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Friday, Apr 12, 2002

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American steel import policy -- Voodoo economics

P. Nagarajan

THE US President, Mr George W. Bush, is an ardent proponent of liberalisation of trade, finance and investment. In the 2000 Presidential campaign, he repeated that he would be a `free trading' President, reject protectionism and work tirelessly to open markets in the interests of global prosperity.

However, we are now witnessing an alarming divergence between the policy the US zealously espouses as a dogma and what it really practices. Obviously, its narrow focus on economic policy in an era of increasing interdependent world economy has become a source of increasing trade friction in recent years.

The so-called `free trade' President has just invoked a strong protectionist policy. He has built a trade barrier by slapping hefty tariffs of up to 30 per cent on a range of US steel imports. This is a desperate attempt to protect the domestic steel industry from fierce foreign competition. The newly-imposed tariffs came into effect on March 20, and will stay in place for three years. Brazil, South Korea, Japan, Taiwan, Russia, China, Australia and the European Union will be the countries most affected. Steel exports from India will be affected by the US tariff.

Steel imported from Canada and Mexico will be exempt from tariffs because of the free-trade accord. A number of developing countries will be exempt as well. This does not mean they will be sheltered from the negative indirect effects arising from the potential devastating impact of the US tariff policy on the world economy.

The new barrier to global trading of steel has drawn swift widespread opposition from steel producing countries worldwide, and angered many powerful allies. It is considered a clear violation of World Trade Organisation (WTO) rules. "The US decision to go down the route of protectionism is major setback for world trading system," says the EU Trade Minister, Mr Pascal Lamy. He sharply condemned the US for acting in a "Wild West" fashion. Given the simmering tension, one cannot rule out retaliatory tariffs from the European Union and others.

It is difficult to comprehend the wisdom of the US in offending many nations by sparking a potential trade war, especially when it is trying to muster support to expand its war on terrorism.

Faced with plummeting steel prices, falling profitability, overcapacity and market distortions, the US steel industry has witnessed turbulence for quite sometime. More than 30 steel companies have filed for protection under Chapter 11 of the US Bankruptcy Code in recent years, with large layoffs. The declining employment in the US steel industry is part of the overall problem of the international steel industry.

For example, total employment in steel industry of major world producers declined from 2.4 million in 1974 to less than 900,000 in 2000.

The ongoing struggle of the US steel industry is largely due to its failure to modernise and restructure to fit into a fast-changing and highly competitive global marketplace in terms of product range, quality and price. Maintaining the productivity level of steel plants close to the international standards is essential.

Surprisingly, American steel companies continue to blame surging cheap imports for the industry's malaises, though imports have been falling in recent years.

Mr Bush has risked a potential trade war with his powerful allies. His sanctions on steel imports, totally driven by domestic politics, are ill-conceived. They cannot be justified on legal and economic grounds.

The consideration of protective tariffs as a cure for the long ailing US steel industry is downright `voodoo economics'.

It is worth mentioning that the two powerful central bankers in the world, the US Federal Reserve Chairman, Mr Alan Greenspan, and the head of the European Central Bank, Mr Wim Duisenberg, strongly disagree with the US steel import policy.

Steel is the basic raw material that is fundamental to the US industrial base. It does not make sense to increase the steel's cost by imposing tariffs on imports. This is bound to have serious economic consequences for steel-using industries.

In the name of protecting the domestic steel industry and its workers, Mr Bush has inflicted more damage to steel users, consumers and US exporters of industrial products.

One wonders whether Mr Bush and his economic advisors are aware of the staggering economic and social costs of protecting domestic steel industry workers at the expense of workers in steel-using sectors of the US economy.

The steel industry employs less than 200,000, compared to more than twelve million workers in steel-consuming industries.

According to a recent study by steel-consuming industries, the annual estimated cost, of protecting one steel industry job, to American consumers is more than $440,000.

Of course, if we consider the economic hardships imposed on steel producing workers in foreign countries, then the overall welfare cost of tariffs would be exorbitant compared with potential benefits, if any.

An increasing trend towards a unilateral US policy on the economic and political fronts is a cause for concern for the world community at this critical juncture.

(The author is Emeritus Professor of Economics, University of Prince Edward Island.)

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