US STEEL TARIFFS: Conference Call Transcript
Analysis
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align=justify> David Taylor (Chair), John Croome, Jonathan Lipkin, Albert Scardino
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David Taylor : Good afternoon and welcome to Oxford Analytica's Open Conference Call. My name is David Taylor. I am the Deputy Editor at Oxford Analytica . Today we shall be looking at the US's decision last week to impose tariffs on most steel imports. We shall break the issue down into three broad categories:
the domestic politics behind the decision;
WTO implications and the likely responses of those states affected, most notably the EU; and
the wider effect on EU-US relations.
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The hour-long conference call will start with brief presentations by the three members of our panel. We shall then go into a question and answer session that will last for up to 45 minutes and during which we will be happy to discuss any aspects of the issue that you may wish to raise with us.
Before we start, let me introduce our panel members. John Croome is a consultant on trade policy matters. John had a long and distinguished career working with the GATT and WTO. He will be talking mainly about trade policy aspects. Dr Jonathan Lipkin is the West Europe Analyst at Oxford Analytica and a specialist in West European politics and EU affairs. Albert Scardino is a distinguished and experienced journalist and businessman who lectures widely in Europe on American presidential politics and American social and business trends.
Firstly I would like to call on John Croome to give us his introductory remarks.
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align=justify> John Croome : Thank you. I shall focus on what the trade rules stipulate and likely developments in the WTO. Let us firstly clarify the US measures. Nine categories of steel products are being hit, with additional tariffs ranging from 8-30 %. Although this represents less than the 40 % of what the industry was asking for, in several cases it is higher than the International Trade Commission (ITC) proposed. The tariffs will be reduced in the second and third years of application of the safeguards, after which they will be abolished. Imports from Canada and Mexico escape the tariff and so do most imports from developing countries.
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align=justify> The tariffs are being applied under the WTO safeguard rules. They are the safety valves that give an industry under pressure from imports, time to restructure -- regardless of unfair pricing of imports, subsidies or dumping. The United States has often acted against dumped or subsidised imports, but this time it has reacted in a different manner. Under the WTO rules, five elements are required before safeguard action is possible:
The government has to take evidence from all parties and then make a determination.
It must also show that imports have increased.
Thirdly, that they are causing or --as a fourth point-- threatening to cause, serious injury to the domestic industry producing like or directly competitive products. Critics are focussing on whether imports have actually increased and the answer seems to depend on the reference period you choose and also on whether imports are really the cause of the injury suffered by the integrated steel producers. Going back to the rules, the restrictions themselves should not take precedent over what is needed to prevent or remedy serious injury and help adjustment. Critics, again, are noting that the ITC did not recommend measures as tough as these. Any trade measure under the broader GATT rules should normally apply to imports from all sources. Of the two US exceptions, the one for developing countries is covered by a special rule, but that for Canada and Mexico may not be.
Fifthly, there are the rules on compensation. The country imposing safeguard measures should offer compensation substantially equivalent to the trade damage they cause. If not, the affected party can retaliate. However, retaliation is not allowed during the first three years of safeguard action, provided the action was taken because of an absolute increase in imports and the country taking it has followed the rules. An EU request for compensation has already been refused.
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The other relevant WTO rules are those on dispute settlement. The EU has started the dispute settlement ball rolling. The procedures are long and complicated, but they do set deadlines that cannot be blocked by one party to the dispute. Assuming that this one goes the full distance, starting from the request just made and ending with a judgment after appeal, the process should take about one year. The EU claims it will suffer about two billion US dollars in trade damage. It has no right to retaliate until the measures are found to have been unjustified. However, it so happens that a WTO panel is about to fix the amount of retaliation that the EU could impose immediately on the United States for injury caused by the Foreign Sales Corporation (FSC) tax regime. The figure is likely to be of very much the same order of magnitude as the EU claim on steel.
