US Steel Tariffs - Essay Example

Order No: 187868 Topic US Steel Tariffs Prepared by Dr. Zulfiquar Ahmed ID: 10131 01-11-2007 Order No: 187868 Topic: US steel tariffs Questions: 1. Critically evaluate the reasons put forward by the USA government as to why it imposed tariffs on steel imports in 2002 Can Protectionist measures ever be justified on economic grounds The USA adopted safeguard measures for declining revenues and rising losses on imports of certain steel products on 5 March 2002, in the form of additional tariffs ranging from 8, 13, 15 and up to 30% for a 3-year period starting on 20 March 2002. Over half the steel mills have filed for bankruptcy. In 2001, US Steel lost $62 per every domestically produced ton. US Steel, the largest American producer, now that LTV, National Steel, and Bethlehem Steel went bust. US Steel Kosice (USSK) made a profit of $55 per ton. USSK plans to purchase still mills in the Czech Republic as well. (Vaknin, 2004). To remedy the situation and the strengthening the domestic steel sector by decreasing imports of cheaper steel and therefore shielding domestic steel producers from foreign competition. The US argued that under the World Trade Organization (WTO) agreements safeguard measures are acceptable if the domestic industry is severely harmed by the cheaper imports and if these measures are limited to a timeframe of less than four years. The government hopes the industry will take advantage of the break to modernize and become more efficient. The history of the industry, however, sheds doubt on the industry's ability to overcome past inefficiencies (Abboushi, 2006). In March 2002, Bush imposed tariffs of up to 30 percent in the first year of the new regime on $8 billion of steel imports, mainly from Europe, South Korea, and Japan. This is about one tenth of the global market. The tariffs were scheduled to decline to 24 percent in the second year and 18 percent in the third. Both Europe and Japan are challenging these measures in the WTO (Vaknin, 2004). The optimal tariff maximizes welfare of a large trading country that acts like a monopoly in trade. It is based on the naive assumption that trading partners do not retaliate. It is arguing that US could gain from a tariff if its trading partners do not retaliate. Economists are not arguing that US should restrict imports for this reason. Maximize U[y1 + z1,y2 + z2], subject to F(y1,y2,L,K) = 0. Figure 1 Use Steel trade indifference curves. z2 Optimal Tariff: to = 1/(* - 1), where * = - (z*1/p*1)(p*1/ z*1) is the price elasticity of foreign import demand. For the above reasons, on June 5, 2001, President Bush announced his optimal tariff comprehensive initiative to address the challenges facing the U.S. steel industry. But The American Institute for International Steel (AIIS) opposes the tariffs. Steel distributors largely support President G.W. Bush's decision to impose the tariffs because they expect it to stabilize the market for their suppliers and help financially-struggling mills regain liquidity. Can Protectionist measures ever be justified on economic grounds There is a classic case to suicidal protectionism of the recent steel quarrel between the USA and the EU. American steel producers ended up imposing quotas and tariffs on manufacturers they have only recently purchased in central and Eastern Europe (Vaknin, 2004). This argument has never been used by protectionists. The administration has backtracked. It promised to consider more than 1000 requests to exclude up to $1 billion in steel imports from the tariffs. The gaffe-prone then US Treasury Secretary, Paul O'Neill, said that this is done in order to reduce the "shrillness" of the conversation. More likely, it is aimed to prevent the emergence of an anti-American trade coalition (Vaknin, 2004). U.S. trade policy has been facing widespread criticism around the world. The economic devastation suffered in the United States resulting from the tragedy could be ameliorated by resurgence in the U.S. steel industry. Significant indications of the crisis began to emerge in 1998 when the American steel industry saw a strong U.S. steel market severely disrupted by record levels of increased imports at low prices. To date, the American steel industry has suffered tremendously: thirty-five steel companies have filed for bankruptcy, more than fifty thousand steelworkers have lost jobs, and steel prices have remained at or below their mid-2000 levels and their historical average. Although most industry experts agree that the 1997 Asian financial crisis (along with financial turmoil in other countries) indirectly led to the recent influx of steel imports, these experts disagree as to whether existing overcapacity in the steel industry, unfair trade practices, or both are to blamer (Henry, 2003). The Figure illustrates the increase in protectionism in the US trade policy. Figure 2: the annual number of anti-dumping and countervailing duty final determinations made by the US between 1997 and 2001 in relation to the steel sector Source: Commission Regulation of imposing provisional safeguard measures against imports of certain steel products This increasingly protectionist stance adopted by the US in recent years in relation to steel led to a decrease in US steel imports of 33 percent between 1998 and 2001. In spite of all the measures taken by the US administration, the US trade policy has not been able to effectively protect the domestic steel industry. Given the effects of what some industry leaders call the most serious crisis for steel producers since the 1980, representatives from both production mills and Congress have called for action. Meanwhile, the European Union (E.U.), the American Institute for International Steel, Inc., and others condemn these actions as "protectionist" measures in order to save inefficient U.S. companies (Henry, 2003). Moreover, these protectionist initiatives have surfaced at a time when the global trading system is already under severe strain. Europe is considering up to $4 billion of counteraction against U.S. tax subsidies for exports -- a practice found illegal under the rules of the World Trade Organization (WTO) -- and is fighting Washington's new steel measures. U.S. backtracking on liberalization gives other countries an excuse to do likewise and reduces the prospects for future reduction of barriers (Bergsten, 2002). The administration should see this drumbeat of criticism as a highly desirable reminder of the costs of protectionist trade measures and the breadth of support for continued liberalization. (Bergsten, 2002). 