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Going Bananas Over Steel
Subject Trade Restrictions
Topic International Trade
Key Words Trade Restrictions, Tariffs, Quotas, VERs
News Story

Less than two months after an agreement that ended a trade war between the United States and the European Union (EU) over bananas, the same parties appear to be headed for another conflict, this time over steel. The Bush Administration has proposed to protect U.S. steel companies from a worldwide glut of steel. The administration will file a trade case to reduce steel imports and hopes to negotiate a longer-term agreement to reduce global steel-making capacity. The EU expressed displeasure at the Bush proposals and said it would challenge any restrictions on steel imports through the World Trade Organization.

U.S. steel manufacturers have suffered from increased bankruptcies and job losses in recent years. About 25 percent of the steel industry is in bankruptcy proceedings, a number that could rise to 40 percent by the end of the year. Prices for some steel products have fallen to their lowest levels in decades, and the quantity of steel imported into this country has been increasing. Lobbyists for the steel industry and their unions have pushed the Bush Administration for action.

EU countries export 1.9 million tons of steel to the U.S., about double the amount of steel that South Korea, the number two exporter, ships. The European Union argued that the Bush proposals are not the way to go. Not only would EU exporters be punished as a result of the restrictions, but domestic steel producers would face increased competition because some of the steel that the U.S. would have imported, about 22 million tons, would be diverted to EU countries. Analysts believe that any restrictions that the U.S. imposes would cause retaliation by the EU.

The EU countries believe that the problem facing American steel producers is a result of their failure to streamline operations and adapt to changing market conditions. "The cost of restructuring in the U.S. steel sector should not be shifted to the rest of the world," Pascal Lamy, the European trade commissioner, said in a statement. The measures proposed by the Bush Administration may seriously disrupt world steel trade.

(Updated July 1, 2001)

Questions
1. What is a tariff, quota, VER? How does each of these measures restrict the flow of imports?
2. Suppose that the U.S. imposes trade restrictions on the import of steel and the EU countries retaliate by imposing restrictions of their own. What would U.S. steel producers be affected? How would U.S. auto manufacturers and the construction industry (steel users) be affected by the trade war?
3. What happens to the price of steel in the U.S.? In Europe? Does this help explain why the share prices of European steel manufacturers dropped significantly upon the Bush announcement?
Source Alan Cowell, "Swift Condemnation of U.S. on Steel" The New York Times, June 7, 2001.

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