EU-US row over steel

An all-out trade war over steel crept a bit closer on June 11 after EU governments cleared the way for the European Commission to apply retaliatory tariffs later this year if talks with the US fail to yield a compromise solution.

The EU is threatening to slap punitive 100 percent duties on a list of US imports, including a range of non-steel goods like Harley-Davidson motorbikes, Tropicana and other fruit juices, recreational guns and ammunition, as well as textiles and steel products, worth about $ 335m a year, if the US fails to offer the EU compensation (about 2.5bn euros a year) or satisfactory exemptions from the duties.

The proposed sanctions for a maximum of six months are against US President George W. Bush’s unilateral decision, March 5, to impose tariffs up to 30 percent on most imported steel for the next three years, which was made with an eye on mid-term Congressional elections in November, according to critics. The EU has estimated that the tariffs could cost its steel producers up to $ 2bn (an estimated 4 million tonnes and up to 16 million tonnes of trade diversion by non-EU steel importers to the EU market), and on June 5 had approved two lists – a short list worth $335 m and a long list worth $ 545m – of US products that could be hit by sanctions in the long-running dispute over US steel tariffs.

Compensation looks highly unlikely but the US has begun exempting certain categories of steel from the duties, a process it will complete by July 3. Earlier this month, the US unveiled a list of 61 steel products that are to be excluded from the tariffs. US officials said the exemptions covered around 1 percent by volume of the total imports covered by the tariffs. Trade watchers in Europe observed that the US is attempting to buy off some individual EU member states and other steelmakers like Japan by offering their steel producers targeted exemptions from its own import duties. Only once the full list of exemptions to European companies is published will EU governments take the final decision on whether to back tit-for-tat tariffs at a ministerial meeting on July 22.

A second longer list approved by the EU that would target US exports worth $ 545m would automatically come into effect if and when the EU wins a WTO dispute settlement panel set up to judge the legality of the US safeguards sometimes next year. The Appellate Body, in the Korea line pipe case on Feb. 15, has already condemned the US approach.

The EU is the world’s largest steel producer, with 159 million tonnes of crude steel (19 percent of world production) in 2001. The European steel industry accounts for about 1.8 percent of the value added and 1.5 percent of employment in EU manufacturing. There has been a rapid growth in steel production elsewhere in the world, leading to a sharp decline in the EU’s traditional trade surplus in iron and steel. EU imports have increased from 15.4 million tonnes in 1997 to 26.6 million tonnes last year.

EU tariffs for steel products are relatively low. The average consolidated bound rate was around 2 percent in 2000 and all tariffs will disappear in 2004, in compliance with WTO rules. However, there are non-tariff barriers against cheaper developing country producers. The EU defends its decision on retaliatory measures against the US saying it is in its self-interest to prevent foreign exporters from flooding the European market with products that are shut out of the US.

According to EU Trade Commissioner Pascal Lamy, “Unfounded, unnecessary and unfair US action has forced us to take temporary steps to look after EU industry, and EU workers. But we have done this without indulging in protectionism. Unlike the US, we will keep our market open to imports from the rest of the world. These limited and carefully crafted measures have one simple goal: to prevent a flood of diverted steel coming into the EU market.”

US steelmakers have warned that the decision on exemptions could reverse the recent rise in domestic steel prices that has occurred since the duties were imposed in March. The ailing US steel industry lobbied the US administration for tariffs saying they were being undercut by cheap imports. With Canada and Mexico exempted as members of NAFTA (North America Free Trade Agreement), the EU has been the hardest hit among leading steel producers. Developing countries such as Argentina, Thailand and Turkey are also exempt.

Big steel producers across the world are closely watching the exemptions process started by the US. The Japanese Trade Minister Takeo Hiranuma announced on June 13 that his country has dropped plans to impose tit-for-tat tariffs (worth $ 4.88m) against US steel products after speaking with his US counterpart Robert Zoellick. “We got the impression that the US was being constructive and taking into account our interests as well,” the Japanese minister said. “I have decided it was necessary to postpone our plans to raise tariffs and continue talks with the US.” Earlier the German Economics Minister, Werner Myller, was quoted in the Financial Times (June 6) saying he was confident of receiving “fair treatment” from the US regarding exemption applications from German producers. Forty German steel companies had applied for exemptions. The German steelmakers’ association said the US had exempted annual exports amounting to 25,000 tonnes in 19 product categories, out of the 1.1 m tonnes of steel that the country sells to the US each year. About 780,000 tonnes of steel exports to the US by Corus, the Anglo-Dutch steel group, mostly produced in the Netherlands, have been exempted from the duties so far. The group is seeking exemptions covering 450,000 tonnes of steel.

Meanwhile, the major non-US steel producing countries are pressing ahead with raising their mounting trade tensions with the US at the World Trade Organisation. The EU, backed by South Korea, China and Japan who have requested dispute settlement consultations on the US steel “safeguard” on the basis of similar claims, argues that the US tariffs are in clear breach of trade agreements, and though the US steel industry faces real difficulties, the key problem is not one of imports but the enormous overhang of the so-called “legacy costs” – health and pension obligations for laid off and retired workers – for US steel producers. However, US Trade Representative Zoellick insists the steel tariffs are a temporary measure designed to protect its domestic industry from predatory pricing by foreign steelmakers until it has time to restructure. “Safeguard” measures of this kind are permitted under WTO rules. But the EU says steel imports to the US have not risen in the recent past, negating one key part of the safeguard’s definition. Unlike European firms, the US did not complete the restructuring process started in the 1980s, the EU points out, adding that the tariffs punish non-US steelmakers for the failure of US steel producers to stay competitive.

The EU’s proposed sanctions target regions that could politically hurt the Bush administration. European officials have openly stated that they targeted citrus fruits due to the importance of citrus growing in Florida, crucial in Bush’s winning the 2000 presidential election. Targeting Wisconsin-based Harley-Davidson motorcycles, according to EU plans, will frustrate the Bush administration’s drive to drum up voter support in Wisconsin.

Unilateral US decisions, such as the imposition of tariffs on steel and the provision of enhanced support to agriculture, that violate WTO rules, show how much Washington respects the new trade regime. Expecting developing countries to follow the rules they were hardly involved in formulating is obviously discriminatory. Hopefully, disputes between developed countries, as in the case of the steel tariffs, would help stall the process of irrational liberalisation of global trade.