2. What are the major Strengths and Weaknesses of the dispute settlement procedure adopted by the WTO The dispute settlement mechanism, which came into being with the World Trade Organisation (WTO) in 1995, is one of the cornerstones of the Organisation. It gives all 149 Members of the WTO confidence that the agreements negotiated and agreed will be respected. It does not impose new obligations, but it does enforce those already agreed. Indeed, the breadth of the WTO agreements gives its Dispute Settlement system a much wider jurisdiction, so that it has the power to decide whether national regulation complies with international standards not only in relation to product technical and safety requirements, but many other areas too, such as intellectual property rights, support for domestic industry and treatment of foreign investors, and even corporate taxation. This power is backed by its speedy procedures, the virtually automatic adoption as binding of its decisions, and especially the right of the winning parties to apply trade sanctions if the losing states do not fall into line. The underlying principle behind the Dispute Settlement Understanding (DSU) of the WTO is to provide Members with a clear legal framework for solving disputes which may arise in the course of implementing WTO agreements (Daniels, 2007). WTO Members, including the EU, are consistently making use of the mechanism. The system has, so far, worked well to solve very important disputes and avoiding 'trade wars'. By providing a multilateral forum for settling disputes, the mechanism guards weaker Members against unilateral action by the strongest. It is issues of concerned by the difficulties that developing countries face in participating actively in the dispute settlement system. It would be totally inappropriate for the WTO Dispute-Settlement system to become in effect an appeals court against decisions by national bodies (legislators, patent examiners, or tribunals) on the scope of IP protection. Due to its work on international trade issues and conflicts, the WTO possesses its own successful and reliable dispute settlement body, which can be used to handle international competition quarrels as well. Moreover, its competence in dealing with conflicts is very high and regarded as legitimate and fair. The WTO can take advantages of its experience at settling trade disputes and dealing with different judgments [Fox 2003. For a formal dispute settlement system to work effectively, ambitious supranational competition rules have to implement. In spite of that, the objective of incrementally approaching harmonized substantive and procedural competition laws will simplify the solution of jurisdictional conflicts [Tarullo 2000; Schoneveld 2003]. In the absence of the WTO's dispute settlement tribunals, U.S. trading partners would obstruct U.S. exports by resorting to their own "fair-trade" measures, and U.S. resentment of the trading system would be heightened. Enforceable rules offer the best hope of forestalling a tit-for-tat use of protective barriers that would further contribute to the deterioration of support for trade. In sum, and contrary to what many policymakers suppose, vigorous dispute settlement tribunals make the revival of the Doha Round more likely. And yet, despite these considerable strengths, support for the WTO and its dispute settlement system remains fragile. After a historic evolution of the disputes and their treatment by the Dispute Settlement System the Dispute Settlement procedure is critically evaluated. Then the welfare and trade effects of these trade conflicts, which can be called "mini trade wars", are quantified by simulations with a computable general equilibrium model (GTAP5) which is designed for our purpose to a 12 regions, sectors and 5 factors of productions world model. The final sections summarize the major findings and make suggestions for possible improvements of the Dispute Settlement System in general and its present sanctions mechanism in particular. The WTO DSB simply does not know the economic consequences of its retaliatory practice in all details. However, the WTO dispute settlement system does not work on its own interest, but on behalf of the complainant and defendant parties (Bronckers, 2001, p. 61). The WTO's new dispute-settlement mechanism, a crowning achievement of the 50-year drive to forge an effective rules-based trade regime, could crack under the intense pressure of a rapidly growing case load; politically sensitive cases that should be negotiated rather than litigated are proliferating (Bergsten, 2002). Whether the WTO Dispute Settlement System was more successful than the former GATT is an open question. Some (e.g. Petersmann, 2004, p. xvii) find that the WTO system was more successful than those of GATT, others questions this position. In comparing the GATT and the WTO dispute settlement