There is also the question of whether this dispute will affect multilateral trade negotiations and, particularly, the new Doha Round. It is difficult to hazard an answer. The round has barely been launched. Robert Zoellick, the US Trade Representative, argues that the steel measures should strengthen domestic support for the grant of negotiating authority to President Bush, both for the Doha Round and for the free trade area of the Americas. Other countries will be discouraged by this demonstration of the clout of US protectionist interests. There is also the question of what will happen to the efforts in the OECD to limit steel subsidies and reduce production capacity worldwide.
David Taylor : Thank you very much, John. John's introduction has suggested that the main affected party is the EU and I should like to turn next to Jonathan Lipkin to address one or two remarks on the question of the impact of the US tariffs on wider EU-US relations.
Jonathan Lipkin : I would like to make a few remarks about the broader state of EU-US relations at this time and the effect that the steel dispute may have on them. I would start by making what is perhaps rather an obvious point in the context of increasing speculation of an impending trade war between the US and EU, the steel dispute and the controversy over the FSC ruling.
The EU has absolutely no interest in escalation and has been very insistent on the fact that it will pursue its case through international bodies, namely the WTO. The US-EU trading relationship is the most important in the world. It accounted for about 450 billion euros (370 billion US dollars) of trade in 2000. EU exports to the US represent about 25% of total EU exports. The FDI relationship is extremely important. So the EU does not want this to escalate out of control and in that respect, as John Croome said, while it is very difficult to speculate too far ahead about what the implications are likely to be, a trade war is in nobody's interest and certainly not in that of the EU.
What does bother the EU immensely, however, is the impression that the steel decision has a lot to do with growing unilateralist trends in the US -- a tendency to look inwards, to be guided by domestic policy considerations and to be perhaps the less credible partner in international fora. The EU concerns about unilateralism are not new. In some respects since the end of the Cold War, European governments have been aware that the relationship between Europe and the United States has changed for good. In some respects, this is a positive development for the EU because it allows it, potentially at least, a greater role on the international scene. At the same time, given the US's political security and economic clout on the international scene, the Europeans are also very keen that the US should not turn away from Europe and from international affairs in general.
The advent of the Bush administration caused alarm bells to ring in Europe and those alarm bells rang particularly loudly on the occasion of Bush's declaration regarding the Kyoto protocol, to his stance on the ABM treaty and to his view of the international criminal court. There is quite a long list of issues that have worried the Europeans and in some sense steel comes at the end of this. September 11 offered the EU a hope that the US would act in a more multilateralist way. The immediate US response to September 11 suggested that perhaps European concerns about the Bush administration were slightly misplaced. However, certainly as we move towards what was previously phase three of the campaign against terrorism -- that is to say, action against states that are believed to be involved in missile proliferation and particularly Iraq -- European governments are becoming increasingly uneasy. Suddenly the trade and security issues and wider concerns are somehow coalescing in a sentiment that Bush is unilateralist and that this is detrimental for EU-US relations.
To finish, I would like to refer to a speech that the European Trade Commissioner, Pascal Lamy, made yesterday to the European Parliament. His speech was striking in terms of how it focussed upon the link made between steel and the wider concerns. Having addressed the European Parliament about the steel issue, he went on to state that the hopes of Europeans and the international community subsequent to the events of September 11 had been disappointed. Mr Lamy made specific references to the international court, the ABM treaty and the Kyoto protocol. His speech reflects thinking within the Commission and within many European governments more generally that all is not well with EU-US relations. How this pans out remains to be seen. As I said, I do not believe at this point that we are on the verge of a major escalation. The US and EU have been very good at managing their trade disputes in the past and let us not forget that there have been many economic disputes in the past decade, albeit not perhaps on the economic scale of steel. I would not be too pessimistic and I would caution against the more alarmist views.
That said, a worst case scenario would be one in which the international security climate deteriorates in terms of a US led assault on Iraq, coinciding with the continuation of FSC/steel disputes. In essence everything rolls into a single confrontation between the EU and the US. However, this is the least likely, least plausible scenario and I would not be too pessimistic.
