Commentary: Bush's Steely Pragmatism

By Paul Magnusson

When Mao Zedong sought to march postwar China into the industrialized world, he ordered peasants to build tiny furnaces in their backyards to make iron and steel. The result was predictably amateurish, but at least Mao understood one of the basic tenets of modern times: Both military and economic strength depend on steel.

On Mar. 5, President George W. Bush showed that he, too, believes in the importance of steel. Acting on unanimous recommendations from the U.S. International Trade Commission, an independent advisory body, Bush imposed three years of tariffs ranging from 8% to 30% on a variety of imported steel products.

It was a bold but seemingly contradictory move. A tax increase on imports from a President who promised that taxes would be raised only "over my dead body." A protectionist move from a Republican who claims to believe in the free market. An inflationary action that can only hurt U.S. exporters struggling against a strong dollar. And a diplomatically risky gambit when America is trying to keep her allies in the war on terror in line.

Certainly, politics played a role in the decision: Getting an edge for Republicans in steel states is important for the midterm elections and beyond. Yet, despite the risks and besides the politics, the White House did the right thing. After all, economic abstractions such as free trade have to be mixed with practical politics to create a realistic trade policy. And Bush's ultimate goal is laudable--persuading the rest of the world to do away with a century of government intervention in steel production. For that, he'll have to get all steel-producing nations back to the bargaining table for some no-nonsense talks. The tariffs will demand the attention of countries balking at serious capacity-reduction.

In fact, talks among 40 steel-producing nations at the Paris-based Organization for Economic Cooperation & Development are scheduled to résumé on Mar. 13. The OECD began considering last year a U.S. proposal to shut down 200 million tons of excess capacity worldwide--a hefty portion of the total global capacity of 1 billion tons.

The talks so far have produced only a tantalizing result. Governments offered last December to close mills accounting for an estimated 97 million tons in annual steelmaking capacity over 10 years. But the offers were deceptive. They represented furnaces already cold because of nonexistent demand, OECD figures show. The European Union, which has been screaming the loudest about Bush's tariffs, came up with only an 8% cut in its enormous capacity at the Paris talks. Japan, with a theoretical capacity of 145 million tons, offered no real shutdowns.

The President's in-your-face tariffs could break this logjam. True, the EC's Trade Minister, Pascal Lamy, calls Bush's action "a major setback for the world trading system" and has vowed to bring the U.S. before a World Trade Organization tribunal for punishment. He has also threatened to walk away from the negotiating table in Paris. But can he?

The tariffs should cut European steel exports to the U.S. by about 4 million tons. What Europeans fear most, though, is an expected 16 million ton increase in imported steel that was originally headed to America. So they, too, are threatening to raise barriers.

So far, the excess steel in the world market has produced the lowest wholesale prices in 20 years. In the U.S., that has meant 30 bankruptcies and the shutdown of 20% to 30% of capacity. But in the long term, that may prove to be good news. U.S. steelmakers boast that their plants are the most efficient, on average, in tons per energy unit, man-hours worked, and pollution. If so, when the tariffs are phased out in 2005, U.S. mills will be able to compete with fairly traded steel. If not, tough.

Economists hate tariffs and quotas, for good reason. Protectionism makes domestic industries inefficient and consumers poorer. But short term, it can provide relief from unfair trade and encourage reform. If Bush's temporary tariffs get the 40 steel-producing nations to begin bargaining seriously in Paris, his gamble will have been worth the risk.

Magnusson covers international trade from Washington, D.C.

Before it's here, it's on the Bloomberg Terminal.