By John Anton
Eighteen months ago, President Bush imposed steel tariffs under Section 201 of the Fair Trade Act of 1974. Steel makers and the United Steel Workers (USW) union welcomed these tariffs. They were aggressively condemned, however, by steel buyers—such as auto parts makers and metal fabricators who claimed they would lose profits and jobs. The tariffs are to run for three years, with a mid-term review. To aid the president’s decision, the International Trade Commission of the U.S. Department of Commerce prepared a study of the effects of the tariffs. The study was released on September 19. Although impartial, it generally re-enforced the tariffs, pleasing steel makers and the USW.
The steel tariffs have always had political overtones, with the imposition generally seen as an effort to please voters in steel-making states, as much as an exercise of economic policy. Leaving tariffs in place will benefit steel makers and help win votes from USW members, but potentially cost votes from workers in steel fabrication factories and autoworkers. Lifting the tariffs will reverse the analysis. Added to the mix is the political importance of the steel mill states. Maryland, Pennsylvania, West Virginia, Ohio, and Indiana are vote-rich states that could turn on perceived sympathy (or lack) for union voters.
When weighing the pure politics, the most probable result is that leaving the tariffs will be less costly. The steel makers and workers are united, and could easily be single-issue voters. Conversely, fabricators are diverse, smaller companies, where workers do not have a single union to mobilize turnout. Many of the administration’s economic advisors are opposed to the tariffs on grounds of free trade and of harm to the manufacturing sector, which has lost 2.5 million jobs since 2001. Before the release of the mid-term report, this team was squarely in favor of lifting the tariffs. Their position will be weakened by the pro-tariff tone of the report. The steel industry has gone through large restructuring while protected by the tariffs, and the USW has renegotiated contracts to aid the industry in productivity and cost containment.
The second consideration against the tariffs is that the World Trade Organization (WTO) has ruled them illegal and ordered that the tariffs be lifted. The United States has appealed the ruling of the WTO. A ruling on the appeal is likely to be announced near the end of the year. It is extremely likely that the appeal will be denied and the WTO will seek to enforce the ruling. The United States has agreed to be bound by the decisions of the WTO, and is in fact one of the primary proponents of the organization. To simply ignore the ruling of the WTO will effectively destroy the WTO as a functioning body. Ignoring a treaty obligation will also have serious diplomatic considerations that will ripple through our negotiations over military and financial aid in Iraq, North Korea, etc. The credibility of the United States will be at risk, and the president must be well aware of this.
What will the administration do?
40% Probability—The administration could leave the tariffs in place, unchanged. Leaving tariffs in place would be the easy decision, for it would simply continue the status quo rather than make a new policy. But this will cost votes from fabricators and could have grave diplomatic consequences.
60% Probability—The administration could lift the tariffs, using one of two political explanations.The administration could cite the authority of the mid-term review and the economic argument that tariffs are exacerbating the manufacturing recession. An alternative and somewhat more likely strategy would be to officially accept the ruling of the WTO and lift the tariff. This approach has three advantages. First, since the appeal will not be decided for several months, it would buy time. Second, placing the decision on the back of the WTO would be politically more palatable to most opponents, although the USW will be unhappy if the tariff is lifted under any scenario. Finally, obeying the WTO would also show the United States honoring an international treaty obligation, a positive for international perceptions of U.S. multilateralism.
