Spring
2002
MACROECENOMICS
The
Visible Hand
of
Steel Industry
Written
by Gregor Schabrun
Document Control Information
|
The
Visible Hand of Steel Industry |
|
|
Version |
1.0 |
|
Drafts |
Monday, 22 April 2002 Tuesday, 23 April 2002 Friday, 3 May 2002 Wednesday, 8 May 2002 |
|
Final Release |
Friday, 10 May 2002 |
|
Author |
Gregor Schabrun, Rte du
Coteau 29, CH-1752 Villars-sur-Glâne |
Table
of Contents
4.1 The Importance of Steel
Industry
4.2 History: Steel and “the
Visible Hand”
4.3 Worldwide Regional Trade
of Steel
5 Recent U.S. Tariffs on Steel Imports
5.1 Contents of Tariffs
imposed 5 March 2002
5.3.1 Domestic economic and political outcome
5.4.4 Global Steel Trade Forecast 2002
5.5 Summary of forecast
results
7 Conclusion – What can we learn?
8.1 COMMISSION REGULATION (EC)
N° 560/2002 of 27 March 2002
8.3 SUBSIDIES TO THE U.S.
STEEL INDUSTRY
8.4 U.S. TARIFFS vs EU RETALIATION
– COMPARATIVE TABLE
[Source: Financial Times FT.com]
8.5 GLOBAL STEEL TRADE MATRIX
2001 and FORECAST 2002
1
Foreword
“Every individual is continually exerting himself to
find out the most advantageous employment for whatever capital [income] he can
command. It is his own advantage, indeed, and not that of the society which he
has in view. But the study of his own advantage naturally, or rather
necessarily, leads him to prefer that employment which is most advantageous to
society ... He intends only his own gain, and he is in this, as in many other
cases, led by an invisible hand to
promote an end which was not part of his intention. By pursuing his own
interest he frequently promotes that of the society more effectually than when
he really intends to promote it.”
[Adam Smith, 1776 – father of economics]
The principle of Adam
Smith’s “invisible hand” explains how the right amount of a good gets to be
traded at the right price at the right time to the people who values it most.
According to Smith, all these advantages will match through free trade without
a central planning of an authority and very few spoil would occur.
“The Visible Hand of Steel Industry” is the title I’ve chosen for the
present paper. I couldn’t find any better, revealing the existing diametric
divergences between that, what basic economic principles continue to postulate
since over 200 years, and our today’s situation in steel industry, of which we
are witnesses right now. Steel has since ever been subject to interferences of
free market – or as Adam Smith used to say “the invisible hand”. The goal of
this paper is to uncover as focussed as possible, facts and future regarding
steel and the recent steel-war between the United States of America and other
powers like Europe and Asia. In addition an approach to identify secondary effects
is undertaken and an attempt to forecast steel industry’s economic future
outcome based on a most probable scenario.
2
Executive Summary
·
Steel
is made based on 2 different technologies: Mini Mills, using scrap and
Integrated Mills using iron ore. Last ones are non-profitable and subsidised
since a long time ago and led the U.S. Steel Industry into an economic
disaster.
·
Trading
steel means dealing about a few percentages in price differences. An additional
30% in form of tariffs will make it very hard or even almost impossible for
commodity steel to enter the USA – unless shortages in U.S. domestic market
will force customers to import steel.
·
Steel
and its Industry is important:
-
Steel
for 270 b $ is traded yearly around the world or 800 M metric tons p.a.
-
Steel is a kind of base good, which’s pricing
can have similar effects as oil or electricity
-
Usually
there persists a global excess production capacity
·
Historically
conditioned, Steel Industry has always been assisted, subsidised, protected,
regulated and quoted by governmental intervention. In the last years this
tendency has significantly decreased in Europe, but not in the USA.
·
Recent
U.S. tariffs of 30% on 95% of imported steel products were implemented to
protect American Steel Industry. In the same statement Mr. Bush declares that
free trade is one of his cornerstones in his economic activities.
·
The
major problems of the U.S. Steel Industry are:
-
The
obsolete infrastructure of Integrated Steel Mills with their incapacity to
produce in a competitive way
-
Reengineering
of Integrated steel mills is very difficult to implement and almost useless
-
U.S. Steel
mills are accustomed to receive governmental assistance (see appendix SUBSIDIES
TO THE U.S. STEEL INDUSTRY)
-
The huge
legacy cost of up to 13 b$ for over 600 00 retired steel workers. These have to
be paid by a retirement fund hold by the steel mills themselves.
-
A high
competition due to increasing output of foreign steel mills. Steel Mill owners
have in general a high commitment with reducing their cost by getting the most
output with their existing infrastructure and
- Thereby an always even more increasing production and its excess supply, which was in 2001 5% more than worldwide consumption.
·
The
immediate effects of U.S. tariffs:
-
Political support to Mr. Bush of
steel industry and Republicans face to Congress Elections (“Fast Track”).
-
Bankruptcy wave of mills stopped for
next 3 years
-
Legacy cost still imposed to mills
(600 000 retired), cost estimated at 13 b $
-
Prices for 1 ton gained from 300 $ to
370 $ (increase never seen)
6400 steel jobs saved for next 3 years
o
·
The
secondary effects of U.S. tariffs:
-
No incentive for owners to further
restructuring and capacity excess dismantling of U.S. mills
-
Mini Mills will boost up profit
while Integrated Mills still try hard to achieve break-even
-
Higher prices affect
steel-elaborating industry and as a consequency every job saved (6400) in steel
producing industry will cost steel-using industry up to 13 jobs
(80 000)
-
Other domestic Industries will claim
governmental assistance (eg. textile industry, farmers, timber industry,
bananas, spaghetti, chicken…)
-
International reactions, retaliation
·
Results
of a forecast 2002:
-
Global
supply drops 20...40 M metric tons (-2% ... –5%)
-
Traded
gross volume (including tariffs and taxes) will grow by 0...20 b$ (0...7%)
-
Most
punished industries are other than the steel industry itself, namely: All steel
processing industries, Engineering industry, Construction and Sectors affected
by other countries’ retaliatory and regulating reactions
-
Loss of
demand of steel
-
General
price increase of a basic good can create inflation, like increases of oil it
does
-
Danger of
political escalation and deceleration of economic boom
-
As a result
of political instability and distrust, harm to further globalisation’s process
·
Alternative
Solutions:
-
No further financial assistance and
intervention in favor of steel mills. Natural closure of non competitive
integrated mills and creation of a fund bearing legacy cost to assist retired.
