Summit steels itself for a bumpy ride

Date: 14/06/01

Peter Chapman reports on what President Bush's probe into steel subsidies means for the EU

THE transatlantic trade relations roller-coaster took another plunge last week, just in time for today's (14 June) EU-US summit in Göteborg. And given that the latest spat is over steel subsidies, perhaps it would be better if this particular amusement-park ride were made of wood.

The world's metal trade was never likely to dominate headlines during President Bush's first trip to Europe. But his decision to launch a 'Section 201' probe into the steel sector was just enough to keep the nerves of transatlantic trade negotiators jangling - and make sure the president and his EU counterparts will have something to discuss, should they run short of small-talk over tonight's Swedish smorgasbord.

The independent US International Trade Commission (ITC) now has eight months to investigate allegations that foreign steel makers are benefiting from "pricing below fair value" or subsidisation.

If they find this evidence, Section 201 could give the US carte blanche to impose duties or strict quotas on steel products from around the world.

European Commissioner Pascal Lamy immediately threatened World Trade Organisation action in a letter to US Commerce Secretary Donald L. Evans, referring to penalty duties imposed earlier on 18 EU steel companies.

If the Union's trade chief was a little tetchy with the Americans, that was nothing compared with the annoyance of EU steel makers, whose stock prices took a punch in the teeth following the announcement of Bush's probe.

Now that the dust has settled, opinion is sharply divided over the actual impact trade restrictions would have on the Union's industry.

European steel lobby Eurofer lambasted the US for putting in place a chain of events which could see up to 10 million metric tonnes of steel diverted to the EU. Eurofer's international trade director Gordon Moffat says anti-dumping duties have been faced on specific product lines in the past - "but this is the nuclear option".

While Eurofer runs for the air-raid shelters, another industry analyst claims Europe will hardly feel the pinch at all. Phillip Tomlinson, director of the steel research unit of London-based CRU International, says it is not a foregone conclusion that the ITC will find evidence of unfair trade practices - although he expects there to be at least some sanctions at the end of its probe. "The major impact will not be on European mills," Tomlinson says. "Selling into Europe is actually not so easy because of the distribution system."

And even if countries are able to flood the Union with steel, the most likely exporters, nearby Russia and the Ukraine, are constrained by tight EU quotas.

In fact, Tomlinson claims trade restrictions will do more to harm US consumers of steel, such as motor industry giants Ford and General Motors, who will "have to stump up more" to buy raw materials for their US production.

Nevertheless, with trade relations in such a nervy state, it's fair to ask how this latest spat was allowed to come about.

Eighteen months ago, the European steel industry was discussing an 'early warning system' for potential trade rows caused by the cyclical nature of the steel market.

That plan, touted at the Paris-based Organisation for Economic Cooperation and Development, fizzled out after governments and the EU saw no extra value in it beyond their regular round of talks at the OECD steel committee. They also balked at the cost of running the system, with its heavy reliance on statistics.

Since then, Lamy claims he has asked for talks at OECD level aimed at setting up a multilateral steel agreement to tackle perceived problems facing the industry - a plan which has so far fallen on deaf ears. "We were not in favour [of the early warning system] because it would not serve the purpose of having less conflict in the future," says a Commission steel expert. "But we have always promoted international dialogue. That was always the policy of the EU."

Washington is reportedly now keen to set up a system to keep global capacity in check so that the US cannot be flooded with cheap steel when world demand slows down. But experts say such efforts would merely deflect attention from the facts: the Section 201 steel probe is a response to domestic political problems, pure and simple. The parlous state of the US steel industry means many of its firms feel the pain when a slowdown in the world market lowers prices by 5-10%. "Steel is highly political in the US. It is like agriculture in the EU. There is a lot of inherent protectionism - it is pretty backward, under the stranglehold of the unions," added Tomlinson.

Many US firms use big 'integrated mills' which rely on inputs of iron ore and coke and are no longer able to hold their own in the world steel market. They cannot even compete with domestic firms which have invested in smaller, more efficient 'mini-mills' which melt scrap metal to turn it into competitively priced steel products.

But the crucial factor, says Tomlinson, is a huge unfunded pensions liability hanging round the necks of US companies. In the 1980s they built up huge debts, but did not have the money to service them. "You could buy a steel company for a few hundred-million dollars but you would also get huge pension liabilities...a lot of these companies have had shrinking working forces so that there are now two or three pensioners for every employee."

The problem is that US bankruptcy laws mean firms would have to close before they could legally rid themselves of these huge liabilities.

A federal pensions agency could take the burden off the companies - but this is unlikely to be a political option with a Republican President in the White House.

That leaves EU industry with two ways to get beleaguered US firms off its back.

Option one - wait for the Section 201 probe to work itself out - or for Lamy and US Trade Representative Robert Zoellick to thrash out a solution. Zoellick said last week he intends to "pursue the President's initiative in full conformity with our WTO obligations and our interest in an open, rules-based trading system".

Option two - buy or merge with US rivals to create a global steel giant immune from parochial trade affairs. There is certainly room for one, claims Tomlinson.

In the meantime, negotiators from both sides are going to have to hold on tight until the ride levels out.

An examination of what President Bush's probe into steel subsidies means for the European Union.