Now that the EU has apparently backed off on its threat to impose retaliatory tariffs on the US, an international trade war over steel has been postponed for the time being. The EU's forbearance has created a window of opportunity that the US needs to take full advantage of to dramatically restructure and down size the American steel industry. Unfortunately, the time needed to complete this restructuring may be longer than the year that now seems available. And the temptation for the industry to foot drag will be great. Moreover, much of what US steel makers need to successfully restructure -- relief for integrated steel producers from obligations to pay the health care costs of retirees and laid off workers and a coordinated reduction of steel making capacity around the world -- is still beyond their control.
Unless significant progress is made in restructuring the US steel industry, another steel crisis looms next summer at the latest. If European and Asian steel makers are to avoid another round of US antidumping next year, they have to being leaning on the US now to finally fix its industry. And they must show a willingness to bargain more constructively in the steel over capacity talks now ongoing at the OECD in Paris.
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The George W. Bush Administration's imposition of tariffs on steel imports in March of this year granted the US steel industry long-sought protection so that it might restructure. But the window of opportunity it created, ostensibly for three years, is likely to slam shut next summer, when the WTO is expected to declare that the US tariffs violate international rules. (The WTO has consistently ruled against such protectionist actions.) Even in the unlikely case that the WTO sides with the US, steel industry analysts on Wall Street forecast rising US steel imports and falling prices in the US next year as American consumers exploit tariff exemptions now being granted by the administration or they shift purchases to mills in countries, such as Canada and Mexico, not covered by the duties. That could lead to even more bankruptcies and layoffs.
So US steel makers have little time, much to do and no assurance of success. The US steel industry remains one of the most fragmented in the world, with too many firms and too many facilities. So far, efforts at consolidation have been long on promises and short on results. Nucor Corp, a mini mill, has bought a number of other small producers. Brazilian steel makers are angling to buy Bethlehem Steel Corp's Sparrows Point facility in Maryland and US Steel Corp may buy Bethlehem's Burns Harbor, Indiana plant.
Much more rationalization is needed, but the US market may be working against restructuring. The recent run up in US steel prices -- a 20 percent to 40 percent rise thanks to the tariffs and the rebounding US economy -- have induced some American steel makers to bring shuttered facilities back on line. International Steel Group Inc has already reopened some of the bankrupt LTV Steel plants. Other bankrupt firms are likely to follow suit. As a result, Wall Street analysts with J.P. Morgan forecast that US steel making capacity will actually grow 7 million tonnes in the 12 months following the March imposition of tariffs, not what the US market, burdened by overcapacity, needs. No wonder the Bush administration demanded in late June that steel makers produce by September an interim progress report on restructuring, with a follow up accounting in March next year.
Whatever happens with American downsizing, the US steel industry's billions of dollars in health care obligations to its retirees and the workers laid off by bankrupt firms -- what have come to be known as legacy costs -- will return to political center stage in Washington next year. US steel makers can't restructure with such costs hanging over our heads.
The Bush tariffs in March were a band aid. The legacy costs are the wound. But the White House refused to treat that bleeding sore this year because of the cost, conservative ideological opposition to subsidies and fear that other American industries would demand similar bailouts. If the WTO disallows the US tariffs and imports surge in to the US causing domestic prices to tumble, Washington will need to get health care costs off company books fast. If not, all consolidation within the industry will stop because no one will want to buy another company if it means taking on the burden of the legacy costs. And in the end, its foreigners' who will pay because, as one CEO of a major US firm told me: "We will take whatever measures we need to protect ourselves." That means more antidumping suits.
Finally, if the global steel problem is ever to be resolved -- there are an estimated 250 million tonnes of excess capacity world wide -- there has to be progress in reducing global over capacity. The major industrial nations met late last year in Paris and pledged to cut capacity 97.5 million tonnes over the next decade. That non-binding goal would only reduce over capacity by a third and is not substantially greater than capacity reductions that might occur anyway thanks to market forces.
To avoid another global confrontation over steel next year, Asian and European steel makers have to press their governments now to leverage the US to make meaningful progress on restructuring the American steel industry and reducing US steel producers' legacy costs. At one point, these issues would have been considered purely internal matters, not appropriate for international dialogue. But its foreigners -- through a new round of US antidumping actions to protect the US market -- who will ultimately pay the cost of US failure to address these concerns. So its foreigners who must make it clear to the Bush administration that the world will no longer tolerate American foot dragging on consolidation of the US industry and government help with health care costs.
At the same time, Asian and European governments should propose a grand bargain in the OECD over capacity talks. They should suggest that the US wave existing and future steel anti-dumping and countervailing duty cases in return for meaningful steps by in Asia and Europe to cut capacity and to open markets to foreign competition. This would address US concerns, while heading off a future round of US protectionism next year.
At a time when relative calm has returned to global steel markets, such initiatives may appear ambitious and not immediately necessary. But make no mistake about it, the current calm is a truce in the global steel war, not peace. And if another round of fighting is to be avoided, the US and the world need to take advantage of this lull to ease tensions. Now is the quiet before the next storm.
Bruce Stokes is a senior fellow for economic studies at the Council on Foreign Relations in Washington.
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