Trade Act of 1974 on Euro Exchange

¶ … Trade Act of 1974 on Euro exchange rates?

Free Trade has been a key agenda for the past three presidents. In an expanding global market, tariffs and trade policies are more important today than they have been in the past. More and more countries are forming alliances such as the North American Free Trade Agreement (NAFTA), the Asian Alliance, and the European Union (EU). These trade agreements are meant to level the playing for all countries, both industrialized and emerging countries.

President Bush's trade policy is aimed at helping to generate American jobs, open markets to American products, and provide economic growth. Sometimes massive increases in imports can have a devastating effect on U.S. industries. [This has been the case for the U.S. steel Industry and is the issue addressed in Section 203 (B) (1) of the Trade Act of 1974. Foreign steel makers have had the luxury of government support which allowed them to have large capacity for expansion and as a result they have flooded the U.S. market with cheap imports. Since 1998, thirty percent of all U.S. steel producers have filed for bankruptcy as a result of falling steel prices in the U.S. The World Trade Organization allows countries who have been severely effected by changes in trade policy to take temporary actions to provide ailing relief to suffering industries. This is the premise behind the Presidential Proclamation issued by President Bush (Congressional Report, 1974).]

This measure will impose taxes on European steel products being imported into the United States from other countries. It effectively excludes NAFTA countries from this, however does effect Africa, the European Union, and the Asian Alliance. Tariffs on certain products, such as rolled steel bar can be as much as 30%. Other products such as Carbon alloy fitting sand flanges will carry a tariff of 13%. Eleven products will be effected by the import tariffs. The measure is temporary and will only last for three years. This time frame is supposed to ease foreign competition pressures from U.S. steel producers and allow them to undergo a re-structuring of the industry. After the time of the Trade Act is ended, these measures should allow for a more even global playing field in the steel industry (Office of the Press Secretary, 2002).

This amendment to trade policy caused an immediate outcry from European and Asian steel makers. They claim that these measures will severely hurt the industry in their own countries. Members of the EU claim that this measure will send the already ailing Euro plunging even deeper. Some threaten to retaliate with counter measures to protect their own interests.

In the year 2000, the Euro was averaging .88 to .90 U.S. Dollars. In 2001, the Euro rose to 1.19 U.S. Dollars. This began to drop in the fourth quarter of 2001 and has been on a steady decline since that time. In March of 2002 exchange rates took a sudden plunge down to 1.13 UD Dollars, however this is still will above the exchange rate of 2000 (Xrates.com, 2002). Members of the European Union, particularly Great Britain as outraged and blame the drop in price of the Euro on Bush's tariffs. However the Euro was in decline for a full four months before these acts were even announced and the Euro is still at a rate well above the U.S. Dollar as of 2000. The steel industry only accounts for a small portion of exports to the U.S. And it is doubtful whether one industry sector would have an effect on the total economy. It may have a short-term effect, but we must remember that the steel industry is only one small part of the total European economy and is not strong enough to make or break the economy, as some would lead you to believe. This report will demonstrate that the Euro will be affected little, if at all by the Tariffs imposed by the U.S. On foreign steel.

Size of the U.S.-European import-export trade.

In 1999, EU countries traded 8.7 million metric tonnes among themselves. They exported 13.6 million metric tonnes to NAFTA countries. Their biggest destination was Central and South America at 62.5 million metric tonnes. Total exports of the EU in 1999 were 128.1 million metric tonnes. NAFTA countries only exported 0.4 million metric tonnes to the EU. Most of its steel was used domestically at 13.6 million metric tonnes. For the EU exports-imports = -113.9. This same ratio for NAFTA countries is + 8.1(World Steel, 1999).

The following chart sums up this information:

Scrap: consumption, trade and apparent domestic supply, 1999

PRIVATE

Consumption

- Imports

+ Exports

Apparent

=Domestic

Supply

Austria

1.8

0.6

0.6

1.7

Belgium-Luxembourg

6.3

3.5

1.8

4.6

Finland

1.2

0.3

0.2

1.1

France

9.8

2.9

3.8

10.6

FR Germany

17.6

2.9

8.5

23.2

Italy

16.7

4.3

0.1

12.5

Netherlands

1.3

1.4

2.5

2.4

Spain

12.2

5.6

0.0

6.6

Sweden

2.5

0.4

0.4

2.5

United Kingdom

5.9

0.2

3.6

9.3

Other EU

3.0

0.9

0.6

2.6

European Union (15)