David Taylor : Thanks Jonathan. Lastly I would like to turn to Albert Scardino. Albert, we have heard about some of the damage that this decision seems to be causing to the US in the international arena. Presumably there must have been some very strong reasons behind the decision to impose tariffs on steel.
Albert Scardino : What is going on here is not so much a concern about international relations or a desire to act unilaterally. There is a very strong case for this decision being exclusively concerned with domestic politics. In particular, this is an election year for the United States House and the United States Senate, and for many of the state legislatures and gubernatorial seats in states where there is an almost even division between Democrats and Republicans.
The members of the United Steelworkers Union and the Coal Miners Union, who are involved in the supply of fuel for steel making, and the Autoworkers Union, who are dependent on steel as an important component of their work, are voters who generally were very strong supporters of Al Gore in the 2000 presidential campaign. They have been the margin of victory or defeat for the Democrats or Republicans in such States as West Virginia, Virginia, Kentucky, Ohio, Illinois, Pennsylvania and to a lesser extent, Michigan. The states that straddle the Appalachian Mountains from Pennsylvania to Virginia and Kentucky are those where the Republican Party badly needs to win House and Senate seats in order to have any hope of controlling Congress in the next two years of the Bush administration.
The ability to manipulate union members into voting Republican is the driving force behind the choice of tariffs on steel, particularly given that the safeguards expire in three years, which just happens to be the year after the next presidential election. One can interpret this as almost purely a domestic political decision process intended to protect against any domestic political damage on states that border Canada and Mexico. The exemption of the developing world from these kinds of safeguards in order to attract American voters from the developing world is another important factor behind the decision. It would be very difficult to design a political strategy for an election year that would be more helpful than this particular set of decisions. It does not seem to affect many people who have much of a domestic political constituency.
The success of this strategy can be measured in the pattern of internal polling conducted by both the Democratic and Republican parties. They have performed very detailed polling in states where voting will begin as early as June for the political primaries. The level of emotion attached to this issue, at a time when the domestic economy is thought --at least at the consumer level-- to be still in recession, is a better source of information than any analysis found in the popular press or in academic studies. This will be at the top of the agenda of most primary voters in the current environment and will be over the next three months. Despite Bush's strong personal popularity rating that strength has not been translated into strength for party candidates at the Congressional level.
I think there is a very strong case to be made about the significance of this decision as one that does not really consider the relevance of international reaction and instead is designed to consider the response of voters in the Appalachian States.
David Taylor : Thank you, Albert. You have made a very clear case there and I would be interested to hear if any of our callers want to take issue with that analysis. It is now time to start our question and answer session and I hope that there will be plenty of questions.
I will kick off the question and answer session with one for John Croome. John, at the end of your presentation, you talked briefly about the effect on the wider WTO Doha trade round and on multilateral trade negotiations generally. Would you like to elaborate briefly on what you think the impact of this decision will be in the broader international trade environment?
John Croome : My feeling is that it is not going to be all that great. The Doha Round is a very long call. It has barely commenced at this stage. We are a very long way from any kind of bargaining. I suspect that the steel issue will have been largely forgotten as we get to a more difficult stage in the round. At the moment, there are two big elements of the negotiations which have been going for 18 months or more on agriculture and on services, but in both cases all that has been happening is that the participants have been setting out their agendas.
On the other subjects that have been added by the Doha Round, we have negotiations on tariffs and on some of the GATT rules, particularly on anti-dumping, which have not even started. There are yet other elements in the negotiations --investment, competition and several other issues-- which will not start until the autumn of next year, so there is nothing immediate over which parties can sensibly walk out on. The major point is that the fundamental trade interests of the participants are not changed by what has happened. It is perhaps a blow to confidence, but I would not think it goes very much further.
A further point is that the United States was not keen on these negotiations. It is in the favourable position that if a party walked out, it would not be terribly hurt, except perhaps on services, so I do not see that as a problem. A further aspect is that help to the developing countries, while no doubt to a large extent rhetoric, is at the core of these new negotiations and politically it would not look very good if the round were to flounder simply because of disagreements over tariffs on steel that are principally between developed countries.
