Steel Trap: How Bush could harm free trade

Since taking office, President Bush has repeatedly voiced strong support for free trade-often in stirring terms. In a May 7 speech before the Council of the Americas, for example, he declared: “Open trade is not just an economic opportunity, it is a moral imperative.” Yet not quite a month later, on June 5, the president announced that he was initiating a “Section 201” investigation that could end up imposing comprehensive import quotas on foreign steel. Whatever happened to that moral imperative?

The sausage grinder of domestic trade politics, that’s what. The Bush administration has mapped out an ambitious agenda of trade negotiations: at the bilateral level, deals with Chile, Singapore, and others; at the regional level, a 34-nation Free Trade Area of the Americas; and at the global level, a new round of talks at the World Trade Organization. But to negotiate successfully at any level, the administration needs a grant of “trade promotion authority”-TPA, formerly known as fast track-from Congress. Such a grant commits Congress to an up-or-down vote on trade agreements, thus assuring other countries that the deals they strike with the U.S. executive branch won’t be rewritten by the legislative branch.

Once granted more or less routinely, TPA in recent years has become a kind of Sisyphean boulder. The last such grant expired over seven years ago, and efforts to secure one failed in 1997 and 1998. A third failure would more or less doom the Bush trade agenda; indeed, it would call into serious question the whole future of America’s postwar commitment to ongoing, negotiated trade liberalization. Administration officials are therefore understandably white-knuckled about a TPA vote that may happen as soon as this summer-and they are determined that no potential “yes” vote be left behind.

Which explains the apostasy on steel. In economic terms, the U.S. steel industry is a pipsqueak: It employs fewer than 200,000 people in an economy with 140 million workers. But politically, it is a bruising heavyweight. In particular, the Congressional Steel Caucus-which boasts 100 members in the House and 33 in the Senate-is a ferocious advocate of steel-mill and steel-union interests. The administration needs many of those votes if TPA is to pass, and getting at least some of them will be easier if the White House gives the steel lobby what it wants.

And what it wants, plain and simple, is protectionism. In 1992, the first Bush administration allowed comprehensive steel quotas-in the form of so-called “voluntary restraint agreements”-to expire. Ever since, the steel industry has been struggling to rebuild the protectionist wall. Multiple barrages of antidumping and countervailing-duty petitions have resulted in cripplingly high duties on specific products from specific countries, but to little avail: Demand has shifted to other products, and third-country suppliers have rushed in to fill the vacuum. In 1999, in the aftermath of a flood of imports triggered by the Asian financial crisis, the steel lobby pushed hard for import-quota legislation. The House passed it easily, but the Senate killed it-largely because of its egregious inconsistency with WTO rules.

Enter Section 201 of the U.S. trade law, a seldom-used provision that exploits a loophole in WTO free-trade disciplines. Under Section 201, if the U.S. International Trade Commission finds that increased imports are causing “serious injury” to a domestic industry, the president can impose temporary trade barriers-including quotas-without violating WTO rules. Normally Section 201 investigations begin with an industry petition. In those cases, even if the protection-seeking industry convinces the ITC, it can still come up empty if the president declines to grant relief. By launching an investigation on its own authority, the White House has signaled that the president’s finger is on the steel-quota button. As soon as the ITC gives the go-ahead, the button will be pushed.

In explicitly endorsing steel protectionism, the Bush administration has caved in where the Clinton White House held firm. President Clinton stood up to steel-industry pressure and refused to self-initiate a Section 201 case-even when doing so in the fall of 2000 could well have made a difference for Al Gore in West Virginia or Ohio, and thus tipped the national election.

What will the administration get for this abandonment of principle? Presumably, some extra votes for TPA that might not otherwise have been forthcoming. Such compromises are nothing new in U.S. trade policy: The path of U.S. postwar trade liberalization is littered with squalid little interest-group payoffs that allowed the larger process to move forward. In this particular case, though, the Bush administration could very well end up winning the battle and losing the war. It may get its precious trade authority, only to find that it is unusable.

Trade politics, after all, is a two-level game: You have to win the political contest against domestic opponents, but in a way that doesn’t prevent you from winning trade deals with foreign partners. And globally, we are now facing an uphill struggle: Most countries’ commitment to further trade-opening is lukewarm at best. Brazil, for a variety of reasons, would be all too happy to see hemispheric trade talks fall apart. The European Union is much more concerned about defending farm subsidies at home than about opening markets abroad; so is Japan. Under these conditions, there is little prospect for large- scale trade initiatives unless the U.S. actively leads the way.

That would mean putting our money where our mouth is, and showing a willingness to endure political pain on behalf of trade liberalization. It is flatly inconceivable that hemispheric or global trade talks can succeed if our position is that other countries should open their markets while all our major trade barriers remain sacrosanct. In particular, it will be very difficult to make real progress unless the Bush administration finds the stomach to take on the steel lobby. The Section 201 case is a disturbingly clear signal that it won’t.

And Section 201 is not the only problem. The antidumping laws-which purportedly target “unfair” practices like trade barriers and subsidies-are routinely invoked to impose punishing duties on perfectly normal business practices; nearly half of U.S. antidumping cases involve the steel industry. Many countries have and use such laws, but the U.S. implements them more aggressively than do the others; curtailing U.S. antidumping abuses has therefore become a top priority for many of our trade partners. Brazil has insisted that antidumping be included in hemispheric talks; Chile has adopted a similar position in bilateral negotiations; dozens of countries have pushed to include antidumping on the WTO agenda. The choice facing the Bush administration is increasingly stark: stand up to steel on antidumping, or watch one trade-opening opportunity after another slip away.

It’s not too late to rescue the Bush trade agenda from the steel trap it’s stumbled into. Temporary protectionism under Section 201-assuming the ITC approves it-could serve as the medicine that helps the free- trade sugar go down. That sugar is movement on the antidumping question. Here’s what needs to happen: First, any import quotas under Section 201 must be in lieu of-not in addition to-existing protectionism under antidumping and other “unfair trade” laws. Next, the U.S. has to agree to changes in its antidumping law that eliminate or at least substantially limit its potential for abuse. That way, once the quotas expire, the U.S. steel market will be more open than it is today: a prospect that could do wonders for pushing through deals with our trade partners.

A quotas-for-antidumping-reform tradeoff would also facilitate other elements of steel-policy reform here at home. The White House has announced that, together with the Section 201 case, it will be pursuing negotiations to reduce subsidies and other anticompetitive practices engaged in by foreign countries. This is a fine idea-but one that is absolutely doomed to failure unless the U.S. is willing to address the distortions caused by our own antidumping law. The administration also wants to condition Section 201 relief on restructuring efforts by the steel industry; if the industry knows it can’t go back to the antidumping strategy once quotas expire, it will have a powerful incentive to streamline itself.

At present, unfortunately, it doesn’t appear that the administration is willing to bite the antidumping bullet. Consequently, the moral imperative of open markets may have to make do without much help from the United States.

Brink Lindsey is vice president for research at the Cato Institute