78.2

23.0

22.0

77.2

Canada

8.5

1.6

1.9

8.8

Mexico

7.3

1.4

0.1

6.0

United States

55.4

3.7

5.5

57.2

NAFTA

71.1

6.7

7.5

72.0

(Source: Scrap: consumption, trade and apparent domestic supply, 1999.Trends & Indicators: Miscellaneous Data. http://www.worldsteel.org/trends_misc/misc16)

These numbers support the argument that the steel exports to the U.S. will not cause the Euro to "Crash." The EU exports 5 times more steel to South America than it does to the United States. In addition, the EU imports more steel than it exports. The media, particularly the BBC is making claims that the tariffs spell disaster for steel exports and the Euro as well as the British pound, but these numbers simply do not reflect that it. The amount of steel exported to the U.S. is small compared to that shipped else where and only accounts for approximately 10% of the total EU exports. It is unlikely that the decline of 10% of the market will have as drastic effect as the European steel workers and the new media would have you believe. Let us now take a look at their arguments.

Mass Media Reactions to the Tariffs

According to Crowley, 2002. A world-renowned steel economist called the tariffs "Damaging" to the U.S. economy and sets a dangerous precedent that could cost tens of thousands of layoffs in steel using industries. In this same article economist Robert W. Crandall called the tariffs "draconian" and claims that they are not the compromise, as President Bush calls them. They called it a "damaging economic blow that could delay the U.S. economy's recovery by increasing the cost of steel-made products like automobiles, cutting the demand for them" (Crowley, 2002).

Most recently, U.S. steel imports have dropped from 34.4 million tons in 2000 to about 27 million tons in 2001, according the U.S. Department of Commerce (Crowley, 2002).In this same article by Crowley, Robert Crandall the problems with the U.S. steel industry are not foreign imports, but rather excess U.S. capacity, huge retiree health care and pension costs for integrated mills, competition from more efficient U.S. mini-mills, and weakness in worldwide steel demand (Crowley, 2002). An estimated 50% of U.S. steel imports already are protected by tariffs. Despite these tariffs and a long history of voluntary export restraints by our trading partners, integrated steel mills are still not competitive. Crandall added that the U.S. market prices will recover when demand worldwide recovers, and the industry reduces production capacity (Crowley, 2002). He also points out that the new tariffs will destroy the agreement made on February 8, to cut global steel production by more than 100 tons. Crandall calls these tariffs a contradiction in policy by the Bush administration. He fears that this could start a trade war with Europe and Asia. (Crowley, 2002). Many economists on both sides of the ocean share his sentiments, particularly those in which the ailing steel industry has made its own bed, and now must lay in it.

As a reaction to the tariffs, the BBC notes that Japan and the European Union were quick to file complaints with the World Trade Organization. The EU fears that it could be hit by a wave of cheap far eastern steel displaced from the U.S. market. But the U.S. argues that the tariffs, aimed at shielding ailing steel makers from cheap imports long enough to allow them to restructure, are permitted under WTO rules (BBC News, 2002). As far as fears of a flood of cheap steel to the European market, let us remind ourselves that they only use less than 10% domestically and that they themselves ship 128 million metric tonnes per year.

According to the BBC news the U.S. is expected to lose 175,000 jobs in 2002 and the EU is expected to lose 22,200 jobs as a direct result of these tariffs (BBC News, 2002). It is not known on what their estimations are based, which is typical of their coverage of this situation.

Other Countries' reactions

PRIVATE "TYPE=PICT;ALT=steel wars"

The BBC draws support for it unsubstantiated arguments by over-inflating the reactions of other countries as in this article. The BBC reports that the "Japanese trade minister Takeo Hiranuma warned his country may retaliate with measures to protect its own steel industry. EU Trade Commissioner Pascal Lamy said late on Tuesday that it would be "a question of days" before the EU issued quotas on steel imports to prevent its own industry being damaged by steel redirected from U.S. markets." (BBC News, 2002)

The BBC is quick to address the argument by the U.S. that the "dumping of foreign steel on the U.S. market" has been the sole reason for the economic down turn. The European Unions says that their firms are just more efficient than American producers. The EU and Brazil threaten retaliatory tariffs of their own to protect their industry (BBC News, 2002). These measures are unsubstantiated as the export and import between Europe and Brazil is 5 times larger than that to the U.S., as mentioned earlier.

