November 10, 2003

Why Oh Why Are We Ruled by These Fools? Part CCCXXVII

The Wall Street Journal reports on the downward spiral that is the Bush administration's steel tariff:

WSJ.com - WTO Appeals Panel Holds U.S. Steel Duties Are Illegal: ...U.S. duties on imported steel introduced last year are illegal under international trade rules, a World Trade Organization appeals panel ruled Monday. The panel upheld the major findings of a July ruling -- issued following a complaint from the European Union and seven other countries -- that said the duties break WTO rules. EU Trade Commissioner Pascal Lamy said in an interview that the EU will impose $2.2 billion in sanctions unless Washington withdraws its tariffs in 35 days. Other countries also could join in.

When the U.S. introduced the three-year duties of up to 30% in March 2002, President Bush claimed they were justified to protect domestic steel producers during a period of restructuring. Monday's appellate ruling had been expected. The July report, which said that the U.S. failed to prove that its industry had been harmed by a sudden flood of cheap imports -- a precondition for imposing such duties under WTO rules. That report also said it was illegal for Washington to exclude imports from the countries with which it had free-trade agreements at the time -- Canada, Mexico, Israel and Jordan.

The 15-nation EU has drafted a list of U.S. imports ranging from cigarettes to frozen vegetables to paper products, on which it is threatening to impose 100% import duties, effectively pricing the goods out of the EU market. To increase political pressure, many of the products targeted are produced in swing states that would be crucial to Mr. Bush's re-election campaign next year. The White House is facing heavy political pressure in the dispute, especially from steel-producing states like Pennsylvania, West Virginia and Ohio, where campaigners want the tariffs kept in place. Representatives of industries that would be targeted by the EU's sanctions, as well as big steel users in the U.S., have argued against the tariffs...

Posted by DeLong at November 10, 2003 10:52 AM | TrackBack

Comments

A perfect excuse to retreat from bad policy

Posted by: bakho on November 10, 2003 11:09 AM

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"A perfect excuse to retreat from bad policy."

No, a policy that was designed to insure West Virginia and Pennsylvania, even Ohio, would vote Republican next year. Michigan was not likely to be Republican no matter the tariff policy. The idea for the tariff was votes votes votes. Any change in policy will have votes votes votes as the rationale.

Posted by: lise on November 10, 2003 11:27 AM

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Hasn't Bush been indulging in a lot of sanctimonious babble about "free trade", "fair trade", etc.? Will he even be embarrassed by this, will he even interrupt his free trade preaching?

Posted by: BobNJ on November 10, 2003 12:10 PM

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Hasn't Bush been indulging in a lot of sanctimonious babble about "free trade", "fair trade", etc.? Will he even be embarrassed by this, will he even interrupt his free trade preaching?

Posted by: BobNJ on November 10, 2003 12:15 PM

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Oh my god, not only is US foreign policy being decided by the French at the UN, they're now trashing US trade policy via the EU in order to influence the US domestic political scene. How can this be tolerated a moment longer? Invade now!

Posted by: E Lake on November 10, 2003 12:47 PM

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in re, "[a]ny change in policy will have votes votes votes as the rationale," hence the EU's draft list of imports targeting swing states. not so naive as to think this was ever about policy, those Europeans.

Posted by: wcw on November 10, 2003 12:48 PM

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A textbook case of why the far right hates global organizations such as the WTO so much. They're always getting in the way of what they want to do.

Of course, it seems to me a win-win for GWB. If he ends up rescinding the tarrifs, he will just tell the voters "hey I tried for you but it wasn't me that got us into the WTO" and they will just eat it up.

Posted by: Alan on November 10, 2003 12:52 PM

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I say - thank goodness for the WTO. At least one governing body has principles.

Posted by: Hal McClure on November 10, 2003 01:29 PM

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I say - thank goodness for the WTO. At least one governing body has principles.

Posted by: Hal McClure on November 10, 2003 01:32 PM

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The French, the French, always the French!

Posted by: lise on November 10, 2003 01:58 PM

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I'd agree with bahko that normally this would be a fine opening to quietly euthanize the steel tariffs, considering the abject failure of the policy and all.

But given (as lise points out) the purely political motivations of the policy, unfortunately Alan's "blame Truman" scenario isn't as far-fetched as it ought to be.

Posted by: Tom Bozzo on November 10, 2003 02:08 PM

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I think Bush is in a pretty intractable spot.

If he keeps the tariffs, then such all-American companies as Harley Davidson will be targeted. If the Dems worked it well (though there is no reason to think they will), it could make for a pretty compelling campaign advertisement targeting the NASCAR crowd.

But if he gets rid of them, he is going to have to admit he was wrong. And to date his administration has been loathe to do this.

