Cynical U.S. steel move not worth trade war

Lim Say Boon, Director, OCBC Investment Research, The Straits Times, Asia News Network, Singapore

Now, why would United States President George W. Bush threaten the very economic recovery that Federal Reserve chairman Alan Greenspan and company had been working frantically to bring about?

And there is a theoretical possibility that he might damage the tentative global economic recovery by shoving his steel tariffs down the throats of Asian and European producers -- that is, if it triggers a trade war.

Well, maybe President Bush's guys have done some hard-nosed calculations on America's economic and political clout, and the relative weakness of the main losers from this display of economic unilateralism, and reckon the worst the affected countries will do is whine loudly before the World Trade Organization (WTO).

And what is the worst the WTO can do? Force the U.S. to back down on this bit of economic bullying or compensate is about all that is likely.

Beyond that, the Bush administration can piously tell its constituents in Ohio, Pennsylvania and West Virginia that it tried its darned best.

Sure, the exercise is cynical. More than that, it leaves a nasty taste in the mouths of almost everybody from Asian friends and "containment" candidate China to staunch, "all-the-way" ally Australia.

And if it does provoke retaliatory measures that run out of control, we could -- in theory at least -- see a global reversion towards protectionism.

And that might frighten the heck out of the equities market, sending prices down, and taking consumer confidence down with it through the wealth effect.

After all, one of the justifications for historically high valuations for equities these days is that we now live in a much more open global economy than before.

And with that, we can look forward to consistent, relatively high growth rates. The flip side of the coin is that we may face lower growth if the U.S. measures provoke widespread retaliation.

Well, that's the theory anyway.

Well may the headlines scream "looming trade war", but taking a closer look at the details of the U.S. measures, they appear calculated to appease the domestic gallery -- but fall short of inflicting the sort of damage that might tip the world into a tit-for-tat trade war.

Yes, it has irritated friends such as Japan, South Korea and Taiwan. It has deeply hurt and disappointed Australians, some of whom at the highest levels of the Canberra power hierarchy reckon they are Washington's best buddies this side of the Suez.

And it will test the patience of China.

But is it worth going to "war" over? I doubt it.

To begin with, the tariffs last only three years. And the highest tariffs at 30 percent on flat-rolled steel will apply for only the first year, phasing down to 24 percent the next, and 18 percent in 2004.

The lowest tariffs are on slab steel -- and that tariff will, according to press reports, apply only when annual imports hit 5.4 million tons. That is about the amount sold into the U.S. two years ago, excluding Canada and Mexico (both of which are exempt from the tariffs).

It is also worth noting that the Organization for Economic Cooperation and Development (OECD) is already working on a plan to wipe out about 14 percent of the world's steel producers.

It is targeting old, inefficient plants, many of them in Europe and in former Soviet countries. The destruction of approximately 110 million tons a year of steel-making capacity would bring the market back into balance.

So the U.S. plan appears aimed at buying time for its steel makers while awaiting the restoration of demand and supply balance.

Nevertheless, there has been a lot of breast-beating, especially from the Europeans.

But at the end of the day, European Union trade commissioner Pascal Lamy indicated that the EU would battle this through and within the WTO framework.

Although the EU could take its own "safeguard measures" against dumping from other countries seeking alternative markets, Lamy reckoned it was not in the EU's long-term interest to be drawn into an escalating trade war.

And of course not -- iron and steel exports account for only 0.2 percent of the EU's economic output.

As for the Japanese, they might be smarting -- as witnessed by Nippon Steel's 4.4-percent share price decline on the announcement. But it would be strategically foolhardy for Tokyo to take on Washington over this at a time when other economic considerations such as a possible banking crisis and U.S. acquiescence for its weakening yen loom large.

Then there is China. As irritated as it might be over this -- and the source of greater anger for the Chinese might be American unilateralism rather than the actual potential damage to Chinese industry -- it may want to exercise patience given its very new membership of the WTO.

In a nutshell, the WTO does not condone retaliatory trade action, and urges arbitration through the organization's framework.

And being a new WTO member, China might want to show a law- abiding hand rather than going feral.

Indeed, the official stand of the Chinese authorities was summed up by a Foreign Ministry spokesman who said: "I don't think the U.S. position is in line with the principles of WTO. The Chinese government will maintain the right to appeal to the relevant departments of the WTO."

Besides, China does not have significant steel exports to the U.S. -- the country is a net importer of high-end steel products. It will be affected largely through a possible flood of cheap imports from other countries seeking alternative markets.

As for the Aussies, who seemed particularly outraged given their support for the U.S. in the war against terrorism, their anger will pass.

This is a long-standing cultural issue for the Australians, whose ardor (well, at least among the power merchants in Canberra anyway) for the Americans often lead to disappointment when "jilted".

Besides, as one Aussie commentator put it: "It needs to be remembered that (Australian steel producer) BHP owns steel businesses in the U.S., including a half-share in a 1.5-million- ton-a-year plant in Ohio."

The widespread anger is understandable given the U.S.' aggression in shoving free trade down the throats of just about everybody when it suits Washington.

The steel tariff move is cynical, it is political expediency, and it is hypocritical. But it's not worth a trade war.