Canton Repository

July 28, 2002

Despite warnings, tariffs didn’t start a trade war 

By FINLAY LEWIS and PAUL M. KRAWZAK
Copley News Service

WASHINGTON — Despite grim warnings, President Bush’s controversial decision to increase tariffs on imported steel has not
triggered a trade war. That’s because few governments have the stomach for a confrontation that could exact a heavy toll from their
economies.

Bush’s move in March to help the domestic steel industry stirred threats of retaliation from steel-producing nations everywhere. But
it was the European Union that prepared the sternest counterattack, raising the prospect of a tit-for-tat spiral that could have crippled transatlantic commerce.

Instead, both sides blinked.

“We are so integrated economically with each other now and have so much at stake in the relationship, and in the global economy,
that, while we may write about trade wars, there is such an incentive not to let those things escalate to that level,” said Bruce
Stokes, a trade expert with the Council on Foreign Relations. “It is too dangerous, and you end up invariably shooting yourself in the
foot in the process.”

After a splashy March rollout of the temporary tariff hikes, the Bush administration set about soon thereafter to cushion the impact
by quietly exempting different categories of foreign steel products that do not have United States-made counterparts.

In response, the European Union has postponed a decision on whether to implement its package of retaliatory measures until Sept. 30. Most experts now expect the two sides will confine the dispute over the U.S. tariffs of up to 30 percent to the World Trade
Organization, an umpire overseeing global trade that is expected to rule on their legality by September 2003.

Things still could go awry, largely because both the administration and the European Union are under intense pressure from their
domestic steel industries to act tough. Indeed, the Bush administration boosted steel tariffs because the industry in politically pivotal states such as Ohio, West Virginia and Pennsylvania was demanding protection from cheap imports.

The European Union’s postponement was designed to give the White House time to consider more exemptions, which some
European Union politicians say have so far been insufficient.

The American industry to date has not seriously challenged the administration’s exemptions, which by now cover about 800,000 tons of imports, or 6 percent of the volume of imports affected by the tariff increase. That could change if the exceptions list grows to
include steel categories that are more politically and economically sensitive.

The 261 exemptions approved so far are insignificant in the view of Thomas Usher, chairman and chief executive officer of U.S.
Steel Corp., the nation’s largest steel maker.

“They have been what I would call legitimate exclusions,” he said.

But the industry has expressed concern that too many exceptions could water down the benefits from the three-year tariffs.
However, Usher and steel state lawmakers such as Rep. Phil English, a Pennsylvania Republican who leads the Congressional Steel Caucus, say they have received assurances from the administration that it will not undermine the program.

Meanwhile, senior officials in virtually all steel-producing countries recognize that lashing out at each other would ultimately solve
nothing. Although steel prices are on the rise, the global industry still suffers from a price-depressing supply glut that reflects deeper
problems that can only be solved by joint action.

In addition, neither the European Union nor the administration could command a united front at home if either side made a decision to risk a trade war.

Within Europe, a number of key governments, most notably Germany, oppose a retaliatory counter strike against the U.S. tariffs
because of fears of damage to their own economies.

In addition, the European Union has imposed tariff hikes of its own against steel imports from developing countries, and it is not at
all clear to analysts that targeting the American tariffs in advance of a World Trade Organization finding would pass legal muster.

“They ... do not have the strongest leg in the world to stand on,” said Dan Tarullo, President Clinton’s top adviser on international
economics. “If they were to retaliate immediately ... they would risk losing what most of the rest of the world would regard as the
high ground.”

Meanwhile, the Bush administration has had to contend with the domestic impact of the tariff hikes, which have raised prices across
the manufacturing sector. Factories that depend on affordable supplies of steel have struggled, raising the threat of layoffs at a time when unemployment nationally remains stubbornly high.

Several small steel-using manufacturers told Congress recently that they are beginning to lose customers and will have to lay off
employees and even shut down if high prices continue.

But predictions that the duties would cost 15,000 to 30,000 jobs among steel users have yet to prove out.

“If things don’t get better between now and (the fall) — we don’t get some steel into this market — then I think you’re going to start
seeing some of these job losses come fall,” said Laura M. Baughman, an economist who issued those predictions last December.