Case Write up on Standing up for Steel

ECN121B Case Write-up: Standing up for SteelInstructions:Read the case “Standing up for Steel” in the case packet and briefly respond to the case question(s) below.You are welcome to discuss the case as a group, but each person must write their own response. Responses that are identical will not receive credit.Based on your reading of the case, respond to the following question(s):(a)Who are the winners and losers from steel tariffs?(b)Referencing the class on political economy, what explains why the U.S. government might enact a policy like steel tariffs?(c)Big steel firms were initially against the steel tariffs, despite the fact that they would seem to benefit from higher domestic steel prices. Later, they change their stance to favor steel tariffs. later favored steel tariffs. What might explain why they weren’t in favor of steel tariffs throughoutthe period?

Kennedy School of GovernmentCase Program C15-02-1651.0HKS075This case was written by Susan Rosegrant for Robert Z. Lawrence, Albert L. Williams Professor of InternationalTrade Investments at the Center for Business and Government, John F. Kennedy School of Government, HarvardUniversity. (0302) Revised July 2005.Copyright © 2002 by the President and Fellows of Harvard College. No part of this publication may bereproduced, revised, translated, stored in a retrieval system, used in a spreadsheet, or transmitted in anyform or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the writtenpermission of the Case Program. For orders and copyright permission information, please visit our websiteat www.ksgcase.harvard.edu or send a written request to Case Program, John F. Kennedy School ofGovernment, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138Standing up for Steel:The US Government Response to Steel IndustryAnd Union Efforts to Win Protection from Imports(1998-2003)When President George W. Bush took office in January 2001, a messy trade issue landed onhis desk that had bedeviled the administration of President Bill Clinton for the last three years.Since 1998, the domestic steel industry had experienced two distinct downturns involvingdepressed prices, falling profits, a stream of bankruptcies, and job losses numbering in the tens ofthousands. According to the United Steelworkers of America union, a coalition of powerfulmembers of Congress, and most US steelmakers, unfairly priced foreign imports had caused thealarming declines. To restore the industry’s profitability, steel representatives repeatedly called forthe Clinton administration to seek a trade ruling—known as a Section 201 action— that, ifsuccessful, would allow the president to impose a steel quota or other form of far-reaching relief.But a range of critics claimed such a measure would be misplaced and would provideunjustified relief. Foreign steelmakers insisted US firms were struggling because of increasingdomestic competition and a lack of consolidation at home; many steel analysts said falling steelprofits were the inevitable result of excess capacity worldwide, including in the US; and a numberof US steel consumers and economists argued that cheap foreign steel was actually good for thecountry, and that quotas would inevitably spur trade retaliation. If the government imposed a steelquota, many observers agreed, it would unnecessarily harm foreign countries dependent on steelexports, and would benefit one narrow product sector at the expense of the broader US economy.The Clinton administration ultimately left office without bringing a Section 201 case. But asthe health of the domestic steel industry continued to deteriorate in 2001, the Bush administrationFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.02faced increasingly urgent pleas to open a comprehensive 201 trade investigation. Whatever Bushdecided would likely have far-reaching consequences for the domestic steel industry, the USeconomy, and the nation’s relationships with its foreign trading partners.A History of Trade RemediesThe steel industry’s quest for trade relief was not new. For much of the 20th century, the USsteel industry had served as the nation’s industrial backbone, providing jobs for generations ofworkers, and in the process becoming a potent symbol of the country’s industrial might. But sincethe 1960s, when foreign steel first entered the US market in significant quantities, domesticcompanies and steelworkers had complained of unfairly priced imports and an uneven playingfield.While market conditions had changed over the years, and the number of steel-producingcountries had grown, many of the fundamental issues remained the same. According to USindustry, domestic companies couldn’t compete effectively against most imported steel because ofpervasive market-distorting practices overseas. These practices included closed markets thatpermitted few imports, such as Japan’s protected domestic market; non-market economies underwhich steel enterprises were state-owned and supported, such as in the former Soviet Union; andreliance on government subsidies, such as the assumption of pension costs by Europeangovernments to aid