Further, there is no reversing the damage already done. A lot of tool and die jobs have already moved to cheaper places. This hurts him badly in Michigan, among other places (and if Bush actually believed he couldn't win Michigan, then he would probably have already removed it from his semi-weekly travel schedule--which he shows no signs of doing).

The smart move would be to talk about the things that make US steel uncompetitive--like pension obligation--and work towards fixing them. But I'm not holding my breath for Bush to make the smart move.

Posted by: emptywheel on November 10, 2003 03:00 PM

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This isn't about steel and tariffs anyway; it's part of a longer-term structural change in the economy as more American manufacturing and blue-collar jobs go elsewhere due to free trade. Free trade is good, but one should help the workers in a way that makes long-term economic sense instead of chaining them to a dying industry. The solution isn't more tariffs, but more worker retraining and temporary jobless compensation. Trying to make this a industrial nationalism game is pathetic, dangerous, and merely shows how the management of these steel companies are trying to hang their workers out to dry. If it weren't for a common enemy in foreign steel "dumping," labor and management in what's left of America's steel industry would be back at each other's throats. Tariffs as such are a diversionary tactic that don't solve the underlying problems.

If Bush can make the federal government go half a trillion in debt to pay for Iraq (the funds for which, BTW, the Economist says are more than the U.S. has ever spent on aid for Africa, ever), then why can't he Keynesianize his way out of this one in the other direction and actually go to bat for job retraining, education, health care, unemployment insurance, and other saner economic strategies? Simple: Oil commands more attention than common sense. If he spent half as much deficit spending on real domestic economic priorities instead of dragging the U.S. into a foolhardy war in a land where we are neither needed nor wanted, he wouldn't have to resort to these desperate tariff shenanigans to please too many people too late.

Posted by: Corithan on November 10, 2003 05:15 PM

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The steel tariff is politics, pure & simple. And, so is the anti-free trade rhetoric flying from the mouths of several Democratic candidates.

Posted by: Ellie on November 10, 2003 05:24 PM

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If Bush maintains these tariffs, he will lose the votes of all principled conservatives. Only a few dozen votes, sure, but they're concentrated in key states.

Posted by: Zizka on November 10, 2003 05:43 PM

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If I remember correctly didn't the steel tariffs help Bush win the votes needed to pass “fast track” presidential trade promotion authority?

Posted by: Mcwop on November 10, 2003 05:56 PM

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Not all of them are spewing anti-free-trade rhetoric. Dean and Clark seem to have a slightly saner attitude towards free trade; I would hope so in Clark's case as he has Robert Rubin himself teaching him economic policy!
As far as Dean goes, here's what he had to say during a Q&A session with voters in the Washington Post:
"Concord, N.H.: Dr./Gov. Dean, many of your fellow candidates criticize NAFTA and the WTO for our country's loss of manufacturing jobs. What is your plan to help stop the loss of these jobs without America losing out on the long term economic benefits that come from free trade under NAFTA and the WTO?

Howard Dean: Globalization is here to stay whether we like it or not, but the rules for globalization are not. Both NAFTA and the WTO help large multinational corporations but ignore the needs for the people who work for them -- not only in America but around the rest of the world. In order to make globalization work we also have to globalize worker protection, labor rights, environmental rights and human rights. Free trade won’t work under the present circumstances."

But yes, one can concede that anti-free-trade rhetoric is heating up for Iowa. Iowa is a hard-core labor stronghold and any Dem who doesn't indulge in ritual NAFTA- and China-bashing raises eyebrows. Speeches to the troops and official policy statements are two different things. The nominee, whoever it turns out to be, will likely button up on the feistier denunciations of free trade once the 2004 election begins in earnest.

Posted by: Corithan on November 10, 2003 05:58 PM

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Isn't there some evidence that the Reagan-imposed protectionist measures in the 1980s for the auto manufacturers, in the hopes of giving them some time to adjust - like the reconstructuring explaination in this case, if you will - so they wouldn't be killed, actually did work? Even if it didn't, is there any credibility to the argument that such a period of adjustment would be helpful right now?

It seems like the Bush administration simply can't do anything right.

Posted by: Brian on November 10, 2003 05:59 PM

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Correction: "Even if they didn't..."

Posted by: Brian on November 10, 2003 06:00 PM

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(5% informed viewpoint: take what I have to say seriously at your own risk) The thing is, the U.S. steel industry as a whole is *already* restructuring. Not the whole U.S. steel industry is doing badly: it's primarily large, integrated steel manufacturers that are doing badly, while mini-mills are generally not doing so badly (though that's a more diverse group).

The problem is, mini-mills can produce steel for cheaper than integrated steel. That isn't to say that mini-mills will eventually replace integrated steel, because there are certain applications demanding very high quality steel that only integrated manufacturers can provide. The restructuring of American steel is happening: it's just that it's taking place within the industry as a whole, not so much within individual companies.

