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US dares a trade
war
By John Berthelsen
The
George W Bush administration's announcement on Tuesday
that it would limit the import of knit fabrics, dressing
gowns, robes and brassieres from China considerably
complicates a US trade system that seems to be slipping
out of control and threatens an international trade war
on several fronts.
The administration is already
wrestling with global steel-manufacturing economies over
tariffs up to 30 percent to protect US steel that the
World Trade Organization (WTO) declared illegal. The
United States faces retaliation of up to US$2.2 billion
on a series of politically painful products that it now
ships overseas.
In addition, in October 2001,
the US imposed a 12.6 percent duty on Canadian lumber
after finding that Canada was dumping in the United
States at what it called artificially low prices. That
was in addition to a 19.3 percent anti-dumping tariff
put in place three months earlier.
The
administration in 2002 also pushed through Congress a
$180 billion farm-subsidy bill that helped wreck WTO
ministerial meetings in Cancun, Mexico, in September.
Earlier this year it ruled against Vietnamese basa and
tra catfish imports at the behest of catfish farmers on
the Mississippi River Basin and is now considering
similar dumping penalties against Southeast Asian shrimp
farmers, despite criticism from international economists
and members of the US Senate.
Concerning the
textile quotas announced on Tuesday, a spokesman for
China's Ministry of Commerce said the next day that
China is "deeply regretful over and firmly opposes the
US decision to impose quotas on three types of textile
products it imports from China".
The major
concern in financial markets is that with the US needing
to fund its current account to the tune of more than
$365 billion by September and perhaps as much as $550
billion by year-end, China could retaliate by refusing
to invest its trade surplus in US treasury bonds. Or it
could sell some of its already gargantuan bond holdings.
Currency markets were badly rocked on the same
day by publication of stunning Treasury Department
figures showing that capital inflows to the US had
fallen dramatically, from $49.6 billion in August to
$4.6 billion in September. If capital flows were to slow
more permanently because of fears of the US ability to
fund its current account and fiscal deficit, the dollar
would take the pressure until interest rates had to rise
to make it more attractive overseas. That in turn would
snuff out the nascent economic recovery (see Sliding greenback highlights trade
deficit, May 23, and Asia fills her boots: Dollar reserves
skyrocket, July 15).
The decision on
the China textile quotas, announced by US Commerce
Secretary Donald Evans, is not entirely without legal
foundation. China, when it joined the WTO in 2000, made
the unheard-of decision to allow the unilateral
imposition of quotas if the United States believed
imports were disrupting US markets. China, however, is
threatening to take the case to the WTO for
adjudication.
The quotas, Evans said in a
Commerce Department press release, were to "demonstrate
the Bush administration's commitment to our trade rules
and American workers". It caps weeks of negotiations at
the behest of US clothing manufacturers, who charged
that they are the victims of unfair competition that has
seen Chinese sales of textiles to the US grow by 63
percent to $3.15 billion in 2002 and which have climbed
considerably since.
Given China's enormous
annual trade surplus with the US - although not with
other countries - which is expected to climb to well
over $100 billion by year-end, the threatened quotas are
largely symbolic. Critics such as Kenneth Kourtis, the
vice chairman of Goldman Sachs Asia, have pointed out
that about 60 percent of China's exports are actually
generated by multinational joint ventures, many of them
involving US corporations.
Nonetheless, over the
past several months, there has been a steadily growing
political drumbeat of US criticism of China for its
refusal to revalue the yuan, which has remained at 8.28
to the US dollar. In the past year to date, China's
trade surplus with the US has grown to $89.7 billion,
far ahead of America's perennial trade debtor, Japan, at
$48.1 billion.
With the global US current
account deficit now at $365.9 billion through September,
the Bush administration has all but abandoned any
commitment - other than rhetorical - to free trade. For
instance, with steelworkers ready to take to the streets
in three politically sensitive states, the
administration is forced to choose among kicking off a
major world trade war over steel tariffs, losing
steelworker votes in the next election, or losing even
more votes in other states as retaliatory tariffs
imposed by the rest of the world begin to bite.
The administration is vigorously searching for a
solution that would both protect the steelworkers and
stall imposition of the tariffs at least until next
March. At the urging of the White House, US steelmakers
have agreed to the end of tariffs next autumn, according
to a report in Tuesday's Wall Street Journal.
