July, 2001: The Yankee Trader

By Greg Rushford
Published in The Rushford Report

“I am deeply concerned” about the U.S. steel industry,” President George W. Bush told reporters in the White House Cabinet Room on June 5. The president announced that he would be asking the International Trade Commission to initiate an investigation under Section 201 of U.S. trade law that could result in quotas and tariffs. Most everyone in Washington agreed that Bush’s statement marked a turning point in his new administration. For better or worse — and the weight of evidence so far tilts toward the latter — this will shape Bush’s ambitions to advance the cause of free trade. The ramifications go far beyond steel. From an economic perspective, caps on steel imports — beyond question, particularly in these days of a wobbly national economy — could inflict serious harm. The politics are also as complex as they are little-understood. Anyone who hopes for further trade liberalizations through a new round of negotiations in the World Trade Organization — from farmers, intellectual property holders, insurers and bankers, aerospace and automobile manufacturers, small and large businesses, consumers — has a stake in how the steel 201 issue works out. Domestic steel politics is the stuff of high international politics.

Bush’s political position is not enviable. Without the political backing from at least some members of the congressional steel caucus, the president’s chances of obtaining fast-track trade negotiating authority (or Trade Promotion Authority in the new parlance) to take to the WTO are dicey. But in his eagerness to secure that backing, Bush has already started to pay a diplomatic price.

Officials from Europe, Japan, Brazil, and other important WTO members already have made it clear that they will drag their heels on free-trade reforms, as long as the United States threatens to turn more protectionist on steel. The Europeans in particular are delighted to use steel as a convenient excuse to delay any reforms of their Common Agricultural Policy, which costs American farmers dearly. The current Bush position on refusing to negotiate reform of U.S. antidumping laws in the WTO — aimed at pleasing the U.S. steel lobby — is essentially the same one that the Clinton administration took to WTO meetings in Seattle in 1999, to disastrous results.

There are many opinions around town on where Bush and the steel lobby are now taking us. The truth is, nobody really knows. Is U.S. trade policy headed in a protectionist direction, as it appears? Or is it precisely the opposite, which is also a real possibility? It will take probably until November to see the details of the anticipated 201 plan, as Bush announced his intention to give the industry 201 trade relief before he even knew what its scope would be. The president no doubt felt that he had little choice but to move ahead to try to keep control of the issue. If he had not, Senate Finance Committee members Max Baucus and Jay Rockefeller — protectionist Democrats who are now the majority in the Senate, thanks to the defection to “independent” status of former Republican Sen. Jim Jeffords — had the votes to initiate their own 201 petition.

One worry is that newcomers Bush and his Commerce Secretary, Don Evans, don’t seem to have fully grasped exactly what a Section 201 action is. In his June 5 White House announcement, Bush said that he was asking the ITC to look into 201 protections because “we’re concerned about unfair trade practices that may be affecting the economics of the steel industry.”

The problem with the president’s statement — which no member of the White House press corps questioned him on — was that whether he understood it or not, he was completely misrepresenting what a Section 201 action is designed to do. Unlike the antidumping laws, which are ostensibly aimed at alleged “unfair” foreign pricing, the 201 statute envisions no wrongdoing on the part of foreigners. Rather, 201 quotas to limit import competition are designed to give a domestic industry that is in trouble for whatever reason (including mismanagement) a few years of temporary breathing room to try to get back on its feet.

After (usually) three years, the 201 petitioning industry is expected to live or die according to its ability to cut it in the marketplace. The distinction with the antidumping tariffs that target allegedly “unfair” foreign pricing — year in and year out — is very important. Ronald Reagan gave the steel industry five years of quota protection against foreign steel in the 1980s. But he insisted that U.S. steel makers refrain from filing new antidumping actions while under quota protection, and that they invest their quota-rent profits to modernize the industry. (It didn’t work very well. As soon as their quotas expired, the domestic mills went back to their protectionist ways, and have been living off antidumping tariffs and various forms of government largesse ever since.)