To that extent that the mini-mill processes are coming to predominate steel manufacturing in the U.S., tariffs, which raise the price, thus narrowing the difference in profits between mini-mills and integrated steel might encourage restructuring within integrated steel companies, since it would give them more money to work with, but would delay restructuring within the industry as a whole.

Posted by: Julian Elson on November 10, 2003 07:29 PM

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Brian, I don't think there's much of a positive case to be made for the '80s "voluntary" import restrictions. Trade theory obviously is not encouraging to start with.

A problem in attributing an effect on the '80s auto industry recovery to the import restrictions is that the restrictions coincided with a robust recovery from a very deep recession. So a recovery for the domestic auto industry would have been expected anyway. Meanwhile, the cost of the restrictions was quite high -- I dimly recall a figure of something like $1000 per vehicle. (That would have applied to both domestic and imported vehicles, and the implicit tariff on imported vehicles went to the foreign automakers rather than the treasury.)

A $20 billion publicly funded research project that yields the minivan and the SUV doesn't seem like a great deal :-).

Posted by: Tom Bozzo on November 10, 2003 09:07 PM

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Tom,

I was going off the words of one of my professors. I really don't know that much about the subject. What you say makes sense, but I guess I need to refer to a study of the subject or someone who specializes in labor and/or international trade studies.

Anyway, if these fines stick, won't they dampen the recovery?

Posted by: Brian on November 11, 2003 11:18 AM

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Tom,

I was going off the words of one of my professors. I really don't know that much about the subject. What you say makes sense, but I guess I need to refer to a study of the subject or someone who specializes in labor and/or international trade studies.

Anyway, if these fines stick, won't they dampen the recovery?

Posted by: Brian on November 11, 2003 11:22 AM

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Tom,

I was going off the words of one of my professors. I really don't know that much about the subject. What you say makes sense, but I guess I need to refer to a study of the subject or someone who specializes in labor and/or international trade studies.

Anyway, if these fines stick, won't they dampen the recovery?

Posted by: Brian on November 11, 2003 11:22 AM

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Brian,

One relatively recent paper based on a structural econometric modeling exercise is "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy" by Berry, Levinsohn, and Parks (American Economic Review, June 1999).

I don't claim to have reviewed the technical details in any depth. Their point estimates were that the Japanese auto export restrictions cost consumers about $13 billion (which they claim is relatively precisely estimated) for a $10 billion increase in domestic auto industry profits (not). The implicit bribe to Japan was large ($11 billion). In fairness to your prof, Berry et al. muster a case (though not necessarily a strong one) for a positive surplus from the policy assuming that the $11 billion in foregone tariff revenue could have been raised other things equal (w/o retaliation, GATT problems, etc. -- which is questionable).

As for the retaliatory sanctions, the value of the goods potentially affected isn't that large relative to the economy as a whole. But it would be a loss inflicted on society for no good reason IMO.

Posted by: Tom Bozzo on November 11, 2003 12:54 PM

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Tom,

Thanks. I'll try to check out that paper some time. One of the great things about being at a university is that I have highly educated people who can answer my questions - my economics professor was particularly great in helping me understand more about the minimum wage debate - and that I can take classes which will make me able to sort through these matters with more ease.

But anyway, you say that the sanctions aren't going to be huge on the economy. But are they big enough to have a small effect on one area, which will hurt other areas and so on? Or is that, even if that is true, the losses won't be so striking as to cause anything huge?

Posted by: Brian on November 11, 2003 01:13 PM

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According to the editorial of my newspaper (NRC-Handelsblad) 11-11 the EU have got George Dubya by the balls now: he agrees with the WTO-decision and faces election-problems in the states with steel-industry or he does not and faces sanctions through products that are mainly produced in other states that are of importance for his re-election!
He might as well take a decision based on ideas instead of interests!
BTW: compare this “influencing” of the US presidential elections with the attempts by a group called “theworldvotes” on which I commented here: http://www.fransgroenendijk.nl/comments.php?id=P149_0_1_0_C

Posted by: FransGroenendijk on November 11, 2003 03:43 PM

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Brian,

In saying that the effects of any trade sanctions shouldn't be disproportionate, I'm assuming that they wouldn't erupt into expanding cycles of punitive tariffs.

The nature of this sort of situation is that there are relatively large effects on small groups (steel producers, Florida citrus growers) while the costs to society, however large collectively, are diffuse. So it's tough to motivate the majority that bears the costs to act in the collective interest. I'd refer you to the works of Mancur Olson -- e.g., the first chapter of "Power and Prosperity" (Basic Books, 2000) for more discussion of the issues here (his books are conceptually pretty rigorous but not mathematically so).

See also
http://www.j-bradford-delong.net/movable_type/archives/000339.html

Posted by: Tom Bozzo on November 11, 2003 03:46 PM

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Wow, thanks for the suggestion.

Posted by: Brian on November 11, 2003 04:19 PM

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