restructuring during the 1980s and 1990s. In addition, US steelmakers said,production costs in the US were generally higher due to more stringent labor and environmentalcontrols.Because foreign steelmakers enjoyed such home market advantages, US companiesclaimed, they often could afford to sell steel in the US at prices well below what US steelmakersneeded to charge to remain profitable. Domestic steelmakers didn’t compete directly with importsfor all their business. Large steel consumers, such as the major auto manufacturers, for example,met most of their steel needs through contracts with US companies. By contrast, most foreign steelwas imported by metal trading companies or steel service centers that sold the steel on the socalled“commodity grade” spot market. But even the large contract sales were affected when cheapimports forced down overall prices, industry representatives said.In order to protect profitability and market share, the US steel industry and its workershad repeatedly appealed to the government for protection from foreign imports, claiming thatwithout relief the domestic industry would be unable to compete. Government had been unusuallyresponsive, due in large part to the clout of the United Steelworkers of America union and thestrength of the Congressional Steel Caucus, a powerful bipartisan group of lawmakers whorepresented districts and states with steel manufacturers.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.03Four administrations in a row imposed import restraints, beginning with PresidentRichard Nixon, who in 1969 established quota-like voluntary restraint agreements lasting five yearsthat affected steel from Japan and Europe. In the late 1970s, the Carter administration devised a“trigger price mechanism,” which allowed a certain amount of steel imports into the country ifsold at or above a set trigger price. After that expired, President Reagan negotiated a new round ofvoluntary restraint agreements, later renewed by President George Bush, that apportioned sharesof a limited import pool among foreign steel-producing countries. Many critics pointed to thisseries of import restraints as evidence of undue government protectionism. “Beginning withimport quotas in 1969, protection has been the rule rather than the exception for the steel industry,”according to Daniel Griswold, associate director of the Cato Institute’s Center for Trade PolicyStudies.1By the time Bill Clinton assumed the presidency in 1993, the voluntary restraintagreements of the Reagan and Bush era had expired. Domestic steelmakers, however, continued tomake aggressive use of the US trade laws at their disposal.Antidumping and Countervailing Duty LawsThe antidumping and countervailing duty laws dealt specifically with unfair trade. Mostfrequently brought were antidumping cases, often referred to simply as dumping cases. If a unionor group of domestic steel companies believed that a steel product was being imported at an unfairprice, or “dumped,” it could request that the US Commerce Department initiate an investigation.2If Commerce concluded that unfair pricing had occurred, by finding that the import price waslower than the home market price or than the cost of production, it then determined the margin ofdumping.3 Finally, the petitioners went before the International Trade Commission (ITC), anindependent, quasi-judicial federal agency, to try to prove that the dumping had caused injury orthreat of injury to the industry.4Countervailing duty cases also involved unfair trade, but were brought when domesticcompanies believed a government subsidy in a foreign country was giving an industry in thatcountry an unfair advantage. Unfair government subsidies could include the granting of interest-If the ITC reached a positive finding, the importer had to payduties equal to the dumping margin. While it could take 12 to 18 months for a final ruling,importers had to post a bond to cover estimated duties as soon as a preliminary positive findinghad been reached, a process typically completed within about six months.1 Daniel Griswold, “Counting the Cost of Steel Protection,” Hearing on steel trade issues before the HouseCommittee on Ways and Means Subcommittee on Trade, February 25, 1999.2 The Treasury Department had originally overseen dumping cases, but Commerce assumed responsibility in 1979, amove that most observers agreed had contributed to the process becoming more industry-responsive.3 If using the home market price as the basis of comparison, for example, the dumping margin would be thedifference between that price and the US import price.4 ITC regulations required that no more than three of the six commissioners be of the same political party. Inpractice, this usually resulted in a commission split between Democrats and Republicans.