Will Bush also insist that domestic steel (crybabies) take the pledge to abstain from the antidumping and subsidy narcotics that they are presently addicted to?

Not necessarily.

On June 6, Commerce Secretary Evans went out into the rain to toss some protectionist rhetoric at a Capitol Hill rally that was organized by the United Steelworkers of America. “We are going to be with you every step of the way until the problem is fixed,” Evans told the crowd. Evans added that Section 201 trade protection was only “a first step,” and that “we will take others” to insist that foreigners play on “a level playing field.” This means that Evans and the domestic industry are planning for more antidumping cases.

Indeed, Evans’ Commerce Department is busy with business as usual. On June 20, Commerce issued a preliminary ruling that Japanese steel makers like Kawasaki Steel and Sumitomo Metal Industries would be slapped with 30-plus percent antidumping tariffs for selling large-diameter welded steel pipes “below fair market value” in U.S. markets. And Nancy Kelly reported in American Metal Market that industry lawyers were drawing up another dumping case targeting cold-rolled steel imports from Russia, Brazil, Thailand, Kazakhstan, Korea and Japan.

On June 21, Evans — a Texas businessman who is still at the low end of the learning curve when it comes to sophisticated international negotiations — also opened the diplomatic Pandora’s box. Evans told the Senate Finance Committee that in any WTO negotiations, the United States would fight any efforts to liberalize its antidumping regime. “In discussing a potential new round with our trading partners, we have made abundantly clear that we oppose any weakening of WTO trade remedy rules,” he declared. How Clintonesque.

There were two problems with this.

The biggest is that that the Bush administration’s catering to the steel lobby is weakening prospects of negotiating meaningful trade liberalizations in the WTO. While Evans’ statement was meant to appease the steel caucus, it really played into the hands of some wily foreigners whose enthusiasm in free trade is less than burning.

The European Union’s trade commissioner, Pascal Lamy, responded by telling reporters that the reports from Washington on steel protectionism could “backfire” on the United States by weakening support for a new WTO round when trade ministers meet in Qatar in November. “This is bad news,” Lamy said. Lamy threatened to file more steel cases challenging the U.S. antidumping regime before WTO dispute-resolution panels.

Actually, the prospect of more American steel protectionism and more WTO cases to embarrass the Americans is very good news for Pascal Lamy. When I was in Europe last month, I learned that agriculture protectionists there — particularly Mr. Lamy’s associates in France — are delighted to have U.S. steel protectionism as a whipping boy. They are delighted that U.S. Trade Representative Robert Zoellick will go into WTO negotiations saddled with protectionist steel barnacles. All the better to bash the Americans over steel — and buy time to delay any serious reforms of the EU’s notorious Common Agricultural Policy subsidies for the rest of the decade.

Moreover, European steel makers will survive 201 quotas because they will divide them up. Owning quota rights is a wonderful way to make money anytime governments set up these cartel-like scheme for your industry. Quota licenses are essentially free money. It’s American consumers who will pay for all this. Small domestic businesses that need market competition to keep the prices of steel imports low stand to be hurt the most. Powerful multinationals like General Motors that have multi-year contracts to buy steel, have already relatively insulated themselves.

The current domestic political problem for Bush is that while the U.S. steel lobby was happy to receive the promise of goodies from the president, hardly anyone could be found who was willing to do much for George W. Bush in return. “You give the domestic steel industry one thing, and they don’t even thank you,” says David Phelps, who is the president of the free-trade oriented American Institute for International Steel. “They just stuff it into their pockets and go the next level of making more demands.”

Probably Bush’s help for the steel industry will translate into at least a few — but not many — votes for fast track at the end of the day. A handful of lawmakers like Reps. Phil English (R-Pa.) and Sander Levin (D-Mich), who currently are keeping a low profile on this, are expected to come around at the last minute. But for all his willingness to be accommodating to the steel people, the president doesn’t have much to show for it.

