Lessons to Learn from U.S. President Bush's Decision on Safeguards on Steel Imports

Fellow, RIETI

The U.S. safeguard on steel imports as an emerging source of trade friction

On March 5, U.S. President George W. Bush announced a plan to impose a maximum 30 percent tariff on steel imports and import quotas of up to three years to allow some time for the U.S. steel industry to carry out structural reform. The European Union wasted no time in expressing its intention to bring the case to dispute settlement under the World Trade Organization, while Japan and South Korea requested bilateral talks with the U.S. China, which has just entered the WTO, also suggested the possibility of making its first case before the Geneva-based trade watchdog. Fearing that surplus steel products, virtually shut out of the U.S. market, may head for Europe, the EU itself is considering implementing safeguards. Given those developments, concerns are now mounting that we may have yet another major trade issue.

It is still fresh in our mind that Japan's imposition of provisional safeguards on three agricultural products caused much turbulence in Japan-China relations throughout the past year. That friction was finally settled at the end of last year when Japan decided not to invoke definitive safeguard measures.

President Bush, however, decided to go ahead in using safeguard measures despite mounting criticism from trade partners. What circumstances lie behind his decision and what should Japan learn from this case?

It is widely known that the U.S. steel industry has relied on restrictive import measures for the past 30 years, lagging behind in structural reform and thereby losing international competitiveness. Some 300,000 retirees - those who supported the industry during its heyday - are now on pension and healthcare programs funded by steel makers and thus form a powerful lobbying force concerned with the survival of those companies. Thus, the U.S. has been unable to cut the vicious spiral delaying consolidation, decreasing international competence, import restrictions, and causing further delays in consolidation. The EU, which has gone through substantial structural adjustment of the steel industry since the 1980s, could not hide its irritation, saying that the problem of the U.S. steel industry is not an external problem but a problem of domestic industrial adjustment. British Prime Minister Tony Blair, German Chancellor Gerhard Schroder, EU President Romano Prodi and EU Trade Commissioner Pascal Lamy are all strongly criticizing President Bush.

What political game is President Bush playing?

President Bush's top concern in trade policy is to obtain Congress' approval on the Trade Promotion Authority (TPA), thus, he cannot afford to ignore the steel lobby. A bill calling for TPA has managed to pass the House of Representatives by a margin of one vote, or 215 against 214, in December and it now awaits endorsement by the Senate. In his speech on the steel safeguards before the Congress, President Bush explicitly called for the Senates' approval on TPA. The new round of WTO trade talks has begun and negotiations on the Free Trade Area of the Americas (FTAA) need to be concluded by the end of 2005. If President Bush wants to make notable achievements in those trade negotiations and win another term in the 2004 presidential election, he definitely needs TPA. The mid-term election will be held in the later half of this year and Democrats will be trying to regain a majority in the House. All those circumstances lie behind the President's decision on the safeguards.

It is doubtful that the U.S. has a chance of winning in the WTO dispute settlement over the safeguards. The U.S. has implemented a series of restrictive measures such as antidumping duties and its steel imports have substantially decreased during the past three years. It is quite probable that the U.S. would lose the case as the WTO dispute settlement panel will likely see that the U.S. doesn't meet the conditions for invoking safeguards, when a damage on a domestic industry is caused by a sharp rise of imports.

The EU is already suggesting the possibility of taking retaliatory measures in case it cannot receive sufficient compensation. Having just lost cases concerning safeguards on wheat gluten and lamb meat, the U.S. should be fully aware of the risks involved. Is President Bush trying to use "gaiatsu''-external pressure-as leverage to push forward internal policies, emulating Japan's hallmark tactics? While maintaining his political stance to protect the domestic steel industry, President Bush may be trying to avoid political risk and putting off hard decisions.

Backwash of President Bush's decision is huge. It would halt the ongoing dialogue at the Organization for Economic Cooperation and Development on concerted efforts to reduce excessive capacity for steel production and market-distorting protection of inefficient steel plants. The EU has already expressed its intention not to attend the upcoming OECD meeting on the issue in a show of its protest against the U.S. move. With the center of steel production shifting from industrialized countries to developing countries, the U.S. might have seen a limit to the debates at the OECD. Still, the U.S. deserves a major backlash for making an about-face in taking a protectionist stance at a time when the global community is trying to form consensus on the disposal of surplus production facilities and the reduction of market-distorting government subsidies. Once he obtains the Senates' approval on TPA, President Bush will definitely need to make serious efforts to restore confidence in its trade partners.

Japan in transition - The need to formulate comprehensive trade policy

What should Japan learn from all those developments? Impressions have been renewed that the U.S. is protective of its own market. Meanwhile, Japan avoided the definitive implementation of safeguards. This deserves certain credit in the sense that Japan has thus prevented the credibility of its commitment to market opening from being undermined.

Imposition of safeguard measures would serve as disincentive and postpone the solution of problems unless it is accompanied by a firm decision to push forward the structural reform of a concerned domestic industry. Indeed, responding to media interviews, U.S. steel industry officials said that they now have a little breathing room.

Japan should not tolerate the U.S. action. It should exercise its rights under the WTO rules and lodge strong protection. The number of import restrictive measures taken by Asian countries, however, is increasing. Japan should take the U.S. case as an opportunity to learn wisdom from another's fault and caution itself not to easily take import restrictive measures.

On the other hand, it deserves certain attention that the U.S. government has a strong will to get the Senates' approval on TPA and proceed in trade negotiations such as the new round of talks under the WTO and FTAA negotiations. It is notable that the U.S. government forced the domestic steel industry to make certain concessions with regard to antidumping in the WTO Ministerial Conference in November in order to allow the launch of the new round of WTO talks. Each country has areas that benefit from globalization and those which protest against it. Nothing by acting in the defensive by utilizing import restrictions can ever generate positive results. If Japan wants to receive greater benefits from globalization, then, it must make serious efforts to formulate comprehensive trade strategies to promote free trade for encompassing sectors.

March 12, 2002

March 12, 2002