lobbying heavily for even sharper tariff increases, of up to 40 per cent, and a decision on its demands was to be made in the first week of March.

This follows very depressed conditions in the world steel industry over the past two years, and especially in the U.S., which has witnessed a wave of bankruptcies and closures among steel companies. In fact, one major steel company - the Indiana-based National Steel - filed for Chapter 11 bankruptcy protection just the day after the new import tariffs were imposed, making it the 14th such U.S.-based steel company in three years.

U.S. steel industry lobbyists have blamed imports for the downward pressure on steel prices in the domestic markets, leading to falling profit margins. They have pointed the finger at what they say is subsidised production in other countries, especially Japan, Russia and South Korea, all of which are net exporters of steel.

The U.S. government decision goes a significant part of the way in meeting the domestic industry's demands. Flat-rolled steel, which accounts for more than half the value of all steel imported into the U.S., will face tariffs averaging 25 per cent. Most other smaller steel products will face tariffs between 20 and 30 per cent.

It turns out that only a handful of countries will bear the brunt of the U.S. measures. Canada and Mexico will be excluded because they are part of the North American Free Trade Agreement (NAFTA). Several developing countries will be left out because of trade rules that exempt developing country producers. So the European Union, Japan, Brazil, South Korea and other countries will face most of the impact.

Predictably, the U.S. decision has come in for major criticism from its trading partners, and particularly those who are most affected. The E.U.'s response thus far has been the most strident. The European Union Trade Commissioner, Pascal Lamy, accused President Bush of putting domestic politics before international legal commitments by imposing the tariffs. "When the U.S. is caught between domestic pressure and respecting its international commitments, the former prevails."

The E.U. has estimated that this measure would affect E.U. exports worth between $2billion (Euro2.3billion) and $2.5billion. But even more than this, European steel makers have expressed fears that such constraints on steel entering the U.S. could divert supplies of the metal to Europe, thereby harming the profitability of the local industry.

The E.U. has declared that it will work with other steel producers, including China, Japan and South Korea, in an immediate challenge against the U.S. in the World Trade Organisation (WTO). It claims that the U.S. move violates at least nine WTO provisions, and that the U.S. is not eligible for "safeguard clauses" because steel imports into the U.S. have actually been falling for three years now. Therefore E.U. will demand compensation for lost trade along lines laid out in the WTO guidelines.

But this is likely to do very little in the short term. WTO dispute panels typically take more than a year to arrive at a ruling, and even compensation would take months to come into effect. This has prompted the E.U. to threaten to introduce its own tariffs against an expected surge in imports. The decision on this is expected after a Commission meeting on March 12.

This suggests that the beginnings of a trade war sparked by such retaliatory moves may not be far off. Currently the major importers of steel in the world are the U.S. (23.5 million tonnes) and China (25.1 million tonnes). China in fact is also the world's largest producer but requires even more steel for its rapidly growing industries. The E.U. is currently a net exporter (to the tune of around 3.8 million tonnes) but it could easily turn into a net importer, which is the fear of the European steel producers.

Meanwhile, large exporters like the countries of the former Soviet Union (which currently export more than 53 million tonnes) and even South Korea desperately need these exports to shore up their fragile balance of payments. It is likely that they would indeed try to divert such exports to other parts of the world, leading to protectionist pressures elsewhere in response.

All this looks suspiciously like the start of the type of competitive protectionism that has traditionally accompanied international economic recession. It is interesting, if ironic, that this first major threat to the WTO regime in this century should have come not from the developing countries who have suffered the most from it, but from the very developed countries which have been most eager to use the WTO to further their own economic interests.