Rep. Stephanie Tubbs Jones (D-Oh), a member of the executive committee of the congressional steel caucus, called it “a positive act” for Bush to request 201 relief for domestic mills. But the congresswoman still “won’t support fast track, though,” says her spokesman, who explains that Ms. Tubbs Jones does not believe that a president should have such carte blanche negotiating authority.

Sen. Jay Rockefeller (D-WVA), another steel-state lawmaker, didn’t return a telephone call asking whether he was inclined to be more sympathetic to fast track because the president sympathized with domestic steel interests. Rep. Richard Gephardt (D-Mo) issued a press release vowing to do everything in his power to see that Bush does not get fast track.

Leo Gerard, president of the United Steelworkers of America, issued a press release from Pittsburgh applauding “the Bush Administration’s announcement that it would seek relief from illegal dumping of foreign steel by invoking Presidential action under Section 201 of the U.S. Trade laws.” But neither Gerard nor his spokesman, Marco Trbovich, would say whether they would do anything to help Bush get fast track. It was much the same story when I asked Bethlehem Steel’s CEO, Duane Dunham (a power in the Business Roundtable), if his company would lift a finger to help Bush in return. No comment.

Perhaps Dunham was a bit sensitive, since I also asked if his understanding of the scope of a section 201 action would include painful-but-necessary market restructuring of the domestic industry’s weaker sisters. I also asked him if he favored slapping quotas and tariffs on the semi-finished foreign steel that companies like his require. Their own dependency on imports of steel products is not considered a subject for polite conversation in Pennsylvania steel circles.

Two of the really weak sisters in the Ohio Valley, Wheeling-Pittsburgh Steel Corp, and Weirton Steel Corp., though, were sending strong public signals that Section 201 quotas will mean life support for the foreseeable future. Bush would be providing “a major boost to Wheeling-Pittsburgh’s efforts to successfully reorganize,” said President James Bradley. “For Weirton Steel, our goal is to be among the last steel companies standing,“ stated John Walker, president and CEO.

Guess it depends upon what you mean by standing. To steel CEOs, “standing” doesn’t mean standing alone. “Standing” means standing with Uncle Sam propping you up.

Even Geneva Steel — another recidivist bankruptcy user — thinks that 201 will give the company still another lease on life. Geneva Steel is located near Salt Lake City Utah. Think about it. There is no economic reason for a steel mill to exist there. The Utah mill was originally established by the War Department to place its steel out of the reach of Japanese bombers during World War II. Ever since, Geneva Steel has bombed in the marketplace.

Will the Bush administration come up with a crudely protectionist Section 201 plan to keep the Geneva Steels, the Weirtons, and the Wheeling-Pitts propped up, at least until George W. runs for reelection in 2004? Not necessarily.

There are many complex issues, but basically, three things to watch in the coming months as 201 is put together:

(1) How much damage will quotas and their resulting higher prices do to the American economy? Will the quotas roll back current import levels and thus do real damage? Or will they maintain current market shares, hoping not to disrupt the marketplace too much? Will the limits on steel imports be raised annually, thus allowing for market growth?

(2) Will Bush insist that in return for 201 protection, the steel industry agree to clear the books of current antidumping orders and not file new cases? In return, will the president get the political backing to negotiate much-needed antidumping reforms in the WTO?

(3) Will the U.S. steel industry agree to use its 201 protection to restructure itself, which would mean mergers and acquisitions, allowing weaker competitors to die, and other market-oriented consolidations? As part of this process, will foreign investors participate in internationalizing the American steel industry?

What are the odds of a happy, market-oriented solution?

The smart money would take note of the fact that as it prepares to cut this major deal with the steel lobby, the Bush administration is being anything but transparent. Officials are spending a lot of time huddling over the details of a 201 plan with steel lawyers, executives, and union officials. They have very little time to spend on anyone else. Meanwhile, these free traders are getting comfortable using the (corrupting) language of protectionism.

Trust our free-trade credentials, our good intentions, the Bush people whisper.

That’s usually the sure sign that the fix is in.

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