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Steel trap

George Bush declared free trade a top priority - then sought protection for steel.

George Bush declared free trade a top priority - then sought protection for steel.

By Deepak Gopinath
July 2001
Institutional Investor Magazine

George Bush declared free trade a top priority - then sought protection for steel. The spin: This was astute politics that will further free trade. But U.S. trading partners, especially Brazil, will take a lot of convincing.

It was one of those only-in-Washington scenes. Early last month at a rain-swept Capitol Hill rally, U.S. Commerce Secretary Donald Evans told a couple of thousand cheering labor union members - hardly a natural Republican constituency - that "you can trust that we will be with you every step of the way until the problem is fixed." The "problem" is that U.S. steelmakers and steel union leaders feel that producers from Brazil, Germany, Russia and South Korea are flooding America with cheap, subsidized steel, and they want relief.

They appear to be well on their way to getting it, too. The previous day President George W. Bush had directed U.S. Trade Representative Robert Zoellick to ask the International Trade Commission, the independent U.S. agency that administers trade laws, to launch an investigation under Section 201 of the 1974 Trade Act into whether American steel companies are being seriously injured by imports. If the ITC decides in the steel industry's favor, the government could impose restrictions on steel imports. Section 201 cases allow the U.S. to unilaterally impose temporary tariffs or quotas on imports found to harm particular industries; after three years, U.S. trade partners may challenge the restrictions before the World Trade Organization.

But the Capitol Hill spectacle was curious not just because a conservative Republican cabinet member was successfully playing to an ostensibly liberal Democratic crowd of union members. Secretary Evans's boss, President Bush, has proclaimed himself a staunch opponent of just such protectionism. A diehard free trader, Bush met in April with 33 other Western Hemisphere leaders in Quebec City to ratify a 2005 deadline for creating a sweeping Free Trade Area of the Americas. At the summit, Bush delivered an earnest plea for trade, mustering moral as well as economic arguments. Free trade, he said, not only benefits the poor but also "reinforces the habits of liberty that sustain democracy over the long term."

Long-time Latin American free trade advocates felt that the tide was turning in their favor. "Never before have we had the kind of early commitment to regional cooperation as we have had with this administration," says Enrique Iglesias, president of the Inter-American Development Bank. "Latin America is in a period of special relationship with the U.S."

Why, then, would the president embrace such a putatively protectionist measure? He wants to appeal to domestic interest groups, clearly, but the steel action might also serve to further his free trade agenda. It "strongly strengthens" the administration's hand in getting Congress to go along with so-called fast-track trade negotiating authority for the president, says Pennsylvania Republican Phil English, a member of the House Ways and Means subcommittee on trade and chairman of the Steel Caucus. "Particularly with legislators from manufacturing districts, this shows the administration is capable of thinking outside the box on trade policy."

The intended message: President Bush is someone you can trust because he has shown that he will stand up for U.S. companies and workers, so he deserves carte blanche to negotiate trade deals.

But what works at home may not play so well abroad. If Bush's advisers imagined that this is how the steel matter would be interpreted by the U.S.'s trading partners, especially in Latin America, they grossly miscalculated. "We are dismayed, discouraged and disappointed," says Luiz Felipe de Seixas Corrêa, secretary general of Brazil's Ministry of Foreign Relations, who sees progress stalling on the Free Trade Area of the Americas. The FTAA, never as sure a thing as implied by the ebullient mood of Quebec City, may now be in jeopardy. "The end result may be to discourage further negotiations, says Seixas Corrêa.

Protectionists in wavering nations like Brazil have fresh grounds to oppose the FTAA. "How can we go out and call for politically sensitive changes in Latin American countries when we can't say no to a small, declining industry?" asks Daniel Griswold, associate director of the Center for Trade Policy Studies at the Cato Institute. "We have really chilled the environment for free trade."

Nonsense, says an official in Trade Representative Zoellick's office. The Section 201 steel-review process "demonstrates the willingness of the administration to listen to the concerns of Congress and the communities they represent," he asserts. And he points to what the administration regards as its trade achievements so far, including the completion of WTO negotiations with China and resolution of a long-running dispute with the European Union over banana imports. "The Bush administration has advanced an ambitious trade agenda, and we are engaging trading partners bilaterally, regionally and globally," the official says. "The 201 review is WTO-compliant and just one part of a larger approach the administration is taking - an approach that includes initiating negotiations with our trading partners on capacity and on the issue of subsidies."

