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U.S.: Domestic Politics Drove Decision On Steel Tariffs

For years, the U.S. has been trying to persuade the European Union to end its protectionist policies for farmers. But now President George W. Bush is invoking protectionist policies of his own by imposing high tariffs on imported steel. Many analysts say his decision is based not on sound fiscal policy but on partisan politics.

Washington, 7 March 2002 (RFE/RL) -- Some of America's strongest allies are criticizing U.S. President George W. Bush's decision to impose high tariffs on most imported steel.

The U.S. will impose a 30 percent tariff on imported steel during the first year of the regime, 24 percent during the second year, and 18 percent during the third. The countries expected to be hurt the most are several in the European Union, plus Russia, Ukraine, China, Japan, South Korea, and Taiwan.

Bush says the decision, announced on 5 March, is nothing more than a response to what is known as "dumping," that is, flooding the American market with inexpensive steel to the detriment of U.S. manufacturers.

Bush says the three-year tariff regime will give the ailing domestic steel industry time to restructure -- and save the jobs of 100,000 steelworkers.

America's trading partners say the decision amounts to nothing more than protectionism and represents Washington's first shot in a trade war with its allies. International reaction was best summed up by Pascal Lamy, the trade commissioner to the European Union, who spoke yesterday in Brussels.

"The American decision is a political decision, without any legal or economic foundation. Legally speaking, the decision directly flouts WTO (World Trade Organization) rules on safeguards [to protect domestic steel markets], as such measures can only be taken if imports increase, which is not the case with the United States."

Lamy said the EU will challenge the tariffs in the WTO.

Such reaction was not unexpected. So why would Bush risk offending so many friendly nations at a time when he is trying to maintain a sometimes fragile coalition in the expanding war on international terrorism?

The answer appears in large part to be domestic politics. Bush's Republican Party holds a narrow, 11-seat majority in the 435-seat House of Representatives. The opposition Democratic Party, meanwhile, has a one-seat majority in the 100-seat Senate.

In eight months, every seat in the House will be contested, as will one-third of the seats in the Senate. It would be politically advantageous for Bush if voters increase the Republican majority in the House and shift control of the Senate from the Democrats to his party.

In addition, Bush only narrowly won the presidency in the 2000 general election. If he seeks re-election in 2004, analysts say improving relations with trade union members by saving the jobs of steelworkers could win him crucial votes. Union members historically support Democratic presidential candidates.

Many analysts interviewed by RFE/RL say Bush is putting his and his party's fortunes ahead of sound economics. They say the American steel industry is burdened with old and inefficient producers and that some of these companies must go out of business as a natural consequence of their inefficiency. The U.S. steel industry is also facing some $10 billion in health costs for the 600,000 retirees of bankrupt steel companies.

Gerald O'Driscoll, an economist with the Heritage Foundation, an independent Washington policy center, says he supports many of Bush's fiscal policies. But he says the new tariffs are an example of politics triumphing over sound economic policy.

And, O'Driscoll warned in an interview with RFE/RL, the political benefits may not last for Bush. He said the tariffs eventually will mean more expensive goods -- cars and refrigerators, for example -- and that consumers may punish the president in the 2004 elections. But at first, he says, the tactic could work: "It may [work], until the pain starts to be felt by steel users, and they say, 'Why did he do this to us?'"

Ann Florini disagrees. She specializes in trade issues at the Carnegie Endowment for International Peace, another Washington think tank. Florini told RFE/RL that the tariffs may actually lead to growing support for Bush over time.

"The problem with trade is that losses are concentrated and benefits are diffuse across the population. So the fact that all of us end up paying slightly higher prices for steel isn't enough to get anybody roused up to go out and vote Bush out of office. Losing jobs, even in demonstrably inefficient industries like the big steel mills that we have -- those costs are very clear. And so those kinds of costs do mobilize people to get up and vote."

Protectionism is not new to the United States. Most notably, American textiles are protected by import tariffs. European Union countries, meanwhile, heavily subsidize and otherwise protect their farmers, putting the U.S. at a severe trade disadvantage.

Washington has been trying for years without success to persuade EU countries to reduce agricultural protectionism. Florini acknowledges that EU protectionism is unfair, but adds that the U.S. should not respond in kind at a time when it claims it wants to tear down trade barriers worldwide.

"The Europeans aren't particularly -- aren't perfect about it either. But the answer shouldn't be for us to impose tariffs on some things. It should be for us to continue putting pressure on the Europeans to lower their tariffs on agriculture."

Such arguments are not convincing to John Duray, a spokesman for the United Steelworkers of America, the largest trade union of the U.S. steel industry. He freely admits that politics played a big role in Bush's decision to impose tariffs on imported steel, but he stresses that this does not mean the president made the wrong decision.

And Duray told RFE/RL that it would be fruitless for the American steel industry -- and its workers -- to wait for their government to persuade an adamant EU to stop protecting its agriculture industry: "If we are prepared to sacrifice a large portion of our domestic steel industry while we're waiting for the EU and others to abandon their protectionist policies, sure, why not?"

Not every foreign steel producer will be fully affected by the tariffs. Mexico and Canada are exempt, for example, because of the North American Free Trade Agreement (NAFTA).

And some nations are given partial exemptions. For example, each year there will be no tariff on the first 5.4 million tons of a versatile form of steel called "slab steel." Of that tariff-free quota, 25 percent will be imported from Russia.

Russia's steel industry still will be hurt, but not as much as it might have been. Perhaps that explains the mild reaction of Russian Prime Minister Mikhail Kasyanov, who spoke yesterday in Svetlogorsk, near Kaliningrad.

"One should not regard this [U.S. decision] as a step towards a trade war with anyone. It affects all other countries, all exporters. It is the right of any country. If there was a difficult situation with certain imports in the Russian Federation that would jeopardize a whole industry, I would not exclude the possibility of taking similar measures, in accordance with our laws. So I consider this a separate issue. Nevertheless, as I have already pointed out, the negative effect is evident."

O'Driscoll of the Heritage Foundation says Kasyanov may have been assuaged by the 25 percent share in the import quota of slab steel. But he says the prime minister's words also can be interpreted as a threat that Russia will respond someday with punitive tariffs of its own.

Daniel Ikenson, an economist with the Cato Institute, another Washington think tank, agrees. He told RFE/RL that Russia may act to protect its poultry industry: "I've heard threats that they will retaliate against the U.S. poultry industry, in particular. The largest export market for U.S. poultry producers is Russia, and the domestic industry over there has been talking about bringing antidumping cases in the past."

That, of course, could lead to a trade war between the two countries. And that, according to Ikenson, could mean serious economic trouble for everyone.