-
Adopt job retraining programs in
order to achieve reduction of unemployment in case of closure and evtl.
facilitate and concentrate creation of other more rewarding industries around
steel mills (check invisible hand principle)
-
Stop blaming foreign countries for
dumping will give access to bilateral and multilateral approaches to reduce
subsidies in foreign countries
Cancel U.S. steel industry’s ability to obtain protection on the demand of antidumping laws will enhance reforming discussions
·
Conclusions:
-
Avoid interfering with the
“invisible hand”
-
Short run matters
-
A well diversified and safe pension
fund system can be crucial for political action space aiming to open markets
-
Trade barriers like tariffs, quotas,
high technical requirements and approvals increase prices and are harmful to
global economy, but most to the protected country itself
-
Subsidies are always paid by someone
and impedes an industry to focus on rewarding activities and creates high
opportunity cost
-
Trade creates value and enriches
both parties
3
Technology
3.1
Steel production
Steel
production happens in 2 mills, the steel mill itself and the following rolling
mill. Melting steel uses mainly 2 complete different technologies:
[Source: USINOR]
Integrated Mills and
Mini-Mills:
Prime materials used in
Integrated Mills are iron ore, coal and limestone. In large blast furnaces and
basic-oxygen furnaces steel is being cooked in a little rewarding way. Required
manpower, energy is much higher than producing steel with mini mills. 25 years
ago, Integrated Mills had about 90% of U.S. steel making capacity, or up to 140
M raw tons. Today these former giants have less than 70 M tons of capacity. In
the same period the Mini-Mills, using much smaller scale plants with electric
arc furnaces, have grown from 10 M t to more than 50 M tons. Their base
material is steel scrap, which in developed countries is easily available. The
reason for disparity in growth is the fact, that mini-mills are much more
efficient. Cost differences between Integrated Mills and Mini-Mills are as high
as 18%...20%. Overall Integrated Mills in USA were loosing in 2000 about 54$
per ton or –15% [Crandall] and Mini-Mills gaining from 2%...5%.
Table: Estimated Pre-tax
Cost for Sheet Products, 1998, 2000
$ Per Metric ton
|
PRODUCER |
MARCH 1998 |
APRIL 2000 |
|
U.S. Integrated Firms |
483 |
481 |
|
U.S. Mini-Mills |
394 |
376 |
|
Japanese Integrated Mills |
474 |
496 |
|
German Integrated Mills |
467 |
440 |
|
South Korea |
336 |
378 |
|
Russia |
331 |
283 |
|
Brazil |
441 |
389 |
[Crandall]
The result of both mills is the same: Blooms, or
billets. These are stocked in a first stage during a time span of up to several
months. Afterwards they are re-heated and rolled down in a rolling mill. In
certain German mills reengineering allowed jumping over the stocking process,
in order to save energy. Products leaving the rolling mills are called
“finished steel products” and are together with blooms and billets the main
target of Mr. Bush’s import tariffs of 5 March 02:
·
Non Alloy Hot Rolled Coils
·
Not Alloy Hot Rolled Sheets and Plates
·
Not Alloy Hot Rolled Narrow Strip
·
Not Alloy Hot Rolled Flat Products
·
Cold Rolled Sheets
·
Electrical Sheets (other than GOES)
·
Metallic Coated Sheets
·
Organic Coated Sheets
·
Tin Mill Products
·
Quarto Plates
·
Wide Flats
·
Non Alloy Merchants Bars and Light Sections
·
Alloy Merchant Bars and Light Sections
·
Rebars
·
Stainless Bars and Light Shapes
·
Stainless Wire Rod
·
Stainless Steel Wire
·
Fittings (<609.6 mm)
·
Flanges (Other than stainless steel)
·
Gas Pipes
·
Hollow sections
[Sources: UINOR, Official Journal of the
European Communities]
3.2
Trade habits
Steel can be
produced in several qualities and forms. Even if there is a high worldwide
valid standardization of the finished products, which can therefore be treated
as commodity, there may still be slight technical differences, which enhanced
governments all over the world during the past decades to built up legal
technically related barriers, such as hard to achieve approvals, difficult
obtainable certifications with severe restrictions and conditions. Costly
introduction and testing phases of several years, uncertainty about the outcome
as well as bribes to approving authorities use to be the daily business of
today’s steel mills, whose purpose is to export steel in foreign countries.
Rolling mills have usually a certain amount of shapes on stock due to the long
lasting and costly interventions on rolling devices when changing shape.
Clients are mainly steel distributors, car manufacturers and other key accounts
and steel traders, who act as middleman between mills and distributors. The main
task of a distributor is to buy the steel from mills directly, stocking and
preparing it ready to use for their clients. These may be construction
contractors, steel contractors and more. Sometimes car manufacturers organise
auctions to deliver “car bundle’s” amounts to steel mills. Usually decisions
are made upon price, delivery time, and quality personal commitments of buyers.
Profitable steel mills achieve net margins of typically 2%...5% by selling
steel EXW and distributors 2%...10% CIF depending on the over all package the
offer and their marketing positioning. Nevertheless steel mills try hard to
achieve “uniqueness” as a result of strong competition, by focussing on
products, which contain special advantages to customers. As examples can be
considered some types of stainless steel, chains, steel shapes with higher
mechanical characteristics like ductility or yield strength and finished
products which allow a fast and reliable elaboration.
Shipping of
raw steel harbours additional risks, such as damage of merchandise due to salt
water or wrong transport logistics, damage on surface, especially of stainless
steel.
All steel
mills face more or less same problems, namely a worldwide excess capacity, a
strong pricing issue as a result of unscrupulous competition and a strong
commitment to steadily increase output of their existing installations. This is
also the reason for today’s excess production capacity, which has reached by
the end of 2001 5%.
4
Steel Industry
4.1
The Importance of Steel Industry
The traded
Steel Volume all over the world was last year 270 b$ or 800 M metric tons
[Source: WTO, Metalbulletin] of material. In comparison: PC Industry gives for
instance just 235 b$ of T/O although sharp increasing. For many countries it
represents a qualitatively high valued industry in terms of T/O stability and
reliability. Major changes in consumption will be slowly and gives governments
apparent workload safety, always being able to react to affecting alterations
of market. As example Steel industry in Japan represents with a production of
102 M metric tons p. a. (30 b$) a non neglecting driving force.
Steel is
likely to be economically treated as oil, wheat or electricity. It's a kind of
base good, which has one the best price-performances. A product which’s use has
to be typically planned, this is to say, steel is used after accurate planning.
This can be a planned production line for cars, a new car model which is going
to be launched next, a building made out of concrete or steel, furniture. Steel
applications have to be planned in advance. As a consequence there are few
short-run substitutes. Short price peaks of steel won’t lead decision makers to
go for a steel substitute. In long term the application and development of
substitutes, such as aluminium, wood or plastic will increase. End-users
receive the best advantage of steel. Pricing of steel can affect our economical
well-being and unemployment rate through inflation in a similar way as oil or
electricity it does.
4.2
History: Steel and “the Visible Hand”
Trade
barriers such as tariffs, quotas, high technical
requirements and approvals, as well as other governmental interventions like
subsidies and additional assistance or loans at null interest rate were and are
still quite common in steel industry. Real free market was far away, but
governments had during last years a good approach to open markets and eliminate
distorting practices.
