Saturday, April 14, 2007

Behind the Steel-Tariff Curtain

During a swing through New Orleans on Jan. 15 as part of a Presidential road show in support of trade expansion, White House political adviser Karl Rove was standing among the crowd when he suddenly found himself face-to-face with a passionate advocate of free trade -- David P. Schulingkamp, vice-chairman of the city's port authority. Schulingkamp intended to make a few pointed observations to Rove, widely considered to be the driving force behind the Administration's support for the domestic steel industry's pleas for import protection.

"I told him that imported steel provides 40% of our total revenue," Schulingkamp recalls. Gesturing toward a nearby cargo container, he told Rove that once the collection of imported steel parts was unloaded, it would be cleaned and filled with U.S. grain for export.

"BREATHING ROOM." Rove wasn't swayed. On Mar. 5, Bush announced that he would impose tariffs of 8% to 30% on a wide variety of imported steel products for a period of three years. Steel users denounced the decision. Steel producers, especially the ailing integrated mills of the Mid-Atlantic and Midwest, welcomed it, even though it fell short of the 40% tariffs they were seeking. Says Robert "Steve" Miller Jr., chairman and CEO of Bethlehem Steel, which has filed for Chapter 11: "This gives us breathing room."

The White House characterized the decision as being driven solely by economics and international trade law. But that Bush's chief political strategist found himself so enmeshed in the minutiae of trade policy -- and so many of the Administration's economic lieutenants found themselves arguing about politics -- shows how the decision became a struggle of economics vs. politics.

Despite the risk of escalating a simmering trade war with Europe, raising prices on U.S. consumer goods, and harming U.S. exporters of manufactured goods, Bush nevertheless chose to secure the GOP's electoral edge in America's steel-producing heartland, in particular West Virginia, Ohio, Illinois, Indiana, and Pennsylvania. But members of Bush's Cabinet also advanced economic reasons for taking the risky step -- among them the need to speed up negotiations to reduce the world's huge overcapacity in steel production.

THE REAGAN PRECEDENT. The steel decision, the largest trade-protection grant since President Reagan took similar steps to aid the same industry, has its potential political downside, too. Tariffs, after all, are taxes levied on imports. Opponents threatening to raise the issue with the public say Rove and other White House officials listened most intently when they complained that the action contradicts the spirit of Bush's pledge last year: that Congress would raise taxes only "over my dead body."

The chief supporters of the tariff hikes -- Rove, Commerce Secretary Donald L. Evans, and U.S. Trade Representative Robert B. Zoellick -- said it was worth the risk. In Cabinet debates, Zoellick argued that President Clinton had made a critical mistake in 2000 by not granting the industry similar relief. Instead of taking action, he said, the Clinton Administration had responded to union appeals for help with a study that concluded the U.S. industry was the victim of foreign subsidies and other unfair trade practices. Disappointed steelworkers in West Virginia probably threw their votes to Bush, providing his margin of victory over Al Gore in 2000, Zoellick said.

He also argued that "to sustain the support for free trade, we have to be willing to help some of the victims of unfair trading practices." Translation: To get a bill through Congress authorizing the Administration to conduct future trade negotiations, the White House needed to win friends among steel-state Republicans.

TARGET: OVERCAPACITY. Evans, who one summer worked in a Texas steel mill, was initially skeptical of imposing the tariffs. He worried because so many U.S. manufacturers use steel in their products and American producers were already suffering the effects of the strong dollar, which makes U.S. exports expensive and imports cheap. But, like Treasury Secretary Paul H. O'Neill, Evans thought the best solution was to negotiate a worldwide reduction in overcapacity.

When Bush announced last June that he was asking the quasi-independent U.S. International Trade Commission for its recommendations on protective steel tariffs, he also made a top priority the ongoing steel negotiations within the Paris-based Organization for Economic Cooperation & Development (OECD). O'Neill, as CEO of Alcoa, once masterminded the same sort of capacity-reducing negotiations on aluminum.

Although O'Neill personally opposed hiking steel tariffs, he didn't push his opposition. When contacted by CEOs opposed to the steel tariffs, O'Neill often referred them to Evans, who would explain that the tariffs were needed to bring into line Europe, South Korea, and Japan -- the biggest offenders in the excess capacity buildup.

CAUTIONARY NOTES. That left internal Administration opposition in the hands of White House Economic Adviser Lawrence B. Lindsey, who posed the classic economic argument: If other countries want to subsidize the production of raw materials such as steel and sell it at below cost, that translates into a subsidy for U.S. consumers and steel users. Raising tariffs, on the other hand, makes U.S. manufacturers less competitive by increasing their prices. Secretary of State Colin L. Powell also struck a cautionary note, saying coalition partners in the anti-terror war could be alienated by the trade action.

Evans countered the inflationary argument by saying three years of declining tariffs on selected steel products would be "just a blip" when it came to inflationary pressure. He cited estimates that new tariffs might raise the price of a U.S.-made car by just $30. Besides, imports of slab steel -- actually ingots that can be fashioned by modern U.S. rolling mills into other products -- would be escaping tariffs in favor of a quota holding them to 2000 levels.

That would also exempt most of the crude production of Russia, whose cooperation in the war in Afghanistan is considered crucial. In addition, coalition partner Canada, as a member of NAFTA, would be exempted entirely from the tariffs. And most developing nations would be spared, too, because they export insignificant amounts to the U.S.

That left only the EU, Japan, Taiwan, and South Korea as the most affected nations. Brazil may complain, but Zoellick and Evans insisted that only 15% of Brazil's exports to the U.S. may be affected, since much of that country's steel exports are in tariff-exempt categories.

A DATE IN PARIS. Ironically, politics aside, this may be a case of too little, too late for many old-line integrated steel mills. On Mar. 6, National Steel, the nation's No. 4 steel producer and a subsidiary of Japan's NKK, filed for Chapter 11 bankruptcy protection. That makes roughly 30 steel companies that have done so in the last four years. And that came less than a week after LTV's assets were sold in a liquidation.

And Bush did disappoint Big Steel in other ways. The Administration passed over pleas from giants such as Bethlehem Steel and U.S. Steel for Washington to assume $13 billion in pension and health-benefit costs for 600,000 retirees. But the industry itself was split on the issue, with only the dinosaurs in favor of the government adopting such "legacy costs." Nothing, Bush concluded, could be gained politically from bailing out the companies when other government programs -- such as the Pension Benefit Guarantee Corp. -- existed that could do much the same thing.

Now, the U.S. industry has its three years of respite. The next talks at the OECD in Paris are scheduled for Mar. 13. And the White House is hoping that Big Steel's newfound breathing room also extends to Election Day 2004.

By Paul Magnusson in Washington with Michael Arndt in Chicago
Edited by Beth Belton