George Bush cannot be expected to carry the welfare burden of consumers the world over

Last week the US President George W Bush announced his decision to protect the US steel industry with tariff rates of up to 30 per cent.

The decision has led to widespread dismay and anger among the US’ trading partners, especially in the EU which, along with the US, have been espousing the cause of free trade to other countries. The move is seen as a reversal of US trade policy and some fear that this will lead to a full-scale trade war.

Moreover, it is seen to undermine the credibility of the US as the proponent of free trade. As Paul Krugman says, “ Even before the steel verdict, the United States was developing a reputation for hypocrisy — ready and willing to criticize others for failing to live up to their responsibilities, but unwilling to live up to its own. Now that our free-trade rhetoric has proved empty, who will listen to our preaching?”

Clearly, George Bush’s advisors could not have been unaware of the reaction the decision would have. Indeed, such a reaction was to be expected.

What, then, were the pressures under which Mr Bush buckled?

The US steel industry has seen over 31 companies face bankruptcy since 1997. The lobby for a bail-out package was led by the large, non-competitive integrated steel companies and the steelworkers’ union.

They were pushing for a package that consisted of, one, a series of “safeguard” measures to protect US companies, including 40 per cent across-the board tariffs and, two, the assumption by the federal government of so-called “legacy” costs consisting of pension and health benefits for workers amounting to $21 billion.

But some economists argue that the problem is not one of the US steel industry as a whole but one of the survival of about 30 bulk producers that are too small to compete with global or with US producers operating modern mini-mills.

In other industries, companies would merge to create the scale to compete in global markets. But in this case it not feasible because of the generous benefits for steelworkers, conceded by weak companies under union pressure which now need to be funded.

For every person working in the industry, there are more than three retired workers whose generous benefit packages impose legacy costs that no acquirer could justify buying.

Critics also argue that raising import barriers still higher would be only a short-term fix. Repeated doses of protection for 30 years have not solved the US bulk steel industry’s basic problems of “outdated production methods, high costs, fragmented structure and poor labour relations”.

Its hope of survival lies in shrinkage, consolidation and mergers. But, these cannot take place while producers remain weighed down by expensive healthcare liabilities for which money has not been kept aside.

So why did Mr Bush simply not pay the “legacy costs”? His excuse is that the issue is for the Congress to address. The real reason is more likely that it is not easy to find the money needed to fund the legacy costs when the budget is under pressure from tax cuts and higher defence spending. Moreover, he may have difficulty defending a bail-out for steel when the Enron debacle has left thousands of the company’s workers without pension or health benefits.

Thus, even though the problem may not be one of too much competition from imports, which anyway declined by 20 per cent last year, Mr Bush decided upon a 20-30 per cent hike on about 16 steel products with exemptions for some developing countries and the US’ North American Free Trade Agreement (NAFTA) partners, Mexico and Canada.

Notably, the increase in steel tariffs is not the result of an anti-dumping investigation. A Section 201 “escape clause” investigation allows any domestic industry to petition for protection against imports as long as those imports cause injury to the import competing industry. This is said to be the last resort in protection.

The steel industry has, of course, welcomed the protective tariff decision and hopes that the Congress may still agree to pay the legacy costs.

The move has also found support among those who argue that these concessions were necessary to reduce domestic opposition to the US government’s free trade policies. They feel that such “tactical retreats” will go a long way towards securing from Congress the “fast track” negotiating authority — the Trade Promotion Authority that Mr Bush is seeking.

“The only way we can continue to get support from the American people to open markets and trade is to use our domestic and international laws to the fullest,” says Robert Zoellick, US trade representative, in defence of the protection.

But steel users in the US are clearly upset. The automobile and machinery producing sectors will be directly hit. Predictably, Detroit newspapers were sharp in their criticism of Mr Bush’s decision. “He ran for office as a free-trader and won. If his turn toward protectionism sparks a costly trade war and damages the economy, any votes he gains in West Virginia and Pennsylvania will be cancelled by those of angry consumers across the nation.”

However, their criticism arises not so much because they wanted free trade but more because among the 16 products that will be subject to the tariff are the steel flanges used in automobiles. The auto industry unsuccessfully lobbied for an exemption of these from a tariff hike. They now fear a big boost in production costs.

But the severest reaction to the US move to protect its steel industry is from Britain, Japan, Germany, Russia, Australia and South Korea. In 2001 the US imported 23.5 million tonnes of steel. Net exporters who will be hit by the US decision include countries of the former USSR (with exports of 53.4 million tones), Japan (23.8 million tones), the EU (3.8 million tones) and South Korea (2.8 million tonnes).

About two-thirds of EU steel exports to the US will face the harshest 30 per cent tariff. Further, the EU is also concerned that the move will result in diversion of steel exports to the EU endangering its industry.

And, though, on the one hand the EU has maintained that it will solve the problem within the framework of the WTO, it is soon expected to initiate action such as imposing restrictions on foreign airlines flying to EU, including US airlines that have received bail out packages from the US government after September 11.

Are we then going to see the beginning of a trade war between the US and its trading partners? Some analysts believe not because US import protection will be limited to a handful of especially sensitive and powerful industries, in particular steel, textiles and agricultural production of goods such as citrus fruits and vegetables.

What the US decision has clearly done is unmasked the US government. For the past 15 years US trade policy had been concerned almost exclusively with promoting free trade. The focus was on opening up markets abroad, which helped US exporters. The decision to protect an inefficient domestic industry makes it very clear that its advocacy of free trade is a political stance, appropriate as long as it suits its interests.

And, why not? After all, the US President is no less a politician than our own desi politicians. Surely, he cannot be expected to carry the burden of the welfare of consumers all over the world. He has to act according to his own political ends. We cannot expect him to fight our battles, especially when the steelworker voters of West Virginia helped him win his election.