In Europe one of the starting points of governmental
interference was the foundation of the “European Coal & Steel Community” in
1952 through Germany, France, Italy and 3 Benelux Countries. The aim was to
propose to European citizens
a future life standard which was nearly of this in USA. Their statutes limited
through insufficiently formulated articles the power of free market’s
principles. The main text of the treaty is long on how to protect steel
consumers from the risk of monopolistic tendencies that were prevalent in the
industry between the two world wars; but it is short on ways to protect the
industry when necessary. The economic aim of the treaty is to “ensure the
establishment of the lowest prices under such conditions that these prices do
not result in higher prices charged by the same undertakings in other
transactions … while allowing necessary amortisation and normal return on
invested capital” (ECSC treaty article 3); with all consequences of the
expression “normal return on investment”. As we know in terms of today’s
free trade, it’s not a governmental task to supervise whether a return on
investment should be “normal” or not...
However Steel
capacity grew from 1952 over 200% to reach in 1974 187 M tons production
capacity. The 1st Oil Shock in 1973/74 caused a substantial change
of that growth. Consumption felt underneath 1/5th of former capacity
and excess capacity, together with a global price-squeeze was the result.
Governmental assistance occurred, quotas were established and subsidies were
given for closing capacity. Till 1980 75% of European Mills stood de facto
under governmental control. Then things went better and 1987 re-privatisation
had its start.
In USA Steel Mills faced the same problems of their
European competitors, with the difference, that coordinated actions (like those
of ECSC) were almost completely missing. U.S. Government seemed to be initially
reluctant to intervene in industrial matters. Later on governmental assistance
was urgent and since 1980 assistance to U.S. Steel Mills count on 30 b$ (see
appendix: SUBSIDIES TO THE U.S. STEEL INDUSTRY). In addition protective tariffs
against imports were established.
4.3
Worldwide Regional Trade of Steel
Worldwide
steel-production can be summarized in 8 major regions:
|
REGIONAL EXPORTS |
DESTINATION |
|
||||||||
|
Western Europe |
North
America |
C./E.
Europe / |
South America |
Africa |
Middle East |
Asia excl. Japan |
Japan |
Production [in b$] |
||
|
ORIGIN |
Western
Europe |
50.1 |
5.8 |
3.0 |
1.2 |
1.4 |
1.6 |
2.8 |
0.2 |
66.1 |
|
North
America |
0.8 |
32.6 |
0.1 |
1.7 |
0.1 |
0.1 |
0.7 |
0.2 |
36.1 |
|
|
C./E.
Europe / |
6.5 |
1.7 |
28.4 |
1.0 |
0.5 |
1.0 |
4.1 |
0.2 |
43.4 |
|
|
South America |
1.5 |
3.9 |
0.0 |
4.4 |
0.2 |
0.1 |
1.1 |
0.2 |
11.3 |
|
|
Africa |
1.2 |
0.7 |
0.0 |
0.0 |
2.3 |
0.0 |
0.0 |
0.3 |
4.5 |
|
|
Middle East |
0.2 |
0.1 |
0.0 |
0.0 |
0.0 |
3.2 |
0.0 |
0.0 |
3.5 |
|
|
Asia excl. Japan |
2.4 |
5.3 |
0.1 |
1.0 |
0.5 |
1.3 |
60.6 |
2.2 |
73.4 |
|
|
Japan |
0.5 |
1.7 |
0.0 |
0.0 |
0.5 |
0.0 |
11.1 |
15.6 |
29.4 |
|
|
|
TOTAL imports*) |
63.1 |
51.7 |
31.6 |
9.3 |
5.5 |
7.3 |
80.4 |
18.9 |
267.7 |
|
|
Intra regional trades |
Austria |
Canada |
Bulgaria |
Argentina |
Egypt |
Iran |
China |
Japan |
|
|
|
>= 1.0 |
Belgium |
Cuba |
Croatia |
Brazil |
Libya |
Qatar |
India |
|
|
|
|
>= 2.0 |
Denmark |
Dominican |
Czech R. |
Chile |
S. Africa |
Sau.Arabia |
Sou.Korea |
|
|
|
|
|
Finland |
El Salvador |
Hungary |
Colombia |
Tunisia |
|
Taiwan |
|
|
|
|
*) Incl.
intra-trades |
France |
Guatemala |
Norway |
Ecuador |
Zimbabwe |
|
China |
|
|
|
|
|
Germany |
Mexico |
Poland |
Paraguay |
|
|
|
|
|
|
|
|
Greece |
Trinidad |
Romania |
Peru |
|
|
|
|
|
|
|
|
Ireland |
Tobago |
Slovakia |
Uruguay |
|
|
|
|
|
|
|
|
Italy |
USA |
Slovenia |
Venezuela |
|
|
|
|
|
|
|
|
Luxembourg |
|
Turkey |
|
|
|
|
|
|
|
|
|
Netherlands |
|
Yugoslavia |
|
|
|
|
|
|
|
|
|
Portugal |
|
Byelorussia |
|
|
|
|
|
|
|
|
|
Spain |
|
Kazakhstan |
|
|
|
|
|
|
|
|
|
Sweden |
|
Moldova |
|
|
|
|
|
|
|
|
|
UK |
|
Russia |
|
|
|
|
|
|
|
|
|
Switzerland |
|
Ukraine |
|
|
|
|
|
|
|
|
|
|
|
Uzbekistan |
|
|
|
|
|
|
Steel
Trade Matrix 2001 [figures from: WTO annual report, World Steel Dynamics,
Metalbulletin]
1.
Western
Europe: Includes EU(15) and other countries like f. ex. Switzerland. Production
2001: 182 M metric tons
2.
North
America including Mexico, USA and Canada, NAFTA. Production 2001: 118 M
metric tons
3.
Central-
and East-Europe including Russia, Baltic states, CIF. Special remarks to be
given to the last year’s increase of steel exports towards (Western Europe /
USA): Russian Federation (+45% / +18%), Poland (+18% / +109%), Turkey (+32% /
+52%), Ukraine (-4% / +79%) and Czech Republic (-11% / +66%). Production 2001: 140
M metric tons
4.
South
America with main suppliers Brazil (+23% / +16%), Mexico (+45% / +4%),
Argentina (+34% / +12%), Colombia (+47% / +91%). Production 2001: 38 M
metric tons
5.
Africa
incl. main supplier South Africa (+32% / +14%). Pproduction 2001: 13 M
metric tons.
6.
Middle East
with main suppliers: Iran (+192% / - ). Production 2001: 11 M metric tons.
7. Asia (without Japan) incl. Korea (+30% /
-1%), India (+29% / +93%), Thailand (+195% / +96%) and China (+68% / 57%). Production 2001: 212
M metric tons
8.
Japan (+6% / -20%). Production
2001: 102 M metric tons
Exhibit: Regional Steel Exports 2001 in b$ and Steel
Production in M metric tons. [Sources WTO Annual report, IISI, Metalbulletin]
Although the number of international demands for
anti-dumping settlements by WTO has dramatically increased during the last 5
years, steel industry has made significant steps towards a more open market.
