-- John Kemp is a Reuters columnist. The views expressed are his own --
By John Kemp
LONDON, Feb 10 (Reuters) - Steel is yet again at the heart of the U.S. protectionist debate.
Later today, the U.S. Senate is set to approve its own version of American Recovery and Reinvestment Act (the economic stimulus bill), including a controversial provision banning public works projects funded by the taxpayer using imported iron, steel or any other manufactured items.
The Senate version still has to be reconciled with the text approved by the House of Representatives. Further changes could emerge from negotiations behind closed doors in a conference committee of the two houses.
And President Barack Obama has urged Congress to drop any provision that could trigger a trade war. The administration is likely to press for further changes before the bill emerges from conference for a straight up-or-down vote in both chambers [ID:nN09540119].
But the bill has already drawn predictable howls of protest from the European Union, Australia, Japan and China. There have been apocalyptic warnings about the risk of a trade war plunging the world economy into a renewed era of protectionism such as followed the Smoot-Hawley Tariff Act of 1930.
However, while the symbolism of the bill's "Buy American" provisions remains highly protectionist, the practical implications are limited and it represents a specific response to particular problems in the steel sector. We should be careful not to read across to other sectors of the global economy or generalise the protectionist danger.
U.S. STEEL IMPORTS SURGE
From a peak of 120 million tonnes in May, global steel output had fallen almost 36 million tonnes (30 percent) to just 84 million tonnes in December 2008. Steel output has fallen to the lowest level for four years (https://customers.reuters.com/d/graphics/STEEL1.pdf).
The problem is that the decline has been very uneven. Production has fallen further in the United States (54 percent) and the European Union (47 percent) than in China (18 percent), the rest of Asia (16 percent) or the Middle East (12 percent).
Steelmakers in the United States and the European Union increasingly feel they have shouldered more than their fair share of cuts.
Of the 120 million tonnes of steel produced in May 2008, China accounted for 38 percent (46 million tonnes). The EU27 accounted for 15.4 percent and the United States just 7.3 percent.
But of the 36 million tonnes of output cuts implemented by year-end, China has shouldered 8 million tonnes (23 percent) with a similar amount from the much smaller EU27 steel industry (8 million tonnes or 23 percent) and a disproportionately high share from U.S. steel mills (4.7 million tonnes or 13 percent).
There is a deep sense of grievance that China's steelmakers are not sharing the pain of the global downturn equitably (https://customers.reuters.com/d/graphics/STEEL2.pdf).
The situation has been further inflated because the volume of Chinese-made steel products arriving in the United States has surged in H2 2008 and in the first few weeks of 2009, even as domestic steel demand falls and U.S. producers have cut output in a desperate attempt to balance the market.
U.S. steelmakers have been losing market share as imports have remained roughly constant in recent months even as domestic consumption falls (https://customers.reuters.com/d/graphics/IMPORTS1.pdf).
But the loss of market share to China's steel makers has been particularly acute. Imports from China more than doubled between May and October last year, from 260,000 tonnes to 660,000 tonnes. While the flood has abated slightly, import license applications suggest more steel will have been imported into the United States last month than before the crisis broke (https://customers.reuters.com/d/graphics/IMPORTS2.pdf).
Congressional action reflects fears that much of the benefit from the roughly $800 billion stimulus package could be captured by China's steelmakers if increased steel demand is met by a rise in imports rather than from domestic sources. With plenty of excess capacity worldwide, it would be relatively easy for China's steel makers to capture much if not all of any upturn in U.S. steel demand.
As a result, whether or not the "Buy American" provisions of the stimulus package are eventually enacted into law, accusations about the "dumping" of "subsidised" foreign steel look set to intensify in the coming months unless the import flood abates [ID:nL8290500].
SYMBOLIC RESPONSE
So far, congressional actions have been designed to send a strong message of solidarity with domestic steel producers, while avoiding a damaging trade conflict or a formal breach of treaty obligations to U.S. trading partners.
The original "Buy American" provisions passed by the House of Representatives would have prohibited construction projects and public works receiving stimulus funds using foreign iron and steel unless there was insufficient U.S.-made steel of the relevant quality, or it would have increased overall project costs by more than 25 percent.
Even in the House-passed bill, however, there was a general provision allowing federal agency heads to waive the Buy American provisions if they would be inconsistent with the public interest. This could arguably have given agency chiefs enough discretion to waive restrictions that threatened to trigger a trade war (https://customers.reuters.com/d/graphics/HR1.pdf).
The language the Senate will vote on later today, and seems set to approve, broadens the provisions to all manufactured items. But it also includes a clause specifically requiring Buy American restrictions to be applied in a manner consistent with U.S. trade obligations (https://customers.reuters.com/d/graphics/COLAMDT.pdf).
Proponents of free trade will lament the unfortunate symbolism of the Senate language. But the significance of the legislation should not be overstated, and it would be unwise to generalise from the steel sector's specific problems to a wider retreat from an open trading system.
Steel has always been a special sector, a legacy of its historical significance as a strategic sector; the fact steel producers often dominate the communities, and employment, in which they are located; and steel is a readily tradable commodity across international borders, rendering it liable to destabilising and controversial import surges.
The problem of how to "allocate" scarce demand among producers in the face of sector-wide and global overcapacity is not new. The Bush administration proposed safeguard measures in 2002 in response to the last big surge in steel imports. The steel sector has always been one of the most frequent users of antidumping and countervailing duty (anti-subsidy) actions.
The amendment enables Congress to send a strong message of support to domestic steelmakers and other U.S. manufacturers, while gutting the legislation of any practical significance. It goes no further than UK Prime Minister Gordon Brown's call for "British jobs for British workers" or attempts by various European countries to reserve stimulus measures, such as tax credits on new cars, for locally produced items.
Despite the bluster from both U.S. legislators and foreign governments, nothing in this legislation marks an unusual retreat from the multilateral process of trade liberalisation.
But discretion is sometimes the better part of valour. The political commitment to an open trading system will be tested to the limit if much of the benefit of the U.S. stimulus bill leaks abroad through a surge in imports of steel and other items.
It would help ease tensions if China's steelmakers could implement further cutbacks in their own production and stem the tide of steel arriving on the west coast of the United States.
Purists will decry the use of "voluntary export restraints". But they helped manage tensions between the United States and Japan during the 1980s. Past experience suggests a willingness to exercise self-restraint is sometimes key to sustaining the multilateral trading system.