In addition the EU and Brazil have demanded compensation from the U.S. For lost imports. South [Korea will also lodge a formal complaint with the WTO this week though officials will hold further talks with the U.S., an official at the Ministry of Foreign Affairs and Trade said. Also according to the BBC, China is also preparing to launch its first WTO complaint since joining the global trade body late year, though a delegation will first travel to the U.S. For talks this week. U.S. ambassador Linnet Deily has warned his country's critics that calls for "immediate compensation backed by threats of unilateral trade retaliation" would be "deeply mistaken"(BBC News, 2002).] It would seem from the numbers that these countries need to check their numbers before levying sanctions.

The BBC also reports that the U.S. move has angered many of its trading partners, and the EU has already filed a formal complaint at the WTO, although that could take months to resolve. Some steel producing countries in developing countries, including South Africa, have negotiated broad exemptions from the U.S. tariffs, while Canada, Mexico, Israel and Jordan are exempt under free-trade deals. But steel producers in China, Brazil, Japan, South Korea, Norway, New Zealand, and Russia are expected to be hard hit by the U.S. tariffs (BBC News, 2002). Last week the OECD, the rich countries' think-tank, said that steel producers needed to cut more than 100 million tonnes of capacity worldwide to restore the industry to profitability. The trade war comes just a few months after world leaders pledged to co-operate in launching a new trade round at a meeting in Doha, in the Gulf Arab state of Qatar (BBC News, 2002). These claims about requests for exemption can be verified through the Report Submitted to the United States Congress. Pursuant to Section 203 (B) (1) of the Trade Act of 1974, as Amended. There have been many claims for exemption filed as reported by the BBC.

While the move may safeguard thousands of jobs within the U.S. steel industry, it will put pressure on non-U.S. firms to make further cutbacks. U.S. steel imports were worth about $8.6bn last year, making up 10% of world trade (World Steel 1999). The EU is afraid of a flood of surplus steel imports from countries such as Japan, which will no longer be able to compete in the U.S. (BBC News.2002). UK Prime Minister Blair warns President Bush that tariffs would be bad, not only for the world economy, but also for American consumers, who would be forced to pay more for steel products (BBC News.2002). In addition, the U.S. ambassador in Moscow was summoned to the Russian Foreign Ministry to be told that relations could be damaged if the tariffs were imposed. Russian Prime Minister Mikhail Kasyanov said the decision would have a "negative impact on Russia's steel industry," but said the move would not spark a trade war (BBC News.2002).

An Article be Arnold, 2002, calls steel the "the backbone of bridges, the skeleton of skyscrapers, the framework for automobiles" (Arnold, 2002). Its many uses include frames for eyeglasses, more durable frame in housing, and it's the high-tech alloy used in the Space Shuttle's solid fuel rocket motor cases; and it's the precise surgical instruments used in hospital operating rooms around the world. According to Arnold, "Some analysts are already speculating that the U.S. import curb will cause a surge in prices for steel, thereby increasing the cost of thousands of everyday items."

According to Walker the EU exports to the U.S. account for about five percent of European Union steel production. The EU is particularly concerned that Asian steel may be diverted to the European market (Walker, 2002). He also notes that many American steel using companies industries are opposed to the tariffs. The lobby group, Consuming Industries Trade Action Coalition, says the tariffs will cost more jobs in industries that use steel than they will save (Walker, 2002). They say that for example many car parts now made in the U.S. will be made abroad.

The steel producers reject this. The American Iron and Steel Institute says the effect on consumers prices will be minimal and there will be no meaningful employment costs for steel using industries.

Walker also addresses the issue as to whether the U.S. has been slow in their restructuring campaign and it is a legitimate slow-down. Walker and the U.S. Steel Industry seem to disagree on this issue. Th e U.S. Steel Industry says no. It claims to be the most efficient and least protected steel in the world. There have been 30 bankruptcies in the sector in the last five years or so. It blames the problem of excess global capacity in the steel industry on government subsidies abroad. The critics of the U.S. steel industry say it needs to bite the bullet and slim down. It is in trouble, they say, because its costs are too high They say that for example many car parts now made in the U.S. will be made abroad (Walker, 2002).

Walker criticizes the claim by the U.S. Steel industry that a flood of imports has been the cause for their dilemma. Walker says that this is strictly not so and points out that under the safeguard provisions of the WTO, there is no need to demonstrate unfairness. However, the U.S. industry does say that most of the imports that have done them so much damage are in breach of other WTO rules: they are either subsidized by foreign governments, or are dumped, that is sold in the U.S. For less than the price in the country of origin (Walker, 2002)..