A short overview on Worldwide Regional Steel Trades
illustrates following summarizing situation:
-
USA is
targeted by exports from Western Europe, Asia and South America. Additional
steel is coming from Japan and C./E. Europe and Baltic States. In total steel
is imported for a value of 18 b$. Exports of USA to other market participants
are mainly South America (1.7 b$) but also many small exports to everywhere
around the world. Over all there still persists an export deficit of about 12
b$.
-
Western
Europe exports slightly more steel than it imports. Export deficit in this case
doesn’t seem to be an unbalancing danger for instance.
-
Asia’s
imports are also about same as exports. Since China announced for 2002 a growth
of up to 7%, it will have trouble to cover steel consumption. China has no
sufficient resources whether of scrap nor iron ore and will probably be forced
to increase their imports next. Their new entry into the WTO will allow
increasing action space for world trading activities.
-
Japan
exports much more than it imports. Steel has been and still is one of Japan’s
driving forces of economy.
-
C. / E.
Europe incl. Russia and Baltic States have increased significantly their
production capacity during last years. Their imports of steel are almost null.
Accelerated reengineering of mills performed them advantage of their most
valued goods like manpower and metallurgy know how. Steel has since ever been
on top of Eastern Europe’s core businesses. Cost reductions allowed increase of
exports. Though this region is still hard working on eliminating technically
based import barriers (approvals etc.)
-
South
America. Price level in South America is generally high, due to the high price
levels of its neighbour USA. Thus they are facing the problem of producing
partially in obsolete steel mills, which don’t accept easy reengineering of
infrastructures. Further more the political instability of Argentina creates
big practical problems like billing, shipping and questions of insurance even
in neighbour-countries. Despite their situation, some 3rd world
countries are exempted from steel tariffs and barriers. All depends if they are
able to catch the opportunity to deliver huge amounts of steel towards USA,
where prices are as high as never before.
5
Recent U.S. Tariffs on Steel Imports
5.1
Contents of Tariffs imposed 5 March 2002
Mr. Bush
announced 5 March 2002 temporary safeguards for Steel Industry. These
safeguards consist in tariffs of up to 30%; to be linearly applied on 16 of 30
imported steel products, which generate 95% of the imported value. Developing
countries are exempted. This decision was anticipated and market participants
knew about a possible application of import restraining action of U.S
Government. It happens in a period where WTO launched a new trade round in Doha
and invited countries are preparing their issues.
Mr. Bush’s
statement:
“Free trade is an important engine of economic growth and a
cornerstone of my economic agenda. My Administration has
successfully launched new global trade talks, reignited the movement for free
trade within our own hemisphere, and helped bring China and Taiwan into the
World Trade Organization. To open even more markets to American
products, I have urged the Senate to grant me the trade promotion authority I
need to create jobs and greater opportunities for U.S. workers and farmers.
An integral part of our commitment to free trade is our
commitment to enforcing trade laws to make sure that America's industries and
workers compete on a level playing field. Free trade should not mean
lax enforcement. Consistent with this commitment, last June I
launched a three-part initiative designed to restore market forces to world
steel markets. This initiative includes international discussion to
encourage the reduction of excess global steel capacity and negotiations to
eliminate market-distorting subsidies that led to the current glut of
capacity. I also called upon the United States International Trade
Commission (ITC) to investigate the impact of imports on the U.S. steel
industry under section 201 of the 1974 Trade Act. The ITC subsequently found
that increased steel imports are a substantial cause of serious injury to our
domestic industry.
Today I am announcing my decision to impose temporary
safeguards to help give America's steel industry and its workers the chance to
adapt to the large influx of foreign steel. This relief will help
steel workers; communities that depend on steel, and the steel industry adjust
without harming our economy.
These safeguards are expressly sanctioned by the rules of
the World Trade Organization, which recognizes that sometimes imports can cause
such serious harm to domestic industries that temporary restraints are
warranted. This is one of those times.
I take this action to give our domestic steel industry an
opportunity to adjust to surges in foreign imports, recognizing the harm from
50 years of foreign government intervention in the global steel market, which
has resulted in bankruptcies, serious dislocation, and job loss. We
also must continue to urge our trading partners to eliminate global inefficient
excess capacity and market-distorting practices, such as subsidies.
The U.S. steel industry must use the temporary help today's
action provides to restructure and ensure its long-term competitiveness.
Restructuring will impact workers and the communities in which they live, and
we must help hard-working Americans adapt to changing economic
circumstances. I have proposed a major expansion of the National
Emergency Grants program to assist workers affected by restructuring with
effective job training and assistance. I have also proposed direct
assistance with health insurance costs that will be available to workers and
retirees who lose their employer-provided coverage. And I support
coordinated assistance for communities and a strengthened and expanded trade
adjustment assistance program.
America's workers are the most highly skilled in the world,
and with effective training and adjustment assistance we will help them find
better, higher paying jobs to support their families and boost our economy.”
[Source:
Financial Times and The White House]
5.2
Background and reasons
In former
time other goods were subject of disputes between several countries, among them
Russia, Europe, Japan, USA and more. According to the theory, that today’s wars
between developed countries are not carried out anymore through weapons but on
an economic approach, columnists used to call these disputes “wars”, such as
the Soya-war between China and Japan, the Corn-war, the Hormone-beef-war
between USA and Europe, the Banana-war between Brazil and Europe, the
timber-war between USA and Canada, the Mad-Cow-War between England and France,
the Mineral-water-war between Switzerland and EU(15), the Piracy-War (Copies of
Videos and Software) between China and the rest of the world, as well as Pasta
and Spaghetti...
Actually
another war on steel wouldn’t be further astonishing – if there weren’t as much
as 30% (!) of tariffs. An additional 30% upon steel is one of the biggest trade
barrier ever seen and from there derives the importance of the tariffs applied
on 5 March 02.
The former
administration during Bill Clinton faced same problems of this industry as
Bush, since 1998 30 Steel Mills announced their bankruptcy. Today’s U.S. Steel
Industry’s main problems are:
·
The
obsolete infrastructure of Integrated Steel Mills with their incapacity to
produce in a competitive way
·
Reengineering
of Integrated steel mills is very difficult to implement an almost senseless
·
U.S. Steel
mills are accustomed to receive governmental assistance (see appendix SUBSIDIES
TO THE U.S. STEEL INDUSTRY)
·
The huge
legacy cost of up to 13 b$ for over 600 00 retired steel workers. These have to
be paid by a retirement fund hold by the steel mills themselves.
·
A high
competition due to increasing output of foreign steel mills. Steel Mill owners
have in general a high commitment with reducing their cost by getting the most
output with their existing infrastructure and
·
Thereby an
always even more increasing production and its excess supply, which was in 2001
5% more than worldwide consumption.