Steelworkers across eight US states have planned rallies
or other actions against cutting the tariffs.
With steelworkers ready to take to the streets,
China threatening retaliation and the rest of the world
generally irritated at US unilateralism, the globe is
thus probably closer to a trade war than it has been in
decades. For the European Union, which has been assured
by the WTO that the tariffs are illegal, compromise
isn't likely. President Bush, visiting London this week,
is scheduled to discuss the tariffs with Prime Minister
Tony Blair. However, he is likely to delay any decision
until at least after he leaves town to avoid angering
Europeans even more than he already has done.
"A
lot of other dominoes have to fall before we're in a
1930s-style trade war," Gary C Hufbauer, an
international-trade specialist with the Institute for
International Economics in Washington, DC, told Asia
Times Online. "But even if [Bush] doesn't lift the
tariffs, he has allowed the atmosphere to sour further
after the fiasco at Cancun [where WTO talks failed] and
other battles we have been having, such as over lumber
and agriculture. It is throwing sand in the process of
trade liberalization and it is regarded across the world
as more evidence of American unilateralism."
At
issue are stiff tariffs imposed on 10 of 12 categories
of foreign steel in March 2002 as a promise made to
protect US steel companies and their workers during the
2000 election campaign. The domestic steel industry,
staggering under the weight of $13 billion in pension
benefits for retired workers, asked for at least three
years of respite to reconstitute itself to ward off
overseas competition. Over the three years, the highest
penalties are to fall to 18 percent while others fall as
low as 6 percent.
The protective steel tariffs
were plainly illegal on their face. Eight
steel-producing economies - the EU, Japan, South Korea,
China, Switzerland, Norway, New Zealand and Brazil -
filed complaints with the WTO, which declared them
unlawful in May. The US has since exhausted its appeals.
Unless the tariffs are repealed by December 15,
the European Union has announced that it will impose
$2.2 billion in retaliatory tariffs that have been very
carefully thought out to punish the president at the
ballot box. The EU tariffs, for instance, would hit
oranges - and voters - from Florida, a state that Bush
either narrowly won or lost, depending on the point of
view, in 2000. The US Supreme Court, in one of the most
controversial decisions in its 213-year history, denied
a recount of the Florida vote that in effect delivered
the presidential election to Bush over then-vice
president Al Gore.
Japan, China and other
steel-producing countries have also announced their
intention to impose retaliatory tariffs. The WTO ruled
that penalties could also be imposed on the export of
Harley-Davidson motorcycles, a blue-collar icon among
Bush supporters. They would also include cigarettes,
important income earners in tobacco-producing swing
states of the US south, as well as textiles, wine,
sporting goods and hunting weapons.
In a
worst-case scenario, the WTO arbitration panel could
allow each of the eight complainants to retaliate
against US products up to the full value of worldwide
steel imports lost, although that is highly unlikely,
according to analysts. The world's trade specialists
have a vivid memory of the damage wrought by the 1930s
trade wars, which contributed to wrecking the global
economy and played a major role in prolonging the Great
Depression, which lasted from 1929 to the onset of World
War II.
From the time of their imposition, the
tariffs have been regarded as a controversial and
ill-advised political move that was widely reported to
be engineered by the president's political adviser, Karl
Rove, to gather votes in the three politically sensitive
states of West Virginia, Ohio and Pennsylvania. Bush won
West Virginia and Ohio in 2000 but lost Pennsylvania
anyway.
They were also reported to be a
trade-off urged by Trade Representative Robert Zoellick
to gain congressional consent for so-called fast-track
trade-negotiating authority by the administration. But
once in place, they have become a millstone. Reportedly
Treasury Secretary John Snow has argued for their
removal, while political operatives want to keep them in
place.
The steel-tariff move, described as
determinedly cynical by critics, appears to have done
more harm than good across the breadth of the US
economy. The steel industry, much of it notoriously
inefficient, has been restructuring for decades and
demanding protection of various kinds since 1968.
Nimbler domestic and international steel producers have
continued to eat into the rustbelt steel mills of the
Appalachian region.