Client : I am interested to have your opinion on the impact of the steel tariffs on other industries in the United States. From the Swedish point of view, where we have a lot of steel exports, they normally do not believe that their customers in the United States will change suppliers, because it is very difficult to do that in the short term. But that means that the industries importing different kinds of high quality steel will have to pay a much higher price. Those industries will, as I understand it, be hit to some extent compared to competitors in other countries. Do you have any idea of the impact, because we are talking here about 30% steel tariffs?
Albert Scardino : The industries in which the kind of steel involved would be used will see an increase in the price of the steel component. However, in terms of consumer prices, any increase will be much more modest and there is not much hint here that other prices will rise sharply as a result. It is hard to say what the impact on industries will be. I think there is a dramatic increase in capacity of mini-mills coming on line shortly and that will help moderate overall steel prices and will not help such companies as Bethlehem and Weirton and other traditional integrated steel makers. However, I am not sure how much more widely it will be felt beyond steel. I agree with you that there will not be very much change in the short term.
John Croome : I do not think I have much to add to that. It is my impression that the most obvious effect will be to shift the pain onto the suppliers outside the United States, to ease the pain on the integrated mills and to hand most of the benefits to the mini-mills.
David Taylor : Do you agree with that?
Client : I am not sure exactly because as I understand from my contacts with the Swedish steel industries, they do not believe that they will lose any sales because there is no alternative. For instance, the steel for the manufacturing of ball bearings, which is high quality steel, will be hit by 30% tariffs. That means, of course, that production of ball bearings will be less competitive in the United States and so on and this will be the case in a lot of different industries. How important it is to the end price is difficult to say, but it is very negative for other American industries that have competitors in Europe and Japan. Have you heard any reaction from American industries importing steel? They should be very negative about these measures.
Albert Scardino : I think what you find controlling the public discourse on this issue are the spokesmen for the unions and not so much the spokesmen for the manufacturers. I am not at all sure that the manufacturers played a very big role in stimulating the imposition of the tariffs. They were mostly working at the encouragement of their employees. The unions have been celebrating this as a great triumph for the American worker and that has drowned out any other concerns that may have come from manufacturers. About 15% of the American workforce is unionised these days and they are heavily represented in the states straddling the Appalachians. The unionised workforce are very well organised and provide an important political margin, because they are the ones who get out to vote on election day. I think that discussion is going to be dominated by those voices and not by other manufacturing sectors that may be hurt.
David Taylor : The steel industry itself then was not prominent in the lobbying that went into the decision?
Albert Scardino : Yes they were, but the letters were not written by the presidents of the companies. They were written by the workforce representatives.
Client : The question concerns Korea, Russia and Brazil, in particular. I have seen reports in the local media there that they are very irate and they expect to see a drop of 56% in revenue because of the tariffs. Other sources really downplay this entirely, so I am looking for a balanced middle ground on the Brazil issue. Also with respect to Korea and Russia, what do you expect the impact to be?
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John Croome : Brazil had to be hit to some extent because the safeguard rules allow the exemption of developing countries, if they are not supplying more than 3% of the imports of a given product. Brazil was well over the mark on this. There are in fact seven developing countries that are to be hit by these measures.
In the case of Brazil, what is called a tariff rate quota has been established by the United States and within this quota, which is supposed to bear some resemblance to the recent level of Brazilian exports of slab, there will be no additional tariff. It is only if you go beyond that. Brazil is complaining that the tariff rate quota is not as big as it should be. The other countries that have been hit to a certain extent are India, Moldova, Romania, Thailand, Turkey and Venezuela.
As far as Korea is concerned, although it is showing considerable indignation it is known as one of the countries that has been contributing to a very large quantity of surplus steel capacity in the world. I suspect that the Koreans are not going to be able to do very much, except to ally themselves with the EU.