A first
reaction of Mr. Clinton’s administration was the “Steel Action Plan”:
Mr. Clinton August 5th, 1999: “ Today I
am releasing a Steel Action Plan... to address factors that pose continuing
risks for the health and vitality of U. S. steel communities and companies and
the U.S. economy. These include analysis of foreign subsidies ... an
international conference on unfair practices that support economically
unjustifiable production capacity (and) bilateral discussions with key steel
exporters to ensure they ... eliminate market-distorting subsidies”
The U.S. based International Trade Commission ITC
was to carry out an expertise about steel and researching which imported steel
products harmed the U.S. economy most. The result was a list of 16 steel
products, which were considered dumping.
Last June Mr. Bush asked the International Trade
Commission (ITC) again to investigate the effects of imports on America’s steel
industry and its workers. The ITC found that imports were a substantial cause
of serious injury to the U.S. steel industry. ITC recommended these types of
temporary safeguard measures, for they were seemly expressly allowed by WTO
rules - in fact, international trade rules had provided such relief for more
than 50 years. Many of U.S. major trading partners - including the European
Union, Japan, Korea, Brazil, and India – had already imposed safeguard measures
covering a wide range of products.
Steel
industry and Steel worker’s councils carried on making political pressure,
voting for a candidate replacing Mr. Clinton, who would further assist and
protect the affected industry, and thereby compromising Mr. Bush with a
obligation to hold his promises. Steel industry pressed for tariffs up to 40%.
Mr. Bush implemented “only” 30%. Despite the question whether 30% or 40% the
effect on imported steel will be likely the same. Since margins of Steel Mills
are about 2%...5% in well running factories, and since a price difference of
few percent make buyers already decide to buy from a cheaper supplier, even an
increase of 15% would probably be sufficient to obtain a 90% import stop.
Another
reasoning of Mr. Bush was to receive from the senate the so-called “fast
track”, in order to have full freedom and competencies during the next WTO
round in Doha.
Mr. Bush
recognized the need for an adjustment and restructuring of the U.S. Steel
Industry. This would impact workers and communities in which they live and one
of Government’s future tasks was to help steel workers adapt to changing
economic circumstances. Direct assistance with health insurance was proposed to
help workers and retirees who lose their employer-provided coverage (!).
In fact
countries of the North American Free Trade Agreement NAFTA agreed on
dismantling production capacity of up to 100 M ton till 2008. After the 30% of
bankrupt Steel Mills this represents an issue, that might be easily achievable!
5.3
Immediate effects
5.3.1
Domestic economic and political outcome
One goal of Mr. Bush’s administration was to stop the bankruptcy wave, which was causing not indifferent damage on U.S.’s recent economic expansion. The past “mini”-recession since last quarter of 2001 and beginning of 2002 managed to have a turnaround, which is – due to still existing uncertainty – not as stable as it ought to be. Concentrated and even exaggerated “bad news” about U.S. steel economy would have bad consequences and a move backwards would result in a pitfall for the people’s trust in American economy. This bankruptcy wave has now been stopped for the next 3 years – if Mr. Bush’s administration hold’s their promises to U.S. Steel industry. Overall some 6400 steel jobs have been temporarily saved.
Prices of steel jumped up from one day to another by over 20%. Steel traders noted prices for HR (hot rolled) steel of 370 $ per ton. A week before same order would have been carried out at not more than 300 $ per metric ton. Even car bundles sold through auctions reached an increase of 15$ per ton – an increase never seen. First shortages on some steel products were already remarked and its future tendency is expected to increase.
Collected tariffs and taxes are going to be used to establish a bill which proposes to create a fund aiming to help retired steel workers to pay for their health care. For instance no further approach has been made besides the health care issue. This means, that pensions are still charged on privately owned steel mills.
One is certain: Governmental imposed restructuring of the steel industry will be adopted. Mr. Bush announced in his statement a retraining campaign to help American steel workers – who were “the best skilled” in the world - to find other jobs in more rewarding industries. Implementations of such campaign remain usually big question marks.
Under a political point of view, Mr. Bush’s steel tariffs might have their reasons. One is the much bigger probability for Mr. Bush to receive from senate the “fast track” for the next World Economic Round in Doha. This allows Mr. Bush to dispose of additional freedom and competencies to accelerate the Globalisation Process.
5.4
Secondary Effects
5.4.1
Domestic
In view of probable tariffs on imported steel, Robert W. Crandall [Crandall] published in November/December 2001 his special report “The Futility of Steel Trade Protection” which contains a sensible reasoning about tariffs, which at those days were supposed to be applied in future.
Some aspects are:
- There is no need for Integrated Steel Mill’s owners to implement further restructuring measures. Any efforts in order to achieve better efficiency are – if not imposed by Government – not rewarding. An inefficient steel mill will receive subsidies as usual and an efficient one none. So efficiency is actually punished.
- Domestic Mini Mills will boost their profit and as a result, expand their capacity where possible – which is exactly the contrary of the NAFTA agreement, which contains the elimination of excess capacity of 100 M metric tons till 2008. Resources will be hold by a strongly subsidised industry until a programmed price shock will shake even the Mini-Mills from their positions. Therefore the next steel-crisis is programmed.
- Higher prices will hit the steel processing industry and create more unemployment than the 6400 saved jobs in steel making industry. Today U.S. steel is produced by 200 000 workers, and slightly fewer than half are employed by the obsolete Integrated Steel Mills. A substantial amount of domestic steel is consumed in construction and nearly 70% of imported and American steel is consumed and processed in just 12 “durable goods” industries, which employ together 3.1 M people. An increase of steel pricing reduces significantly employment in steel processing industries, even if trading partners would not retaliate with restrictions of their own:
|
Industry |
Employment |
Steel
Consumption ($ M) |
Steel's
Share of Labour and Material Costs |
|
Steel |
214075 |
|
|
|
Furniture and Fixtures |
523872 |
3626 |
0.079 |
|
Metal Containers |
33634 |
3173 |
0.248 |
|
Farm, Construction, and Mining Machinery |
228994 |
8299 |
0.223 |
|
Metalworking Machinery and Equipment |
296489 |
4294 |
0.154 |
|
General Industrial Machinery and Equipment |
265359 |
4103 |
0.137 |
|
Electrical Industrial Equipment and Apparatus |
236975 |
3017 |
0.108 |
|
Motor Vehicles and Parts* |
799825 |
25756 |
0.115 |
|
Other Transportation Equipment |
250798 |
4130 |
0.14 |
|
Materials Handling Equipment |
82729 |
2240 |
0.201 |
|
Special Industry Equipment |
121888 |
3100 |
0.134 |
|
Service Industry Machinery |
204675 |
3314 |
0.115 |
|
Household Appliances |
100016 |
2252 |
0.131 |
|
TOTAL - Major Steel Consuming Industries in USA |
3145254 |
67304 |
|
[Source: The
Futility of Steel Trade Protection, Robert Crandall]
* Motor
Vehicles and Parts are combined in this analysis. The share of the parts
industry’s output that does not go into vehicle assembly is treated as a
separate final product sector below. Source: U.S. Department of Commerce,
Input-Output Table, 1997
As a result 1
saved job in steel producing industry will cost unemployment of up to 13 jobs
in steel consuming industries.