Economists are unanimous
that protectionism simply is ineffective in encouraging
industries to regroup and restructure. According to a
study by Hiro Lee of the University of Kitakyushu in
Japan and Dominique van der Mensbrugghe of the World
Bank, "the US steel industry has been protected by
quantitative restrictions, voluntary restraint
agreements, anti-dumping and countervailing duties and
other relief measures" for the better part of three
decades, to no particular avail. In June 2001, the two
wrote, "the United States had over 159 anti-dumping and
countervailing-duties actions on various types of steel
products" in a vain attempt to protect the industry.
In any case, the price of steel immediately shot
up across the United States, contributing to the
weakness in the flagging economy and costing consumers
anywhere between $2 billion and $4 billion for end
products. "The conclusion is that the safeguards are
unambiguously a drag on the US economy," said a research
paper prepared by Hufbauer and Ben Goodrich for the
Institute for International Economics.
Even
before the tariffs went into effect, buyers pushed up
prices by $40-$75 per tonne in their effort to obtain
steel before the deadline, slowing imports by at least
30 percent and tightening the market to its highest
point in 15 years. Hot-rolled prices zoomed to about
$300 per tonne, compared with $210 a year earlier.
That put serious pressure on steel users across
the country, including construction companies, auto
makers, metal-products fabricators and others. William
Gaskin, president of the Precision Metal Forming
Association, an industry trade group, says there are 59
steel-consuming jobs for every steelmaking job. Steel
users, according to Hufbauer and Goodrich, have been
shedding jobs at a faster pace than steel producers
because of the tariffs.
Nor did it help the
workers much. "We calculate that about $2 billion a year
is the transfer of money from user to producer as a
result of the tariffs," Hufbauer told Asia Times Online.
"We think that only a small amount of that, maybe at
most $45 million to $50 million, got to the workers or
pensioners. Most of the money went to improving the
profits of the relatively healthy steel firms, Nucor and
ISG, or to the creditors of bankrupt firms, bondholders,
bank creditors and so on."
One of the best
examples of the effect is the delay in construction of a
replacement for a major section of the San Francisco Bay
Bridge, one of the city's two world-famous spans, which
was damaged in a 1989 earthquake. The price tag has
tripled to $2.95 billion from original estimates. Under
the federal Buy America law, the California
Transportation Department must award the bid to
contractors using domestic steel unless foreign steel is
at least 25 percent less expensive.
The section
to be replaced requires 67,000 tonnes of steel, the
equivalent of 10 Eiffel Towers. However, according to
the department, which is overseeing the reconstruction,
US firms may not be able to supply enough steel.
Japanese and Chinese steelmakers, according to a
spokesman, may well be able to fabricate and deliver the
steel faster than domestic producers. But, because of
the tariffs, they may not get the chance.
The
Bush administration is maneuvering through a series of
options and stalling tactics in an attempt to stave off
the penalties. Nonetheless, there is plenty of
collateral damage to be considered. The administration
has floated the idea of substituting other forms of
protection, which has been met with serious antagonism
by its European trading partners.
Probably the
most likely scenario is some other form of
as-yet-undetermined tariff rate quota (TRQ), a
limitation on the quantity of goods entitled to
specified tariff treatment that may be imported during a
specific period. Nobody knows at this juncture what form
the action might take - probably including the
administration itself.
Certainly, the EU,
already vexed with the Americans over the war in Iraq
and a wide variety of other unilateral actions, appears
in no mood to negotiate, although it may end up in some
as-yet-unknown compromise. Nor is much of America's
right wing pleased. Columnist Pat Buchanan, leader of
Republican anti-trade forces, demanded that "either
President Bush confronts Europe now, or he buckles and
accepts the slow death of US manufacturing".
That leaves the administration in a kind of
damned-if-you-do, damned-if-you-don't posture. It
certainly hasn't done much for the steel companies. By
October, according to Hufbauer and Goodrich, despite a
year and a half of protection, seven steel-production or
-processing companies had declared bankruptcy. In the
second quarter of 2003, after-tax profit as a share of
sales for the industry was minus-2.3 percent.
While that represents a small improvement over
pre-tariff losses, "the industry remains unprofitable",
and much more consolidation is necessary, they said.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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