[moe.ron]

U.S. loses WTO steel appeal

November 11, 2003

BY DAVID ROEDER Business Reporter

The World Trade Organization handed President Bush a stinging defeat Monday, ruling that steel tariffs he ordered 20 months ago are illegal and setting the stage for retaliation by the European Union and Japan.

The decision means Bush faces the prospect of an election-year trade war that could close off overseas markets to U.S. products, especially crops. Analysts said that to increase pressure on Bush, the EU and Japan could slap duties on goods emanating from the Midwest, an important political battleground.

Such retaliation could hurt the U.S. economy just as it is showing signs of recovery, said David Mirza, an economics professor at Loyola University Chicago. He guessed that the votes in steel-producing states from West Virginia to Illinois will lead Bush to stand firm on the tariffs.

"I think it's the politics more than the economics that will drive this decision,'' Mirza said.

The ruling by a WTO appeals panel affirms a decision the Geneva-based arbiter of trade disputes reached in July. The panel said the United States has been unable to prove economic hardship from cheaper foreign steel.

Representatives of the EU and Japan said they would impose up to $2.3 billion in sanctions on U.S. products including tobacco, fruit juices and frozen peas as soon as next month, unless Bush relents.

A statement from the EU and seven other nations said the president has "no other choice'' but to remove the tariffs immediately.

White House press secretary Scott McClellan declined to say when Bush will decide the issue. ''We believe [the duties] are fully consistent with WTO rules and we will carefully review those decisions,'' McClellan said.

The three-year tariffs on imported steel range up to 30 percent. Bush acted to protect domestic steel producers, giving the industry time to restructure and shrink. But the duties also gave the producers cover for price increases, thus increasing costs for a range of steel consuming industries, such as the appliance and auto industries.

Timothy Gleason, president of Olson International Ltd., said the tariffs have increased costs he's had to pay on the spot market by 40 percent to 60 percent. With 160 employees, his Lombard company produces parts for seat belts and air bags.

"I'm hoping that the president will lift the tariffs. I think the WTO will give him an out for doing that,'' Gleason said. He said steel producers have gone through consolidation and no longer need special help.

Another company executive, Michael Holewinski, president of Ace Industries Inc., said Bush acted to protect a single industry while neglecting America's overall plight in manufacturing. The broader problem is competition from cheaper goods overseas, especially from China, he said.

"I'm sensitive to the fact that the steel industry [in the U.S.] is being driven out of business, but frankly they're no different from any other industry,'' said Holewinski, whose metal plating and spinning operation has cut its work force to 50 workers from 85 in the last year. He said he suspects Washington has little sense of how severely the U.S. manufacturing base has eroded.

A coalition that includes big steel companies and the United Steelworkers of America union called on Bush to keep the duties in place for their scheduled three-year run. It said the WTO decision "is based on bias, not facts. It is one more striking example of the broken WTO dispute settlement system, which has never ruled in favor of a safeguard on any product by any country.''

Federal reports show the domestic manufacturing base has contracted by about 10 percent, or more than 2 million jobs, in the last two years, with Illinois reporting a loss of 77,000 jobs.

The American Iron and Steel Institute said prices for hot-rolled sheets of steel nearly doubled to $400 a ton in the immediate aftermath of Bush's tariffs, but the price has since declined to $295 a ton.

Contributing: Bloomberg News