- Politically nobody can defend the question why other industries shouldn’t receive governmental assistance and protection. Industries in question could be Textile industry, Farmers, Timber industry and even more. So most probably these industries will put pressure on Mr. Bush’s administration in order to receive assistance. In addition the action of rewarding no profitable habits of some industries might teach others how to receive subsidies. Sometimes receiving governmental support is more rewarding and less painful than to manage to obtain a profitable situation.
5.4.2
International
In order to
emphasize international reactions there are some statements given of several
top politicians:
v Japan:
Ø JISF: “U.S. Government blame other countries for the own made
problems of domestic steel industry” and "Now that the US market is closed
we're concerned about exports being redirected to Japan, so we're asking the
government to keep a watch"
Ø „Japan doubts about the consistency of
the U.S. measures with the WTO“ Yoriko Kawaguchi, Foreign Secretary of State)
v Russia:
Ø Import stop of chicken for a value of 600
M $ (official motivation: hygienic reasons)
v South-Korea:
Ø „We will adopt all measures to oppose to
U.S. tariffs” Secretary of Finance and Trade Choi Sung Hong)
v China (Joined WTO few months ago):
Ø Considers a WTO dispute settlement
v Germany:
Ø Dieter Ameling (Deutsche
Wirtschaftsvereinigung Stahl) „Bush has recurred to the obsolete tool of
protection, like it has been a bad tradition since over 30 years.“
Ø Gerhard Schröder: „The tariffs are
completely unacceptable” and a letter directed to Mr. Bush “American Import
protection would be the wrong signal for a further liberalisation of global
trade”
Ø Werner Müller (German Secretary of
Economy) „Significant burden for the trade relation between Germany and the
USA. I recognize a clear action against free trade“
v Spain:
Ø President José Maria Aznar: „a serious
mistake“
v EU:
Ø Christoph Konrad (EU Deputy)
„US-Protectionism, which reminds the conditions of the cold war“
Ø Pascal Lamy EU Trade Commissioner: „We
are not living in the old Wild West, where everyone can make what he likes“
v USA:
Ø Steel Mills „Bush’s decision is
courageous“
Ø Others “wrong”, “Disaster”, Politically
easy”
Ø David Phelps (American Institute for
Steel) “Bush’s decision will hurt steel consumers and won’t solve the problems
of weak, mismanaged steel companies”
v Other:
Ø Janet Kopenhaver Consumer Industry’s
Trade Action Coalition (CItac) "If anything good can come out of this
decision, it is that downstream users of imports of all kinds will be motivated
to become more vocal and aggressive in getting their message out to Congress,
the (Bush) administration and the public in future trade cases,"
Ø Jon Jenson Consuming Industries' Trade Action Coalition (CItac), “Bush's decision to impose new tariff restrictions on steel imports has angered American manufacturers. Their interests have gotten lost in the frantic political effort to appease steel producers and their unions. These tariffs are new taxes on American manufacturing. They come at a particularly bad time. Steel prices are rising dramatically, delivery lead times are lengthening, shortages are anticipated and customers are being warned about having their steel supplies rationed."
v Brazil will take no retaliatory economic action for instance,
although under criticism of domestic Steel companies.
v U.K.: Prime Minister Blair intensified his personal relations
between him and Mr. Bush aiming to get exemption of tariffs. His demands have
been denied in the meantime.
As an answer, on 7 March the EU
took the first step in a complaint procedure by requesting formal consultations
with the USA. The procedural steps established by the WTO dispute settlement
understanding (DSU) are:
|
Step of procedure |
Delay set by WTO rules |
Indicative dates |
|
60 days |
May 2002 |
|
|
Panel set up and panellists appointment |
45 days |
July 2002 |
|
Final report to the parties |
6 months |
January 2003 |
|
Final report to WTO members |
3 weeks |
February 2003 |
|
Dispute settlement body adopts report (if no appeal) |
60 days |
April 2003 |
|
Appellate body report (in case of appeal) |
60-90 days |
May 2003 |
|
Dispute settlement body adopts Appellate body report |
30 days |
July 2003 |
[Source: financial Times FT.com]
Japan, Korea, China, Switzerland,
Brazil, Australia, and New Zealand have all requested consultations with the
USA under the WTO-Safeguard Agreement. The EU has established contacts with
these and other countries (Norway and India) that may be interested in joining
a WTO action against the USA. The EU also held a co-ordination meeting with
EU-candidate countries on 12 March.
The EU request for dispute
settlement will, almost for sure, lead the Panel to conclude, that these new
safeguard measures violate the WTO. WTO panels have already condemned the USA
on 6 occasions for breach of the Safeguards Agreement and of other safeguard
provisions in the WTO.
For reason of not being able to
wait (short run matters and missing to react would mean expose the European
Steel Mills to face additional unscrupulous competition on their domestic and
already saturated markets), in a 2nd step EU decided to retaliate
with tariffs up to 100% on goods listed in separate documents on 25 March and
19 April 2002 (see Appendix “Suspension of concessions list” of 25 March 2002
and “Proposal for a COUNCIL REGULATION establishing additional customs duties
on imports of certain products originating in the United Stated of America” of
19 April 2002). Concerned goods are among others:
Steel, citrus fruits, orange jus, apples, pears, rice, all kinds of textiles, paper, fire arms, furniture, seats, containers, table games incl. pin-tables, billiards, automatic bowling equipment, casino games, goggles, glasses, wrist watches, all kind of pens, thermometers, percussion instruments, motorcycles (e.g. Harley Davidson) and even toothbrushes.
With these list EU tries to target
states, who are crucial for Mr. Bush’s further political steps, such as
Florida, Washington and Oregon (Fruits), California, Arkansas, Texas,
Louisiana, Mississippi, Missouri (Rice), North Carolina, Ohio, West Virginia
(Steel), North Carolina, Massachusetts, Utah, Connecticut (Fire arms), Nevada,
Wisconsin (Gaming equipment).
In addition EU applied quotas to
stop greater damage on their domestic steel industry. A cut of exports towards
USA of 18 b $ is likely to lead exporting countries to look for other targets.
EU is certainly one of the most focussed ones. The EU adopted quotas consist in
limits of imported steel. Beyond these limits, tariffs are adopted to entering
steel. Contingencies are applied on a first come – first served basis and no
identification of determined suppliers occurs. As Romano Prodi says: “While
U.S. Government is inserting the hand break, EU is just blowing up the airbag!”
5.4.3
Economic Fears
As an act of balance – at one hand it’s economically unwise to proceed with fiscal intervention and at the other hand a missing answer, facing short run closures of steel mills – EU and the great majority of resting world continued their approaches with retaliation and protection quotas. Other, non-related goods are concerned as well. These could result in significant increase of other services and goods, using these items and so on. If it would be possible to run through the whole value chain, a damage of several b $ would result – much more than “only” 18 b $ steel tariffs in addition to the 6 b $ fine imposed to USA and the 2...4 b $ retaliatory action of EU. Just thinking about the loss of speed created in stock exchanges, caused several b $ of losses in few days. In addition there will be a dead-weight loss in steel and in all other taxed goods. Politically seen, the U.S. tariffs caused big question marks about the next World Trade Forum in Doha. Some analysts talked about a deadly economic spiral, which could lead to a dangerous global instability.