On the surface, Bush's motive for hauling foreign steel producers before the ITC was domestic politics, pure and simple - and canny politics at that. The defection of Vermont Senator James Jeffords from the Republican Party in June of course gave Democrats control of the Senate and of committee chairmanships. The newly minted Democratic chairman of the Senate Finance Committee, Montanan Max Baucus, was already poised to petition the ITC for protection of the steel industry. By preempting Baucus and the Democrats and filing with the ITC first, the administration was able to score political points.

Bush had carried predominantly Democratic West Virginia, a major steel-producing state, in last fall's cliffhanger election and had a political debt to repay. And swing electoral states Ohio (which Bush won) and Pennsylvania (which he lost) are home to sizable contingents of the nation's 160,000 steelworkers.

But the steel initiative was also intended, indirectly, to build congressional support for fast-track, or what the Bush administration refers to as trade promotion authority, or TPA. Fast-track limits Congress to voting yea or nay on any trade agreement reached by the administration, thereby avoiding an arduous process in which first the administration and then Congress negotiate and renegotiate the terms. Fast-track would also make for simpler and more straightforward trade talks, as individual congressmen would be unable to clutter up treaties with special provisions protecting companies in their home districts. Bush pledged to his fellow Western Hemisphere heads of state in Quebec City that he would secure congressional approval for TPA by year-end.

"Without trade promotion authority there is the risk of having to negotiate twice, and there will be a tendency for all partners to take more protective stances," says Brazil's Seixas Corrêa. Adds Iglesias, "Fast-track has become a symbol of the U.S. government's willingness to move."

But with the Senate in the hands of Democrats and serious divisions between and within both parties over trade, the steel referral provides the administration with only modest political capital in congress. "It was a necessary but not sufficient condition to achieve TPA and the FTAA," maintains Norman Ornstein, a congressional scholar at the Washington, D.C-based American Enterprise Institute. "Bush still faces an uphill battle."

Moreover, the president's detour into protectionism carries tactical risks. The ITC may not find in favor of the administration, or Senate Democrats may bring their own case before the ITC, diluting Bush's political gains.

One staunch advocate of steel protection, West Virginia Democratic Senator Jay Rockefeller, is pushing to get the Senate Finance Committee to request its own Section 201 steel investigation. "Having both the administration and Congress asking for a 201 investigation will send a stronger message to the ITC that comprehensive relief is absolutely critical and is the only way to save our domestic steel industry," he has said.

The ITC could conceivably rule against Bush. "This case is not a slam dunk in any way," says William Reinsch, president of the pro-trade National Foreign Trade Council and a former aide to Rockefeller. "Steel users need to be very active in going to the ITC and arguing that no ruling is justified." Sums up Christopher Nelson, a trade expert at Samuels International Associates, a Washington consulting firm: "The political risk is that the ITC will find insufficient injury to give Bush the political credit he wanted in launching this in the first place. The second risk is that Rockefeller launches his own case, which would be broader and more damaging internationally."

The steel referral provides ammunition for protectionists abroad and sends a message to trading partners that the U.S. is unwilling to negotiate on unilateral trade protection measures, such as Section 201. This has become a sensitive issue for trading partners: Many want the U.S. to put antidumping measures - tariffs on imports deemed to be priced below cost - on the table in FTAA and in global trade negotiations.

An ITC decision sanctioning import restrictions would further antagonize U.S. trading partners. And to add political insult to economic injury, Democrats may wield their newfound clout in the Senate to force the administration to include labor and environmental conditions in all trade agreements. This would be both resented and resisted by developing countries. Concludes Ricardo Lagos, head of trade policy at Chile's Ministry of Foreign Affairs and deputy negotiator of his country's bilateral trade agreement with the U.S., "From a systemic viewpoint, it is difficult to digest this policy [on steel imports]."

Brazil is finding the steel initiative especially hard to swallow. As a major South American power, Brazil is loath to subsume its leadership to that of the U.S. within the FTAA without first cementing its dominance of Mercosur, the customs union it entered into with Argentina, Paraguay and Uruguay. Says Brazilian Secretary General Seixas Corrêa: "We want to negotiate the FTAA and have a lot to gain from the removal of obstacles to trade. But we want to negotiate from a minimum basis of strength around us." Gary Hufbauer, a trade expert at the Institute for International Economics in Washington, D.C., suggests that "quite a few businesspeople in Brazil would prefer a South American union building on Mercosur, followed by negotiations with the EU and Nafta" to the FTAA. "It is a tug-of-war," he contends, "for the commercial and ideological soul of Brazil."