The U.S. is blamed for targeting specific countries and that the U.S. has taken a number of actions against these problems which are directed against specific countries. But steel producers say that the unfair imports keep coming from other sources. So they wanted a global solution to protect them from all imports (Walker, 2002). The U.S. claims that this is strictly not so and that the import tariffs are aimed at reducing all foreign competition from the U.S. marketplace, and that it is only a temporary measure to give the U.S. steel industry time to recover. This is one area where their arguments become direct and accusatory on both sides.

History of the Steel Industry in the U.S.

In 1901, the financier JP Morgan paid $250m for the Carnegie Steel Company, making Andrew Carnegie one of the richest men in the world. Steel was at the heart of the confident American super-state that emerged at the beginning of the 20th century, forging its bridges, skyscrapers and railroads, and making massive fortunes in the process. Now, the industry that built America is in ruins. One-third of firms are on the verge of bankruptcy, and tariff barriers are needed to fight off competition from the likes of Kazakhstan and South Korea (Arnold, 2002).

The decline of the industry has been slow. Since the 1970s, it has been struggling to come to terms with over capacity, along with the rest of the world. A drop has occurred in the world demand, not just the demand of any one country. Total employment among major producers was 2.4 million in 1974; now, it is less than 900,000 (Arnold, 2002).

In Britain, a steel industry that once supported 200,000 jobs now employs fewer than 30,000. At first glance, the industry is merely suffering from the sort of ills affecting all manufacturing in developed countries, unbeatable cost competition from the burgeoning developing world (Arnold, 2002).

The situation from an Economist's Standpoint

The mismatch between supply and demand is exaggerated by the inability of producers and governments to do anything about it. In the U.S., the world's biggest market for and third-biggest producer of steel, companies and government have worked closely together since Mr. Carnegie's day. An industry that once was the symbol of the free-market dash, now relies on financial support and trade protection from the state, and has developed one of the noisiest lobby groups in Washington to muster support. This dependency left the industry either unable or unwilling to react to the market changes change which have shaken the steel industry since the beginning of the 1990s. The collapse of the Soviet Union created six major steel producers where once there was just one. Each of these countries, Russia, Ukraine, Kazakhstan, Moldova, Belarus and Uzbekistan, was inclined to produce as much steel as possible, and to push as much as possible out onto world markets in their search for precious hard currency (Arnold, 2002)..

At the same time, the emerging economies of Asia, especially China, the world's biggest steel producer, found the financial muscle and corporate will to boost exports. This meant that, while total world output and demand remained roughly static during the 1990s, the amount exported to major consumption centers surged, pushing down prices. Even at low prices, exporting made sense for producers in the former Soviet Union and other emerging economies.

Production costs are lower. While it costs $293 to produce a ton of hot rolled coil steel in the U.S., it costs just $212 in the former Soviet Union, and $185 in Brazil. Coupled with that, the devaluation of many emerging market currencies in the Asian and Russian crises of 1997-98, made exporting to dollar economies worthwhile, even at very low prices (Arnold, 2002).

It is human nature to try to blame ones bad fortune on someone else and to fail to look at the entire picture, but that is just what leaders are doing now. The conditions of the economic drop in demand are due to a world-wide drop which has been an accumulative effect of countries ignoring market indicators and pushing to produce more, even though the demand is not there. Now every one is blaming every one else. The Paris summit in 2002 was an attempt to fix this problem and make every one reduce production in an fair and equitable way. However, this should have been done over ten years ago when the first signs of a worldwide demand drop first became evident. Now the leaders are trying to put a band aid on a gaping, life-threatening flesh wound. These measures may be too little, too late for the steel industry on a global scale, not just in the U.S. And the EU.

The emerging-market advantage leads American firms to cry foul. They complain that foreign producers are selling steel below cost price on the U.S. market, a violation of international trade rules known as "anti-dumping." More than one-third of anti-dumping complaints filed by World Trade Organization members relate to the steel industry, a far greater share than any other sector. The effect on U.S. producers, lobbyists argue, has started to become intolerable. Late last year, Bethlehem Steel, a Carnegie-era veteran and the country's third-biggest firm, went bankrupt (Arnold, 2002). With a declining demand, we can expect to see many more giants fall, not just in the U.S., but in other countries as well.