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.04free loans and the assumption of pension and health care costs. If the ITC found injury, Commercewould have the US Customs Service impose a “countervailing” or offsetting duty on the importsequal to the estimated subsidy.Section 201 of the Trade Act of 1974Unlike antidumping and countervailing duty investigations, a Section 201 case did not relyon proof of unfair trade practices. Rather, if the ITC determined that the volume of a particularimport constituted a substantial cause or threat of serious injury to a domestic industry, thepresident could impose temporary import relief without violating the rules of the World TradeOrganization (WTO). Once initiated, usually by industry, the case went straight to the ITC, whichruled on the case and, if positive, made a recommendation to the president, all within six months.The president then had 60 days to come up with a remedy, which could be no action at all; a tariff;a quota; a tariff-rate quota; or some form of trade adjustment assistance.Section 201 had the potential to provide a more comprehensive remedy than dumpinginvestigations. In the case of steel, for example, a 201 investigation could target all steel importsfrom all countries, while a dumping or countervailing duty investigation dealt only with oneproduct and one country at a time, such as hot-rolled steel from Japan. But in part because theinjury standard was higher for a 201 than for a dumping or countervailing duty case, and thusharder to prove, and in part because the outcome was entirely at the president’s discretion, 201cases were far less common.Critics of the dumping laws insisted that they were too plaintiff-friendly. Indeed, from1980 to 1997, 80 percent of all dumping cases brought in the US—including steel actions—weresuccessful. According to William Barringer, a partner at Willkie Farr & Gallagher who representedJapanese and Brazilian steelmakers, foreign countries often didn’t even bother to respond todumping cases, believing that their chances of prevailing were so slim. Industry representatives inthe US, however, maintained that the dumping laws were a completely legitimate and necessarytool to combat surges of unfairly priced imported steel. The number of successful cases, theycontended, merely demonstrated the prevalence of dumping and subsidization.In either case, many economists noted that all steelmakers periodically engaged indumping because in a cyclical and capital intensive industry it was more profitable to sell belowcost during a downturn than not to sell at all, as long as revenues covered variable costs. While itwas legal to sell below cost in a home market, something US firms did regularly, to do so overseaswas dumping.55 US steelmakers exported very little steel.“This is completely economically rational behavior in a period of excess capacity,”says one economist, “but it runs afoul of the dumping laws.” Because selling below cost was socommon in the industry, and because the domestic industry was aggressive in seeking protection,For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.05steel companies historically had used the dumping law more than any other industry, and wereresponsible for about a third of all cases brought between 1980 and 1995.History of RestructuringAlthough the US steel industry continued to seek relief from what it deemed unfairimports, foreign steelmakers and some other industry observers argued that most of the steelindustry’s problems were the result of internal decisions and conditions at home. US steelcompanies—loath to make the huge capital investments required—had taken longer than many oftheir foreign competitors to upgrade their outdated open-hearth blast furnace technology to morecost-efficient basic oxygen furnaces, critics said. Not until the 1980s did serious industryreinvestment begin, and the last open hearth furnace in the US didn’t close until 1991.The older integrated steel mills—so called because of the vertically integrated process theyused to turn raw inputs such as iron ore into finished carbon flat-rolled steel products—also facedgrowing competition domestically from mini-mills, many of which began operating in the 1970s.These faster and more flexible companies typically had far lower costs than the integrateds: Theyproduced finished steel from abundant scrap metal melted in highly efficient electric-arc furnaces;their workforces were often non-union; and because they were young, they did not have to paybenefits to large numbers of retired workers. Although the steel produced by the early mini-millswas mostly low grade, the product improved with the technology. By 1998, the mini-mills werecompeting directly against the integrateds in certain product areas, and their share of USproduction had increased to almost 40 percent.Some critics also claimed that US companies had not done enough to consolidate,particularly compared to European and Latin American firms. According to foreign steel attorneyWilliam Barringer, efforts by the United Steelworkers of America union to keep all plants inoperation—regardless of their performance—had constrained restructuring and resuscitated entirecompanies that should have been allowed to fail. By 1997, Barringer says, the industry could bebroken into three distinct segments: the large integrated steelmakers, like AK Steel, BethlehemSteel, and U.S. Steel, most or all of whose operations were cost competitive; globally competitivemini-mills, like