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 Article Published in The Economic Times  14 March, 2002

Whom would US Steel Tariffs benefit ?

‘No nation was ever ruined by trade’-this 18th century maxim of Benjamin Franklin is as true today. But George Bush, a proclaimed champion of free trade believes otherwise. In order to save West Virginia steel workers, who had switched loyalties to the Republicans in last elections, Bush invoked section 201 of US Trade Act 1974, to save the $30 billion US steel industry. Tariffs on 10 items, ranging from 8 to 30% have been imposed as per recommendations of US International Trade Commission, which found injury in 12 of the 33 steel categories, due to imports. This is good news for steel makers. However consumers, auto and appliance makers, who lobbied hard against the tariffs, are set to suffer. Increased prices are nothing but a kind of a new tax, which Bush had pledged to raise only over his dead body.

There are several questions that arise. First is, whether jobs in the US steel industry can be saved at all? A study by the Consuming Industries Trade Action Coalition has concluded that tariffs on steel would lead to higher prices and loss of between 36,000 to 75,000 jobs across the economy, eight times the number of jobs saved.

US steel industry has been a victim of a larger trend in manufacturing, more and more of which is shifting to low-cost citadels like China. US share of manufacturing consisted of 50% of GDP in early 50s, but the same has shrunk to a bare 16-18% today. Steel making in US is costlier and there is no proprietary technology in possession of US R& D labs. Therefore manufacturers in China and elsewhere have an edge in pricing. Consolidation and restructuring in US steel industry is stalled due to fear of job losses. On the other hand, non-unionised low-cost mini-mills, over past 25 years, have quintupled their share of manufacturing, snatching share from the capital and labour intensive integrated steel producers, 31 of whom (since 1997), including Bethlehem Steel have sought bankruptcy protection. Even in a tough market situation, five steel companies, including Allegheny Technologies and the largest steel producer Nucor are profitable. Nucor's new plant at Indiana, with a new casting technology would greatly reduce the slab production costs.

There are other ways, which should have been explored to save the steel industry and the workers. The main problem in restructuring of the industry relates to estimated support of a budget of $12 billion, to defray the cost of workers who would be laid off and for funding the retirement and medical benefits. Pension Benefit Guarantee Corporation can help workers when employers go bust. Trade adjustment assistance can help to retrain workers who lost their jobs. However Tax-credits or subsidies could make health insurance affordable for laid-off workers, not eligible for Medicare.

The unilateral action by the US will have an adverse impact on open and fair trade. A new trade war at WTO is likely to emerge between its trade partners and the US. EU has threatened for a retaliatory action on all imports from US. Other disputes would surely escalate; from US unlawful tax subsidies to Europe's unwillingness to admit American genetically modified foods. Japan, Taiwan, Korea, China and others are none too happy. US has not proved that imports were going up and damaging the local industry. In fact import figures suggest that imports have come down from 39.7 mt in 1998, to 30 mt last year. The total damage to international trade would go much deeper, since US took a keen interest in pushing for a fresh trade round at Doha, which brought hopes for substantial liberalization in world trade, both in manufacturing and services. It was hoped that expanding trade would enhance global prosperity. But the US action is a definite set back to the entire process. The diplomatic victory of Doha achieved through skillful negotiations is now under serious threat. Developing countries may now adopt a stiff posture in the trade negotiations and the results of Doha round may hang in balance.

Who would benefit the most from Bush's action? Benefits to the US Steel Industry would be limited, due to strong dollar and for the fact that one-third of all imports come from the NAFTA trade partners, exempted from the tariffs. China must be having the last laugh, since US producers of appliances have declared moving out to low-cost locations. Well Toyotas and Hondas from Japan also must be happy as they see their US counterparts reeling under higher prices for their cars, in a situation where margins are already squeezed. Thankfully Indian steel industry has got a reprieve, since it has been exempted from the new levy except on carbon flanges.


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