The steel move considerably complicates trade issues for Brazil, a major steel exporter. Like other Latin American countries, Brazil already has grave concerns about U.S. antidumping tariffs and other trade restrictions. And Brazilian companies are reluctant to give up the steep tariff barriers that protect them in their home market. The Bush action only strengthens the hand of Brazil's vociferous protectionist lobby. Says Seixas Corrêa, "For people in our country who are against free trade negotiations, this is a powerful example of the U.S. not practicing what they are preaching to others."

Certainly, the steel initiative and the shift in the balance of power in the Senate couldn't have come at a more inopportune time for the Bush administration. The steel action appears to call into question Bush's free trade credentials just when the administration faces its busiest trade agenda: stepped-up FTAA preparations, this month's Group of Seven summit, the debate on extending China's most-favored-nation status, an Asia-Pacific Economic Community summit in October and a WTO meeting in November.

Trade tensions with the European Union are increasing just when the U.S. economic slowdown and the strong dollar are sapping support for free trade at home. EU antitrust regulators have apparently rejected General Electric Co.'s purchase of Honeywell International, and last month the WTO made an interim ruling that U.S. tax breaks for exporters violate international trade law, which could pave the way for the EU to impose $4 billion of sanctions against the U.S. Emboldened by steel's success, other industry groups may push for special treatment.

Lack of progress on the FTAA could in turn scuttle Bush's hopes of making progress in the global trade round that the administration expects to launch at this fall's WTO meeting in Qatar. "There will be no global trade round without the FTAA," says Richard Fisher, a deputy U.S. trade representative in the Clinton administration. "Bush's inability to do a free trade deal in his own backyard will send a strong message to the rest of the world."

Bush also has a personal stake in the FTAA quite apart from his faith in free trade. As the Institute for International Economics' Hufbauer points out, "Bush recognizes that Latinos form the fastest-growing voting bloc in the U.S. and that the FTAA is within his reach even if he is a one-term president."

Beyond providing a legacy for Bush, the FTAA has the potential to double U.S. trade with Latin America ex-Mexico. Fifty percent of U.S. exports and 40 percent of U.S. imports are already with countries in the Western Hemisphere. But 15 percent of U.S. exports go to Mexico, compared with just 8 percent to the rest of Latin America and the Caribbean. Yet the economy of Brazil alone, at $750 billion, is bigger than Mexico's, at $484 billion. The U.S. tariff on imports of Latin American goods averages 1.5 percent, while Brazil, for example, taxes imports from the U.S. at around 14 percent.

Freer trade with Latin America is especially alluring now because in a sense it is the only game in town. Japan's economy is dead in the water, and other Asian countries are awaiting China's lead before agreeing to trade liberalization. As for Europe, its huge subsidies for farmers are politically sacrosanct, and European companies can readily compete with their U.S. counterparts. The FTAA also matters to the U.S. because it should help keep the the European Union from siphoning off Latin American trade. Last year the EU signed a free trade agreement with Mexico, and it is currently exploring free trade negotiations with Chile and Mercosur.

For Latin America, the FTAA represents an opportunity to increase and diversify exports. "Low exports are a big cap on growth. Our economies are not open enough and as a result, we became highly dependent on commodity exports, which are highly vulnerable," says IDB's Iglesias, who has long championed free trade in the region. But he has no illusions about getting the FTAA without a fight. "This is not the best moment for the FTAA," he says. "There are a number of difficulties with the U.S. Congress and in current negotiations like agriculture and antidumping. It will take a lot of political will."

Bush's immediate priority on the trade front is domestic - getting the House and the Senate to give him fast-track authority. Latin American countries see fast-track as a token of Bush's commitment to reducing trade barriers and have threatened to hold up FTAA negotiations if he doesn't receive it.

