Globalization Questionnaire

Case Study

Case Study: The Politics of Trade in Steel

Do you believe the Bush administration was correct in imposing tariffs in March 2002 on a wide range of steel imports?

At the time President Bush decided to impose temporary tariffs on steel imports, 16 steel manufacturers were operating under bankruptcy and a total of 30 had declared bankruptcy over the prior few years (Hill, 2004). U.S. steel producers were losing market share to foreign steelmakers in large part due to subsidies and other trade issues. Bush and his Cabinet chose to implement the tariffs because of “the need to speed up negotiations to reduce the world’s huge overcapacity in steel production,” (Business Week, 2002, ¶ 5). The tariffs were the largest trade-protection grant since President Regan had taken similar steps to shore up the steel industry. President Clinton had ordered a study that was done in 2000 with the resulting information “the U.S. [steel] industry was the victim of foreign subsidies and other unfair trade practices,” (Business Week, 2002, ¶7) . Commerce Secretary Donald L. Evans noted that tariffs were needed in order to manage Europe, South Korea and Japan, who were the worst in regard to excess capacity. Conversely, White House Economic Adviser, Lawrence B. Lindley, cautioned that raising tariffs would only make U.S. manufacturers less competitive because it would raise prices, and Secretary of State Colin Powell noted that this move would alienate coalition partners of the war on terrorism. The European Union (EU) retaliated on March 27, 2002, by imposing similar tariffs on steel imports to attempt to prevent a flood of steel imports into the EU. EU President Romano Prodi urged President Bush not to proceed with his “protectionist measures” (CNN.com, 2002). Intended to last for three years, President Bush ended the tariffs on December 4, 2003, one month after the World Trade Organization’s court declared the tariffs to be a violation of global trade laws. U.S. trade Representative, Robert Zoelleck declared the tariffs had accomplished their mission and President Bush noted that “Productivity is high, business investment is rising, housing construction is strong and the economic stimulus package that we pass out of the United States Congress is working,” (Lehrer, 2003, ¶7). So, President Bush correct in implementing the tariffs? Under the circumstances, I believe that it was the only action that President Bush could have taken. President Bush had to do something to give the U.S. steel industry the opportunity to revive itself.

Who are the main beneficiaries of protective tariffs such as those imposed on steel imports? Who are the losers?

Tariff revenues are a main source of revenue to the federal government. Hill notes “while the principle objective of most tariffs is to protect domestic producers and employees against foreign competition, they also raise revenue for the government,” (Hill, 2004, Ch.5, p.4). Additionally, high protective tariffs reduce competition and allow for the creation of large business trusts, so big business is also a beneficiary of protective tariffs. Conversely, both consumers and businesses are losers when protective tariffs are enacted. The ...

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Who are the main beneficiaries of protective tariffs such as those imposed on steel imports? Who are the losers?

Does the World Trade Organization in this case represent a loss of U.S. national sovereignty? Why do you think the WTO sided with the European Government?

I do not think the WTO represented a loss of U.S. national sovereignty in this instance. I believe it represents a level of global cooperation in trade. President Bush and his advisers had to know what the reaction would be from the WTO and other countries as well. However, Bush had to respond to interests in the U.S. that were both politically and economically critical. I believe he gambled on the fact that it would take the WTO some time to reach concurrence on a position and actions to be taken. This would give him time for the tariffs to try and shore up the declining steel industry in the U.S, or at least provide the impression that he was doing his best for the steel industry. It seems to me that the WTO was siding not specifically with the EU, but taking a position relative to global trading, which is the whole purpose of the WTO.

4. If all tariffs on international trade in steel were removed, and subsidies to steel

exporters around the world were banned, who would this benefit? Who would lose from

such action?

Under economic theory, if all tariffs on international trade in steel were removed and subsidies to steel exporters were banned, the market should drive the success or failure of all steel producers. Those producers who could provide the best value at the lowest cost would survive and those who could not achieve this goal would cease to exist. In an article by BBC News World Edition the OECD Organization for Economic Cooperation and Development (OECD), issued a proposal in September, 2002, to prohibit substantially all subsidies to the steel sector [and for] countries to agree to eliminate all tariffs and other market access barriers that “have a dampening effect on trade and improve enforcement of domestic competition laws so that the steel markets are allowed to operate fully,” (BBC News, 2002).

The winners would be the most efficient steel producers, the economy of those countries, and the consumers who get the best product at the lowest price. The losers would be the steel producers and the economies in the countries where production has been highly subsidized and where governments have depended on revenues from tariffs for operating funds.

5. Summarize the strategic and operational challenges facing global managers illustrated

in your selected case.

Strategic and operational challenges facing the steel industry were recently presented by the Committee on Manufacturing Technology of the American Iron and Steel Institute (AISI). The steel industry in the U. S. must identify best practices and “achieve advances in process performance, specifically cost and yield improvement,” (AISI, 2005, p. 3). Second, the industry must be able to evaluate the effect of market trends on the operation of steel plants and adapt to those trends in production.

6. Comment on recent global developments affecting the company in your selected case.

Global events make it more critical than ever for the U.S. steel industry to achieve a competitive position. Data from the Iron and Steel Statistics Bureau (ISSB) notes the following:

Comparing the first half of 2005 and the first half of 2006 global steel trade is up 8%.

India is up 16%
Russia is up 6%
America is up 7%
Turkey is up 11%
Brazil down 9%

Chinese steel exports to US and EU set new monthly high in June 2006.
China produced over 35% of world steel in June 2006 – from approximately 12 million tonnes/month in 2001 to 37 million tonnes in June 2006.

I believe that because of its history of success the U.S. steel industry became complacent, which allowed other countries to meet and surpass its position.

References

AISI. (2005, October). Strategic Review: Committee on Manufacturing Technology 2005.

Retrieved August 28, 2006 from

http://www.steel.org/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDis

play.cfm&CONTENTID=12359

Business Week Online. (2002). Behind the Steel-Tariff Curtain. Retrieved August 28, 2006, from

http://www.businessweek.com/bwdaily/dnflash/mar2002/nf2002038_1478.html

BBC News World Edition. (September, 2002). U.S. to Push New Steel Deal. Retrieved August

28, 2006 from http://news.bbc.co.uk/2/hi/business/2247604.stm

CNN.com. (2002). EU Retaliates on Steel Tariffs. Retrieved August 28, 2006 from

http://archives.cnn.com/2002/WORLD/europe/03/27/eu.steels/index.html

Hill, C. (2004). International Business: Competing in the Global Marketplace. The McGraw- Hill Companies

ISSC. (2006, August). Steel Statistics in the News. Retrieved August 28, 2006 from

http://www.issb.co.uk/

Lehrer, J. (2003). Steel Tariffs Ended. Retrieved August 28, 2006 from

http://www.pbs.org/newshour/bb/international/july-dec03/steel_12-4a.html

Globalization Questionnaire

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