President Bush's steel tariffs and their impact on the Euro exchange rate

¶ … 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).

Conclusion

A report by CEBR outlines six approaches to stabilize the steel market. They are as follows: change the inflation target, change the interest rate tactics to make upward movements in larger steps, change the tax and spending mix to have a bigger impact on consumption, tax borrowing so as to allow lower interest rates, tax property so as to reduce borrowing for property purchase, possible, but needs to be applied to lower value properties to have full impact (CEBR, 1999). All of these measures would help the steel industry, but would also have serious repercussions on the rest of the economy as well. It would be like taking out the heart to fix the little toe.

The CEBR also stated that the UK steel industry is now one of the most efficient in the world, having increased productivity by nearly 10% each year for the last 20 years. This is three times the rate for UK manufacturing and five times faster than for the UK economy as a whole. They also noted that the UK steel sector shares world leadership with the U.S.A. And Japan (in man hours per tonne), and is 5% higher than Germany and 12% higher than France. As far as demand goes they predicted a likely fall in demand (based on Jan-March 1998) for UK produced steel will reduce UK GDP by £870 million per annum and export earnings by £350 million (CEBR, 1999).

The BBC would have you to believe the entire British economy, as well as that of the rest of the EU will fall to ruin in the aftermath of the U.S. imposed tariffs. However, the research in this report would indicate that that is unlikely to happen. First of all, steel is not the entire European export market, and comprises a small share. Secondly, the Euro was already on a down trend four months before the activation of the tariffs. Third of all, the EU exports five times more steel to South America than the United States. The answer to the question, "Will the U.S. tariffs on Imported Steel have a direct effect on the exchange rate of the Euro?" is clearly no. However, if other countries react in irrational manners and we get into trade wars with other countries and unsupported retaliatory actions involving other goods and service, the answer may change to "yes," depending on the scale and scope of the other trade sanctions. One sector of the market seldom has the power to crash the entire system, but it can have a wave like ripple effect into other market sectors. This ripple effect is more dangerous than the damage to one sector. This is precisely the situation that we face with the steel industry.

If our leaders keep their cool, and the media quits making unsupported broad statements, a global solution can be found to this problem. The solution to the steel industry's depend on the ability of the World to act as a global community to solve a global problem.