systems Busch-Reinhardt (2003) conclude that the probability of a rich-country complainant to win full concession has improved unambiguously under the WTO, whereas the respective probability of a poor-country complainant has remained broadly the same under both systems. The sanctions mechanism of the Dispute Settlement System should be improved, maybe based on a mechanism of direct transfers. In so doing, it could help the WTO's Dispute-Settlement system identify the specific role appropriate to it within the broader institutions of managed interdependence' (Picciotto, 2001). Consequently, it has been argued that "the WTO dispute settlement system is not appropriate for the review of particular competition cases because of problems of sovereignty and complexity". The dispute settlement system has generally been successful in helping members resolve disputes and in obtaining compliance where violations have been found. Many cases have been settled in the consultation stage (Reinhardt, 2003). However, the WTO system remains weaker than the arbitration processes common in domestic legal systems for four major reasons: Enforcement is not automatic, precedents are not strictly binding, standing of all injured parties is not assured-only governments bring cases-and remedies are limited. The lengthy dispute settlement process is one of the major problems of the WTO. The main difficulty of the WTO, however, is that most countries, although actively engaged in and even profiting from international trade, will value their own self-interest and sovereignty in the short-term higher than any profit they might gain in the long run. This can also be seen by using the steel dispute between the EU and the US as an example, which shows that any international organization, including the WTO, is constrained by its member-states and domestic concerns and restrains. 3. What would have been the implications for the stability of the Global economy if the USA refused to comply with the WTO recommendation If the USA refused to comply with the WTO recommendation the world steel industry will become the latest subject of a global trade conflict. The main problem is that there is too much steel. Low prices based on a huge excess of production capacities are damaging especially US industry, which has to restructure. The decision to impose additional duties on imports will probably not solve the problem, but definitely will raise the level of protectionism in the world. (Czinkota, 1999). Many believe that the tariff on steel is merely the opening shot in an all-encompassing trade war. They fear a 1930's-style world depression (Vaknin, 2004). Reaction to the tariffs from U.S. trade partners has been negative. More important, American actions seem to betray America's free-trade legacy. In the formative years of the General Agreement on Tariffs and Trade -- precursor to the W.T.O. -- the United States was willing to make significant sacrifices to strengthen the free-trade system. But the United States was also the rule maker because the system was, after all, its creation (Richter, 2002). Because no official WTO estimations exist as to the possible damage we make some hypothetical assumptions in our model simulations in two steps: In the first scenario it is simulated that the impact of the safeguard measures by the US implemented at March 20, 2002 amounting to an estimated "damage" for the EU by US$ 1 billion. First, the USA increases import tariffs on steel imports from seven countries/regions (EU, EFTA, Turkey, Brazil, China, Japan and Korea; LDCs, and the NAFTA countries Canada and Mexico were exempted from the safeguard measures) resulting in additional import tariff revenues in the USA by around US$ 391 million. As the EU Commission already estimated the potential damage in the EU to amount to around US$ 1 billion less steel exports to the US market, we calibrate the US safeguard measures in order to target a US$ 1 billion steel import reduction from the EU (which amounts to 0.4% of US imports from the EU). If one accepts the procedure of implementing the steel case one can look at the welfare implications. In the second scenario it is simulated that the introduction fictional retaliatory measures by the EU amounting to an assumed US$ 1 billion. As mentioned earlier, the European Union's threat of retaliation was much higher (US$ 2.3 billion). In the "mini trade war" scenario we combine the scenarios First and Second. This results in welfare losses on both sides of the Atlantic ("shooting in their own feet"). Welfare due to allocation as well as terms of trade deteriorates in both countries. Bilateral trade would have declined by 0.6%. Real GDP is down in both countries. The simulation of the hypothetical steel "mini trade war" between the EU und the USA leads to an overall trade diversion. The exports of all countries/regions not exempted from the US steel measures EU will be redirected from the US to the EU. Besides the EU and the USA, China, Japan and Korea would have experienced welfare losses. If the steel dispute could not have been settled by December 2003 and EU's threat of retaliation amounting to 2.4 billion would have been enacted by the year 2005 this trade dispute would have escalated - after the FSC case - to the second biggest EU-US "mini trade war". The US safeguard measures had a strong impact world-wide and triggered a dangerous "domino effect": several other WTO members (including the EU in September 2002) decided to impose similar measures to avoid possible trade diversion of steel products otherwise directed to the US. In 2000 it has purchased the continent's second largest steel mill, VSZ, in Kosice, Slovakia. 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