KWR Viewpoints

The Law of Unintended Consequences and U.S. Steel Trade Restrictions

By Russell Smith
Willkie Farr & Gallagher

President Bush's March 6 decision to impose prohibitive tariffs on most U.S. steel flat-rolled product imports, along with a tariff rate quota on slab steel imports, was shocking in its scope and scale, even if some restrictions were expected.

While the Bush Administration achieved the immediate public relations and political advantage of the decision at home, gaining the praise of the U.S. industry, steelworkers' unions, and steel state politicians, the real consequences of the decision are only now starting to register at home and abroad. They are not pleasant, either for the United States or for its major trading partners, and they hold no positive promise.

At home, the decision has triggered a market dynamic that is neither controllable nor predictable. Government intervention, meant to "stabilize" the steel market, is instead disrupting it. Prices are rising and inventories are falling, and this is arguably good for some U.S. steelmakers, but in fact these benefits are being overwhelmed by problems created for U.S. consuming industries. For those companies that rely on steel as an input to making other products, their costs are rising and their supplies are becoming more uncertain. In a perfectly protected market, this would simply raise their profit margins as well, but thankfully for the overall American economy, we are not "perfectly" protected. Thus, companies that buy products containing steel can turn to overseas suppliers of those products, who are not under trade restrictions and often have lower production costs. The economic advantages of buying domestically have been offset by the higher costs of steel inputs, so foreign suppliers are far more attractive.

American makers of products as simple as basic tools or as complex as electric motors are seeing their orders cancelled and transferred to overseas suppliers. The Bush Administration's decision on steel has, ironically, created "winners" and "losers" at home. Unfortunately the Administration has chosen to confer benefits on the least, rather than the most, productive end of the manufacturing chain. This is, in effect, industrial policy turned on its head. Abroad, the consequences of Bush's decision have been even more complicated. Certainly major steel exporters to the U.S. are suffering disruption, but the impacts go much further. In essence, a real trade war has broken out over steel. Major steel trading countries have now erected barriers to assure that steel -- which would legitimately flow to American markets is not redirected to their shores. In the process, trade barriers that had been negotiated down are being restored. A number of countries have raised steel tariffs to bound limits of 30% or higher, while others like the EU have announced their own anti-surge safeguards.

Second, efforts to reduce overall world steel production capacity, which was a U.S. priority as part of its steel program, are suffering. Other countries are rightly asking how the U.S. can credibly argue for global sacrifice when it has added a new, dramatically higher level of protection to its already heavily protected steel industry. They ask what persuasion the U.S. can bring for reductions in uneconomic steel production when these measures assure that bankrupt U.S. mills that ought to be liquidated will now be able to "hang on" for few more years because U.S. prices and supplies are being artificially controlled to their advantage.

Third, the decision and its aftermath present the World Trade Organization with its most difficult challenge to date. This is not because the question of whether U.S. actions violate the WTO Safeguards and other agreements is so difficult--it is not. It is because a substantial U.S. loss, whenever it occurs, will only invite further reaction from the U.S. steel industry and its allies claiming that the WTO is unfair, biased and anti-U.S. Japan and the EU, as the major challengers, are already being condemned in the U.S. for attempting to use the WTO dispute resolution process to force changes in U.S. trade laws that could not be achieved at the negotiating table.

This criticism appeals to the forces in the U.S. which seek to undermine the WTO as an effective force for open trade and the rule of law. It is, of course, dead wrong. A rules-based, multilateral system brings a measure of objectivity to what has become a highly politicized and manipulated exercise. Countries are free to do what they wish on trade, but they must answer for their actions when they violate the basic norms to which they and their trading partners have agreed. Until the WTO sorts out the steel situation, and those involved, including the U.S., accept the outcome and implement it, unfortunately we are still subject to the law of the jungle rather than the rule of law. Japan and the EU, as well as other countries, have performed a constructive service by seeking to bring this politically difficult case into the WTO process as soon as possible.

While these consequences were quick to arise from the March 6 decision, many months, and in some cases years, will go by before they can be overcome. The economic dislocations will remain and some will be permanent. The U.S. steel industry will still have to restructure itself to compete in a global market. There will still need to be rationalization of global steel capacity, and the WTO will need to weather the storm this situation will create. It is difficult to see that weighed against these consequences, the steel decision made sense for the United States, much less the rest of the world.

Russell Smith is an attorney at Willkie Farr & Gallagher international law firm. His opinions may not necessarily reflect those of KWR International.