Russia is in a different position because it is not a WTO member and in fact the United States could, under the rules, hit Russia as hard as it likes. The fact that it has not been hit harder has to be attributed to political considerations.
Client : With respect to Brazil, the local reaction was absolutely enormous and I have tried to gauge where those superlative numbers come from that 56% drop. With respect to Korea, all I have seen is that they might be considering whether or not to lodge a complaint, but they have not actually said that they are going to do so. That more than answers my question. Thank you.
John Croome : I could add one point on Brazil, which is simply that the European reaction of 'here we go with US unilateralism again' is shared very much by Brazil and particularly in the context of the US desire to have a free trade agreement for the Americas as a whole, on which Brazil is not enthusiastic. This is quite a serious set back to US ambitions for that free trade area.
David Taylor : Picking up on one point that you mentioned during the course of that answer about world excess steel capacity, is this going to have some effect on efforts to manage or deal with over-capacity?
John Croome : There was a deal in the OECD last December, which considered that countries participating would try to cut, roughly 100,000 tonnes off world annual steel capacity. A great deal of scepticism was expressed about whether this would in fact happen and how much effect it would have. At the same time, the EU hinted that the deal would be off if the US did precisely what has now happened in the way of direct restrictions by additional tariffs on imports into the US market. If people live up to the kind of statements they were making in December, one would expect the agreement in the OECD to fall apart. On the other hand it could be taken entirely the opposite way, with the reaction being 'the Americans have shown they really mean it. Perhaps we had better do something about reducing capacity and subsidisation.'
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David Taylor : I would like to put a question to Albert. You painted a pretty bleak picture of the US decision-making, with almost exclusive focus on domestic political considerations. If it is indeed the case that there are risks presumably from the growing trend towards protectionism as parties take retaliatory or other safeguard measures of their own, do you not think that the Bush administration was aware of the possible effects on the fragile global economic recovery? Before the Doha Round, I seem to remember that there was concern that the Doha Round should be launched precisely in order to arrest the recession and perhaps now to firmly establish a fragile recovery.
Albert Scardino : I think it is very clear that the Bush administration's priorities are to win control of Congress. Without control of Congress, it does not matter what the President's trade policy is, he is going to have a very difficult time seeking approval for his policies and for his appointees from the Senate. The principle issue that will surround almost all White House decision-making over the next seven months or so is whether or not there will be an opportunity to regain control of the Senate and to retain control of the House. There is the other state level issue of whether the Republicans will be able to withstand the growing Democratic ability to match their campaigning techniques. The Democrats are showing a greater ability to campaign at the State and national level outside of Presidential races, and have recently won governorships in such states as Virginia that have been Republican for a long time. It is no accident that this policy will be perceived to be of some assistance to the coal mining regions in Western Virginia which supply the steel industry very heavily.
It is going to be very difficult to draw the attention of the White House on such issues as international trade and international trade policy until after November when the control of Congress will have been decided. Once that is past, the question of which part of the Bush administration has the President's ear will also need to be considered. If it is Colin Powell's part of the administration that the President is listening to, increasing sensitivity to trade issues and to reaction in such places as Brazil, Thailand and Korea will arise. If it is the Karl Rove part (Bush's domestic political adviser) the White House will focus on how, even after the election, to prepare for the 2004 presidential election campaign. International affairs will take the back seat as they took in the first six months of the Bush administration.
David Taylor : I would like to thank our panel and also those of you who asked questions for your contribution to our discussion this afternoon. I should like to remind you that tape recordings and written transcripts of the call are available and that if you would like one, please tell your normal point of contact in our Business Development Team. If you feel that any of the issues we have discussed this afternoon require more in depth analysis, again speak to your contact in the Business Development Team. I should mention, finally, in case you have not read it, that we put out a piece in the Oxford Analytica Daily Brief on 8 March on this subject.
In closing, I hope that you will join us for our next conference call and encourage you to let us have any ideas that you may have for subjects for that. In the meantime, goodbye and thank you for joining us today.