5.4.4
Global Steel Trade Forecast 2002
Forecasting,
what will happen to steel industry until the end of 2002 is very difficult. In
fact no analysis is available to public for instance; no analyst is willing to
loose his face telling wrong figures. In addition, accurate figures about which
country is exporting how much to what country is hard to find. The WTO annual
report gives already certain numbers, but the uncertainty of correct figures
remains: Are Steel Mills and customs reporting the real value of traded steel
or are they reporting the discounted and cheating “pro forma” billings? In
certain countries the “pro forma” bills are not accepted any more, while other
use this obsolete way of billing on a daily business base. Despite this, it
would be highly interesting to know, what will be the future and outcome of
this recent steel war regarding the steel industry itself! The following
reasoning and the formulation of a few most probable conditions, which will
apply in near future, will give sound figures and is a courageous act to assess
– at least in terms of trend – the outcome:
SCENARIO 2002
Conditions:
·
Ceteris
Paribus (no other economic action will be undertaken, nor considered)
·
Steel for a
value of 18 b$ will shake completely global steel market
·
Prices will
raise by 10%...30% where protections are applied
·
Global
production will decrease, higher prices will lead to a loss of demand and
therefore of consumption. More progressing, substitutes will be used (e.g. some
parts in car industry)
·
NAFTA
partners agreed on dismantling 100 M tons capacity until 2008 [Metalbulletin]
·
Bush announced
and will impose a restructuring program to U.S. Integrated Mills, closing
several of them [Bush’s statement]
·
China will
accelerate its domestic economy by 7% (forecast was under question, but in
terms of steel consumption this figure may be real due to the steel consumption
in construction) [Finanz und Wirtschaft]
·
EU (15)
allows imports of non U.S. origins up to the 3 last year’s average amount + 10%
without additional tariffs, beyond these protection quotas tariffs will apply
varying from 14% to 28% [Die Welt]
·
EU (15)
applies up to 100% of tax on steel imports originating from USA [see Appendix]
·
Minimal
trades will always occur. One reason is the minimum imported amount required to
renew country specific approvals and certifications. Another reason will be
shortages of steel in certain sizes. Sometimes domestic steel of a particular
size is not available in a short term in domestic rolling mills. The only
possibility to satisfy customers in these cases are the imports of steel
·
Some 3rd
world countries are not affected neither by U.S. tariffs, nor by EU(15).
·
Brazil
announces no retaliation on U.S. tariffs
Resulting
forecast (see also TABLE REGIONAL STEEL TRADES 2001 AND FORECAST 2002):
Explanation:
·
Approach
method: This forecast considers in a first step the amounts in M metric tons
traded. These are re-evaluated and altered according to our scenario’s
conditions. The resulting forecast of traded volume is next transformed into
value (b $) again according to the conditions of our scenario. This is to say
the same metric ton originating from Asia or Russia, sold in USA will cost a
30% more than before, while in Europe an additional tax of only 14%...28% will
be applied, but only after exceeding the declared annual quotas. This means
that a metric ton’s price in Europe will increase only between 10% and 15%.
·
Transport
matters and acts like an incentive to sales. However shipping steel in huge
amounts on ships will cost between 10 $ and 20 $ per metric ton and represents
around 3...7% of traded value. In each case it is not a big trade barrier,
since handling and packing in Mills and harbours are the biggest amount of the
whole transportation cost.
Explanation
of regional flow alterations of steel trade:
·
USA is
loosing around 11 b $ of steel imports due to their price increase. However
imports will not exhaust completely because of the consumption of rolling mills
and the imports of speciality steel. We’ve to think that some of the U.S. mills
are owned by European companies. Then certain contracts, which were established
before the application of U.S. tariffs, will be likely to carry out their
commitments of supply. Additional restructuring of U.S. Steel industry will
dismantle some of their production capacity and as an overall result USA will
still import around 10 b$ of steel.
·
Some as 3rd
world considered countries of South America will catch the opportunity of
export more steel to USA. Their price advantage will be a 25-20% compared to
former years. They will not be able to export even more, because of their
structural and instable policy. Argentina will still have the main task of
being able to produce some steel and its billing methods. However overall South
America will decrease slightly exports towards Europe (-0.2 b $) and increase
by +1.6 b $ the exports to USA.
·
As a result
of excessive supply from South America to North America, there will be some
steel shortages with their consequent price increase. This will make South
America attractive for foreign country’s imports. If the credit worthiness of
South America would be better, then more steel would be expected to be
imported. Increased imports will arrive from USA and Asia.
·
Asia
including China will be the main target to absorb the U.S. trade gap. China has
troubles to produce steel for covering their own consumption. Insufficient iron
ore productivity and missing scrap make an increase of imports most probable.
Asia will accept for 4 b $ more steel than last year. Japan will derive 1.5 b $
from being exported to USA towards Asia.
·
C./E.
Europe and Russia will increase their production by 7...10 M metric tons in
2002, due to steady reengineering and improved efficiency. They must and will
sell their steel mainly to EU and Asia.
·
EU is an
easy target for foreign steel imports. Their quota mechanism will start to act,
only if 3 year’s average supply plus 10% is surpassed. As a result EU is rather
exposed to foreign imports land looses around 15 M metric t or to say more or
less 5 b $ - just about the amount of the proposed WTO fine to be applied to
the USA.
·
USA: Trade
will decrease by 10...15 M metric tons but overall increase the gross traded
value by 4...5% including taxes. Indeed, customers receive less for more money
– a rather untypical behaviour of American habits.
·
In general
Governments of non-NAFTA countries might even apply self-imposed export
restrictions in special cases, in order to avoid an international éclat, when
necessary. However their tendency will be to increase their international and
intercontinental communication, also due to their common legal WTO litigation
against the USA.
For instance
the biggest looser will be USA (-13 M metric tons and +3.7 b $) and EU (-15 M
metric tons and –10 b$). USA will be paying a strong and compensating fine to
the EU, which will balance EU’s situation. The only big remaining looser is
USA.
5.5
Summary of forecast results
Our steel
industry forecast illustrates following outcome:
a)
Global
supply drops 20...40 M metric t (-2% ... –5%)
b)
Traded
gross volume (including tariffs and taxes) will grow by 0...20 b$ (0...7%)
c)
Most
punished industries are other than the steel industry itself, namely:
a.
All steel
processing industries
b.
Engineering
industry
c.
Construction
And
d.
