The decision by the Bush administration to impose tariffs on steel imports from various countries is certainly a violation of WTO rules. Legally, the safeguard mechanism that the US invokes is only allowed under WTO rules if there has been a recent surge in imports. In fact, US steel imports fell during 2001. Practically, the tariffs are a response to the failure of the US steel industry and government to deal with pension obligations of acquired or bankrupt steel companies. Politically, the measures are a slap in the face of America’s most important allies. Furthermore, the dispute risks escalating into a broader trade conflict and undermines the United States role as promoter of free trade for the benefit of developing nations.
The unintended beneficiaries of the protection are the efficient US producers whose profit margins will increase as a result of higher prices. The 25 US steel companies on the verge of bankruptcy will only get some breathing space to restructure, but the consequences of restructuring are ultimately inevitable (unless President Bush did not really mean that the measures would be ‘temporary’). The health cost and pension obligations of former steel workers are still not addressed and can only be solved by direct government action. The tariffs hurt American consumers who need to pay more for steel as well as steel producers from Europe, Japan and Korea who are losing a valuable export market. European producers also face the threat of trade diversion, with Asian exports that would otherwise have found their way to the US now adding to the supply in Europe. So how should the EU respond ?
EU should act but not retaliate
Surely, the EU should process its complaint through the WTO and continue direct discussions with the US. However, the WTO Trade Panel which has just been established will take more than a year to come with a verdict and direct discussion with the US have given no result. So the main question remaining is whether to retaliate now. Currently the EU is threatening retaliatory action, clearly hoping that the threat will lead to the abolition of the tariffs and that the threat will not need to be carried out. Considering past performance, the European threat is unlikely to impress President Bush. The US government is already preparing counter measures. Such language could be the start of a vicious cycle whereby much more trade as well as political relations can be harmed by the escalation of a relatively isolated dispute.
Besides the fact that European retaliation is not going to open US steel markets, action would also hurt European consumers. Even if further restructuring of Europe’s steel industry were necessary, this would be preferable to protection. Given the enduring overcapacity in the world steel industry, Europe could further cut capacity and free up resources for other activities. If European steel workers would be affected, they could receive direct compensation rather than protection. In fact, the same factors that make the US protection hurt Americans explain why EU retaliation would hurt Europe. Therefore, retaliation causes more harm than good and the threat of European action is worthless if not credible.
Open markets and promote development
An absence of retaliatory measures would also send a powerful message. In a world where the US acts as the de facto leader on so many fronts, trade gives the EU the opportunity to show the global consistency and leadership that is lacking on trade in the world today. The message should be that the EU is consistently promoting free trade within a framework of global rules (including rules on issues such as environmental protection and child labour). This would benefit all European consumers, make European markets more dynamic and, above all, show the developing world that they can export to Europe. Europe would become the standard setter for honest implementation of trade policies, offering hope to the developing world. The resulting reductions in poverty and instability can only help Europe.
A logical extension of this argument is that the dismantling of protective measures of Europe’s agriculture and textiles industry should be accelerated. Uganda’s flower production has only blossomed after the EU opened its markets. Consumers can now buy good flowers at lower prices and the Netherlands can concentrate on the activity where it has a true competitive advantage ; the auctioning, storage and distribution of flowers. More such openings should be created quickly and where necessary local European producers could be compensated or retrained.
The steel dispute is an important test for EU – US relations and for the global trade agenda. If the EU is serious about its stated objectives for the Doha trade round, which include the ‘promotion of a development agenda’ and to ‘liberalise market access’ it can encourage others to open up only if it sets the example. So no retaliation, but aggressive pursuit of the dismantling of the American measures through direct discussions with our American partners and the WTO.