This effect is seen in other market segments as well, such as in the computer industry in the early 1990s. The demand for computers rose, more companies began producing computers. The market was flooded and prices fell. This forced the closing of many major computer manufacturers. Economists call this a market adjustment. Eventually enough manufacturers go bankrupt and the supply eventually falls to come in line with demand. The companies who survive the storm are now in the game for the long hall. This is exactly what is happening in the steel industry. It is simply a market adjustment.

Bankruptcies are bad, especially for those effected, but they are a normal part of the supply and demand cycle. Economic stability lies in the fact that this only effects one sector. The effects do spill over into other sectors, who must then adjust as well. What is going on with the blame being placed on this and that factor is scapegoating and those persons are failing to see the entire picture for what it is.

This draws our attention to this week's announcement of punitive tariffs. These precedents offer little hope of a quick renaissance for the industry. First, steel imports to the U.S., the battlecry of projectionist activists, are not as mountainous as some make out. Last year, the U.S. imported 27.4 million tons of steel, down from more than 34 million tons in 2000. Imports account for only one-third of U.S. steel consumption, and their share in the total market has not risen noticeably in recent years, despite the mounting controversy (Arnold, 2002)..

Arnold claims that U.S. steel firms are "loath to help themselves." He compares the failing of the steel industry to other sectors who have been experiencing good times and uses this argument to make the statement that the U.S. steel industry has only itself to blame for its woes.

He criticizes the industry for a "suicidally short-term view among major producers." (Arnold, 2002).

In 1998-99, when tariff barriers were raised to protect the industry against cheap imports from Russia, producers opportunistically hiked output in order to cash in on the temporary breathing-space. It might have made more sense to tackle some of the industry's endemic problems, such as inept management, duplication of capacity, over-mighty unions and crippling pension costs. In Europe, after similar foot-dragging, three big producers last year combined to form Arcelor, the world's biggest private steel firm, but there have been few signs of the Americans following suit (Arnold, 2002). These types of reactions are normal in a market -- adjustmetn situation.

The only substantial criticism that can be found of the tariffs is that tariff barriers will do little to support prices. American firms may behave in the same way now as they did in 1999, boosting output in the absence of foreign competition. This will eliminate the price boost that reduced imports should bring. Other measures need to be take to ensure that this does not happen. The tariffs alone will not accomplish this. Without other means to stop the oversupply, the market equilibrium will not re establish.

The plentiful volumes from Russia, China and the rest will have to find a home somewhere, and increasing exports to Europe and developed Asia will simply drag down world prices even faster than before, a phenomenon called a "death spiral" by Brian Levich of Metal Bulletin Research (Arnold, 2002).

Demand, is linked closely to industrial output and Global gross domestic product, and is not expected to surge upward., The International Iron and Steel Institute predicts growth of 2.5% this year, after an equivalent-sized contraction in 2001. Tariff and blaming tactics will do little to boost the global decline of the steel industry.

One of the main arguments against the U.S. decision to impose tariffs on foreign steel is that it would undermine U.S. efforts to get other countries to adopt free-trade policies. President Bush dismissed this argument and imposed trade protection anyway (Bartlett, 2002). According to his argument, Mr. Bush underestimated retaliation by other countries. The Europeans have been particularly violent in their criticism of his action. In a knee-jerk reaction they immediately drew up a list of $2.1 billion worth of U.S. goods that may be subject to tariffs in response to tariffs on European steel. One obvious target is the $500 million in U.S. steel exports that go to Europe annually (Bartlett, 2002)

In addition, Europe will most likely use the ongoing dispute over Foreign Sales Corporations to get even with the U.S. over steel tariffs. These are entities created by U.S. law to lower taxes on U.S. exporters. The World Trade Organization has already ruled that this constitutes a trade subsidy and is illegal under world trade law. In a few weeks, the WTO is expected to authorize the European Union to impose tariffs in response. The Europeans have let it be known that the steel decision will be a factor in their decision to impose new tariffs on U.S. goods over other problems (Bartlett, 2002)

.From the European perspective and the perspective that we are looking at a global crisis, not one only rooted in the U.S. It appears that the steel tariffs are a failure any way one looks at them. The Europeans are being quick to blame the U.S. For all of the steel woes of the world, yet the U.S. is a relatively small producer compared to other countries. There has not been a great deal of domestic criticism of Mr. Bush's action. [One reason is that many people view them as necessary to maintain an adequate American steel industry for defense purposes. However, the amount of steel needed for defense purposes is a trivial amount of raw steel production, on the order of 1%, according to defense expert Loren Thompson of the Lexington Institute (Bartlett, 2002).