The tilt in the Senate's balance of power makes it less likely that Bush will get TPA this year. Senate Finance Committee chairman Baucus has said pointedly that the TPA vote may now slip into 2002. And the Bush administration faces a tough fight on TPA in the House, despite a slight Republican majority (221-210). According to trade advocates, 60 to 70 House Republicans are protectionist and might oppose TPA, while 40 to 50 House Democrats are steadfastly pro-trade and will favor TPA. This still leaves the White House short of the 218 votes it needs. The protectionist tendency in the House was very much in evidence late last month when congressmen voted 2-to-1 to ban Mexican truckers from operating in the U.S.

Unions are unlikely to rally behind TPA. Asked whether there's a linkage between steel industry protection and support for TPA, United Steelworkers of America president Leo Gerard replies: "Absolutely none. We will not exchange something that is right for our members for something that is not right for our country."

A pivotal factor in TPA approval will be how much support Bush receives from the agriculture lobby. Traditionally, farmers have been eager to increase exports to Latin America, and this year the agriculture lobby fought to preserve the cabinet-level status of the U.S. trade representative post. "Generally, we are for free trade, but we also want fair trade," says John Skorburg, senior economist and trade specialist at the American Farm Bureau Federation, the country's largest farm-lobby group. "Our biggest concern is protectionist policies."

But agriculture's support for free trade could wane as economic hardship inclines farmers toward protectionism and the farm sector gears up to lobby for next year's farm appropriations bill. Iowa Senator Tom Harkin's taking over chairmanship of the Agriculture Committee "also means a shift to favor domestic intervention," notes the Cato Institute's Griswold.

Sugar producers and citrus growers will dig in their heels in response to demands that Latin American growers be given greater access to U.S. markets. Nafta notwithstanding, Mexico cannot export any sugar to the U.S. now, and the sugar industry is lobbying hard to keep its product out of the FTAA. "And after sugar," says the IIE's Hufbauer, "we could see tobacco, fruits and vegetables, peanuts or lamb."

The soonest that TPA is likely to be passed is next spring, when FTAA negotiators are scheduled to begin nuts-and-bolts talks on market access and other controversial issues. And because next year is a congressional election year, the vote will probably be especially contentious.

If Bush wants TPA, he's going to have to do more than jawbone, say most observers. "Bush has to get the domestic leadership on board," says former deputy trade representative Fisher. "If he wants TPA and to keep to what he said he would deliver, he has to expend political capital on this." That could mean compromises on anything from judgeships to spending.

So far, however, the Republicans have shown no signs of compromising. Last month Illinois Congressman Phil Crane, chairman of the House Ways and Means trade subcommittee, fired the opening volley in the TPA battle by introducing an authorizing bill that all but ignored Democrats' demands that labor and environmental conditions be appended to trade deals.

Democrats reacted angrily to this hard-line stance. "The Republican leadership's proposal reflects a state of denial, both about the need for a sound policy and for a bipartisan approach," Michigan Congressman Sander Levin, the ranking Democrat on the Ways and Means trade subcommittee, told Institutional Investor. "This fast-track is on the wrong track. Expanded trade has resulted in expanding issues of trade, including the role of labor and environment standards in international competition."

An aide to House Democrat Cal Dooley of California is just as emphatic: "The Crane bill is a partisan prescription for failure. The only way it will pass is if it includes some consideration for labor and environment. It doesn't have enough votes to pass on the floor." Dooley is a leader of a group of 72 congressmen and 19 senators calling themselves the New Democrats, who want enforceable labor and environment standards accorded full parity as objectives in trade talks.

Political posturing aside, even some prominent House Republicans have mixed feeling about the measure. "Crane's bill doesn't show enough to critics to have bipartisan support," says Representative English, who has drafted an alternative bill.

In any case, the Crane measure may be no more than a vote-counting exercise designed to help Republicans gauge how much they'll have to compromise. "If we need to make modifications to the bill to build bipartisan support, we will," says a GOP aide. "Democrats need to proffer their own legislation or outline specific objections to this bill."

Late last month two Senators, Florida Democrat Robert Graham and Alaska Republican Frank Murkowski, introduced a TPA bill that goes further than Crane's in addressing labor and environmental issues. Still, Senator Baucus has declared himself "increasingly pessimistic" about passage of TPA this year.

But amid the political bickering, one point stands out. As consultant Nelson notes: "Republicans have to deal now, whereas they didn't have to deal before." Former U.S. trade official Fisher, who bears the scars from past trade wars, observes: "The President has his chin out there. I hope it is a firm chin and not a glass chin."