WORLD ECONOMY: WTO ruling open way to US-EU trade war



A trade war is threatening to sweep across the Atlantic as the United States lost an appeal at the World Trade Organisation on November 10 against a July WTO dispute panel ruling that tariffs of up to 30% that US President George Bush declared in March last year on many steel imports are contrary to WTO rules.

The appellate body's ruling still awaits confirmation by the WTO's highest council, scheduled for December, following which the complainants will have the right to immediately levy retaliatory tariffs on the US. The European Union, the strongest of the victorious complainants, declared its intention to impose punitive tariffs against US imports if the US refuses to lift its steel tariffs.

Richard Mills, a spokesperson for US trade representative Robert Zoellick, said in a statement issued on November 10, "We disagree with the overall appellate body findings", but he did not hint at how Washington would respond, saying only: "We will be reviewing the WTO report carefully."

The EU action could cost the US up to US$2.2 billion worth of US exports to Europe. The EU's carefully reprisals are tailored to target industries in electorates that Bush needs to win to be re-elected president next November.

Because of the huge size of its common market, the EU has economic clout comparable to Washington and can afford to retaliate. Japan, South Korea, Brazil and China are among the other complainants, but they have not indicated what, if anything, they will do to retaliate against the US.

The EU has already won an earlier dispute at the WTO — against Washington's export-promoting tax breaks for US companies — but has yet to exercise the resulting retaliation rights. EU leaders seem to have been waiting for the steel tariff final judgement before deciding on their overall course of action.

Domestic 'revolt'

Bush's steel tariffs are designed to protect the profits of US steel companies against cheaper steel imports. But since such external competition has been restricted by the steel tariffs, US steel companies have had a freer hand to increase their profits by raising US domestic steel prices and dictating the supply terms to steel purchasers.

US steel-consuming industries' profits have suffered as a result. Particularly hard hit have been companies producing motor vehicle parts and engaged in steel fabrication. In recent months, these companies have been leading a campaign to have the steel tariffs repealed immediately rather than let them run their scheduled course until March 2005.

The anti-tariff camp was boosted by a September review of the US International Trade Commission, which found that the steel-consuming industries have so far sustained a loss of $680 million as a result of the steel tariffs. Meanwhile, as of September, $649.9 million of steel tariff revenue has been collected, which the Bush administration argues is a gain for US business.

The American Institute for International Steel disagrees. AIIS president David Phelps said the tariff revenue had come ultimately from the pockets of US steel consumers, rather than from foreign steel producers. On this basis, Phelps said the steel tariffs have inflicted a cost "in excess of $1.3 billion" on US steel consumers.

As the steel-using companies' profits have been squeezed, they have sought to maintain them by squeezing more unpaid labour out of their own workers, including by "downsizing" their work forces. According to report issued in February by the Consuming Industries Trade Action Coalition Foundation, "200,000 American lost their jobs to higher steel prices" during 2002.

These scale of these sackings was equivalent to the total number of workers employed in the US steel industry (187,500) in December 2002. According to the Washington-based CATO Institute think-tank, the number of workers in the US steel-consuming industries is 57 times those in the steel producing industry.

An electoral considerations also entered into Bush's decision to impose the steel tariffs. He is keen to ensure that he wins votes in steel producing states such as Ohio, Pennsylvania and West Virginia. In 2000, he won in West Virginia, a traditional Democrat state, by only six percentage points, and lost in Pennsylvania.

The Bush administration presented the tariffs as helping the US steel industry recover from damages inflicted by "unfair dumping" (selling below cost) of foreign steel onto the US market. But the political motivation of the tariffs became transparent in the ensuing months when a long list of exemptions was granted. US allies such as Israel, Mexico, Canada and Jordan were at the top of the exempted list, followed by Australia, which has 85% of its steel exports to the US excepted. The steel products receiving exemption also grew to 700 five months after the tariffs were imposed.

Since March 2002, the "recovery" from the March-November 2001 US recession, contrary to general expectations and unlike previous recoveries, has failed to produce gains in jobs. In fact, there has been a net reduction of 2.7 million US jobs since Bush became president. Of these, 2.5 million were in manufacturing. The job question, especially that of job losses in manufacturing, has become an increasingly hot election issue.

Little wonder the Bush administration and the US Congress worked overtime recently to scapegoat China for "stealing" US manufacturing jobs. It helps to deflect some electoral pressure, at least for a while.

To manage the conflicting interests of different sections of the US capitalist class won't be as easy. In the long term, Washington will resolve that problem by giving its highest priority to the section with the strongest clout. But things are more complicated at election time.

Bush's prospects of securing support in the key steel-using states in 2004 are by no means certain. In fact, his chances of winning in those states looks increasingly precarious if the steel tariffs continue.

Steel industry crisis

The steel-using industries weren't enjoying booming sales and fat profits even before the recent rises in steel prices. Key sectors among them, such as car manufacturing, machinery and equipment, and transportation equipment and parts production, face fierce competition domestically and from overseas.

A capitalist company's quest for higher profit can be achieved at the expense of the competitors and often by increasing the capital intensity and thus the scale of production.

In the absence of an unlimited and profitable market, this drive for increasing scale of production leads to the widespread problem of over-capacity.

Over-capacity in the steel-producing industry is particularly pronounced because of its intense use of sophisticated machinery. One trick to minimise import competition allowable under the WTO rules is to disguise protectionist measures as "safeguard actions". In 2002, steel alone accounted for almost 80% of safeguard actions initiated worldwide.

Over-capacity has plagued the steel-producing industry worldwide for decades and most governments have been subsidising their country's steel companies to help them outbid their foreign competitors. But such subsidies, in turn, are often incentives to create even more production capacity.

This problem in steel and some other industries had been partially eased by the industrialisation, albeit partial and of a subordinate character, of some underdeveloped countries, such as that of the Asian "tiger" economies. Their demands for industrial inputs grew. But since the 1997-98 Asian economic crisis, the global over-capacity problem, including that of the steel production industry, has turned for the worse again. Not only have these countries cut steel consumption, they also have established more steel production capability of their own.

The restoration of capitalism in the former Soviet Union has considerably exacerbated the problem. The collapse of the Soviet post-capitalist, planned economy has resulted in the greatest economic contraction in modern history. The Soviet Union's huge steel producing capacity is now married to capitalist economies that have much-reduced domestic requirements for steel and therefore huge incentives to export.

In 1990, the USSR produced 154.4 million tonnes of steel, 20.4% of the world's total steel output. The Soviet Union consumed 116 million tonnes of steel in 1990, 18.4% of total world steel consumption.

By 2000, the countries that constituted the USSR until its disintegration at the end of 1991, produced 98.8 million tonnes of steel — a decline of over a third. They consumed 40.7 million tonnes of steel, 4% of the world total. This left the former Soviet republics, particularly Russia and Ukraine, with huge amounts of surplus steel output — more than 50 million tonnes in 2000.

The global steel glut has got so pressing that 40 steel-producing countries embarked in September 2001 on negotiations for a solution under the auspices of the Organisation for Economic Cooperation and Development. Their goal is to reach international agreements to curb state subsidies to the steel sector and an orderly reduction of steel-producing capacities.

No agreement is yet in sight. An OECD communique following the 40 countries' April 2002 meeting stated: "Participants agreed that the frictions currently arising in world steel markets are a symptom of the serious structural problems in the industry."

According to the American Iron and Steel Institute, steelmakers' world-wide overcapacity is 204 million tonnes. Of that, 122 million tonnes is accounted for by the former Soviet Union.

From Green Left Weekly, November 26, 2003.
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