Sectors
affected by other countries’ retaliatory and regulating reactions
d)
Loss of
demand of steel and choice of steel substitutes
e)
General
price increase of a basic good can create inflation, like increases of oil it
does
f)
Danger of
political escalation and deceleration of economic boom
g)
As a result
of political instability and distrust, harm to further globalisation’s process
6
Alternative Solutions
Bush’s
administration has received through the American Steel Mill overcapacity a big
problem as heritage from former Governments (Clinton, Bush Father, Reagan,
Carter...), because none of them felt sufficiently courageous to solve the real
problem of steel industry. In addition, the U.S. political system allows no
greater progress in these situations; since results of electoral campaigns are
straight related to the amount of money invested for publicity and advertising.
One of the strategies to get President of the United States of America is to
seek allied partners, who have the necessary financial strength. In the case of
Mr. Bush Steel Industry was one of the leading forces that gave him electoral
support, in change of a promise – the promise, that if he got President, he
would help U.S. Steel Industry in a prevalent financial way. Obviously this
system doesn’t allow to bring to high levels candidates, who are completely
neutral; the contrary happens: Sometimes candidates are that compromised with
sponsors, that even the most wrong economic actions could be expected, once a
candidate is President of the United States. Examples are Enron, the timber
Industry and now the U.S. Steel Industry. Politically it is an easy procedure
to blame others for someone’s own miss-situation and therefore adopt
“antidumping” measures.
·
Stop
blaming foreign countries for dumping if it’s not absolutely necessary
-
Q:
What was first – the chicken or the egg?
-
A: For
certain decisions, It doesn’t matter
U.S. Steel Industry has since ever been blaming
foreign countries for dumping and subsidies. It might be true, but it doesn’t
really matter who was first in implementing governmental assistance. We must
learn to escape the past and invent the future. In these days subsidies in
Europe are as few as never before, it would have been a good starting point for
eliminating all of the free market distorting interferences. Stopping to
blame foreign countries for dumping will give access to bilateral and multilateral
approaches to reduce subsidies in foreign and domestic industries.
·
Cancel
the ability of industries to force Governments to act in their interest
U.S. Steel Industry has shown a great ability
to obtain protection on the demand of antidumping laws. Stopping this will
enhance industry’s reforming discussions. Only under that condition a cleaning
with its related restructuring will be possible.
·
Do not
give more financial assistance and stop interfering into free trade favouring
some well-determined industries. Natural closure of non-competitive or non
cost-covering Integrated Steel Mills will free up resources and tax burden to
other citizens. Short run matters. It wouldn’t be legitimate to stop financing
and closing Steel Mills all of the sudden. Workers have given all their effort
during decades and their safe retirement should remain untouched. In this case
Government should look after its task of protecting people from poverty. Let
them get poor is - besides the moral commitment - also harmful for the national
economy. The creation of a fund bearing legacy cost to assist retired would be
one of the possibilities to close Steel Mills.
·
Adopt
retraining programs in order to achieve reduction of unemployment in case of
dismantling production capacity or even closures. The creation of non-related
and more rewarding businesses around the geographic area of Steel Mills could
limit negative effects after lay-offs. Usually a Steel Mill employs several
thousands of workers and closing one of these would paralyse economically a
whole region (see the closure of Monteforno, Ticino 1991; this region in
southern Switzerland did still not manage to recuperate its economic
activities). Concentring other industries that are in a growing segment would
help eliminating unemployment. Of course incentives to new businesses would
represent again interference into the invisible hand. Such actions must be
therefore well planned and checked, whether they harmed to macroeconomic growth
– before implementing them.
7
Conclusion – What can we learn?
Besides
political motivation, economic action and retaliation of others we can
understand the recent tariffs and their answers as a lesson in macroeconomics:
·
Subsidies
are always paid by someone, namely the taxpayer of the subsiding country;
there’s no free lunch. Subsidies impede an industry to focus on rewarding
activities and create high opportunity cost.
·
Trade
barriers like
Tariffs
Quotas
Exaggerated high technical requirements and
approvals
do nothing else than increase prices and are
harmful to global economy, but most to the protected country itself
·
Trade
creates value and enriches both, the buying party and the selling party. It
allows to reward specialization and to implement the law of comparative
advantage.
·
Short
run matters. While altered things and modified financial situations will find
their best equilibrium in long term, short run will create temporarily
unemployment if closing a factory without providing a solution for dismissed
people. Depending on the circumstances short run represents for the single
individual few months up to several years time.
·
Avoid
interfering with the “invisible hand”. In these days, Governments have a high
commitment with globalise and implementing free trade wherever possible, what
overall will result in less poverty and more economic well being.
8
APPENDIX
8.1
COMMISSION REGULATION (EC) N° 560/2002 of 27 March 2002
Download the pdf Document here:
http://europa.eu.int/comm/trade/pdf/steelreg_en.pdf
or through:
http://europa.eu.int/comm/trade/goods/steel/index_en.htm
8.2
COMMISSION OF THE EUROPEAN COMMUNITIES 19.4.2002: Proposal for a COUNCIL
REGULATION establishing additional customs duties on imports of certain
products originating in the United States of America
Download the pdf Document here:
http://europa.eu.int/comm/trade/pdf/crsteel220402.pdf
or through:
http://europa.eu.int/comm/trade/goods/steel/index_en.htm
8.3 SUBSIDIES TO THE U.S. STEEL INDUSTRY
Download the pdf Document here:
http://www.aiis.org/pdfs/report.pdf
or through:
8.4
U.S. TARIFFS vs EU RETALIATION – COMPARATIVE TABLE
EU adopts temporary measures
to guard against floods of steel imports resulting from US protectionism
Press release, Brussels, 27 March 2002
|
|
US Measures |
EU Measures |
|
change in steel imports |
down 33% since 1998 |
up 18% since 1998 |
|
change in prices |
US prices already 30% higher than in EU - showing
existing protectionism |
EU prices fallen 35% in last two years |
|
reference period used to assess whether imports have
increased |
pick and mix over five years, hard to spot any consistent
definition |
last three years - in conformity with WTO rules |
|
definition of steel products |
products aggregated into tailor made "product
categories" to get desired result |
categories defined at start of investigation as WTO rules
require |
|
country exclusions |
favourable treatment for selected friends - far from the
equal treatment required by WTO. |
all developing countries whose imports account for less
than 3%, as WTO rules require |
|
reason for the safeguard |
political pressure from the Rust Belt |
response to US measure |
|
nature of safeguard measures |
increased tariffs (30% for most products) apply, from the
first tonne |
no change in tariffs until imports reach quota levels |
|
quota level, within which safeguard has no effect |
none for finished steel products |
average of the last three years plus 10% to give roughly
2001 import level |
|
Duration |
3 years with a mid point review |
not one day longer than US measures. Provisional measures
will be in place for six months |
|
Objective |
provide yet more protectionism for the struggling sectors
of the US steel industry |
avoid Europe becoming the destination for all the steel
shut out of the US market |
|
conformity with WTO |
read the book - the US have lost four safeguard cases
over the last two years |
rules complied scrupulously with the requirements |