Nucor and Steel Dynamics; and the second-tier integrated mills, such as Weirton,Wheeling-Pittsburgh, and Geneva Steel, which, he claims, were “on the verge of bankruptcy, havebeen on the verge of bankruptcy, and will continue to be on the verge of bankruptcy.”Consolidation efforts were hampered as well by the so-called legacy costs borne by theolder integrated firms. In the 1970s, even as industry and union representatives decried the marketincursions of steel from abroad, and appealed to government to protect the domestic industry,wages for steelworkers grew more rapidly than wages in any other industrial sector—increasingnot only current worker benefits, but also the benefits that would be paid out as workers retired orwere laid off during subsequent plant closures. Such generous wage policies, negotiated during aFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.06period of industry decline, had contributed by the 1990s to soaring legacy costs in the form ofpension, health, and severance benefits that drove down company profits, raised the cost ofrestructuring, and made steel companies unattractive as potential acquisitions.US industry and union representatives, however, presented a very different picture. Atwo-decade period of comprehensive restructuring, they insisted, had by 1997 created a worldclassindustry characterized by quality, efficiency, and productivity. Dozens of inefficient millsclosed, and employment fell from more than 547,000 workers in 1980 to about 236,000 in 1997, amore than 50 percent drop in the labor force. In fact, the very real burden of legacy costs, USsteelmakers argued, was painful proof of the industry’s aggressive consolidation. Over the sameperiod, domestic steelmakers—with the federal government’s encouragement—invested more than$50 billion in updated facilities and equipment, including more than $7 billion in environmentalcontrols. Productivity increased at twice the average rate of all US manufacturing, helped by themore productive mini-mills, and, at less than four man-hours per ton of steel, was among thehighest in the world.However, even some analysts who conceded that US steelmakers had made great stridesover the last two decades questioned whether government policies supporting widespreadreinvestment had been wise. The reason steelmakers were struggling both in the US and abroad,they argued, was the combination of global overcapacity with quickly rising worldwideproductivity and relatively sluggish growth in demand. Despite the domestic plant closings andlayoffs, total shipments of steel products in the US had risen from about 84 million tons in 1980 toabout 105 million tons in 1997. Thus, as more developing nations became steel producers andcountries such as the US increased production, excess global capacity, which in the last fewdecades had often topped 20 percent of production, would only get worse. “Why would we try toforce an industry that is in decline and supposed to be reducing its capacity to actually take moneyand invest it in the steel industry?” asks one former government official.In addition, some industry observers questioned whether the US government shouldprotect the domestic steel industry at all. Cheap foreign imports, after all, lowered the cost of steelfor downstream users, who by the 1990s far exceeded steel producers in employment andcapitalization. Moreover, given the growing strength of the mini-mills and the number of newsteel-producing entrants worldwide, the risk of a single foreign country or company driving all USfirms out of business, taking control of the steel market, and then raising prices was moot. “If theUnited States adjusted out of steel and we ended up producing only 20 percent of our steel needs,would we be in deep trouble, and unable to have our manufacturing sector produce the kind ofmachinery we need?” asks one economist. “The answer is no.”But most Americans still believed in the importance of a vital US steel industry. Whilesteel-consuming businesses wanted access to imports, they also wanted a reliable and accessibledomestic supply. In addition, despite deep layoffs and numerous plant closings, steel was still aFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.07highly visible industry, and regional pockets around the country depended on steel mills to keeptheir economies afloat. Finally, even some economists who considered themselves supporters offree trade argued that simply allowing market forces to work wasn’t fair in a global industry soskewed by foreign subsidies. “It has been distorted by so much government intervention on somany different levels for so long,” says Greg Mastel, trade counsel and chief economist for theSenate Finance Committee, “that it’s a marketplace where it is hard to say, ‘Just let the marketoperate.’”The 1998 Steel CrisisDespite ongoing restructuring, the 1990s were a period of recovery for much of the USsteel industry. The nation’s strong economy created a ready market for steel, as domestic demandincreased by about seven percent a year. While steel imports accounted for 20 percent of the USmarket in 1997, much of that was needed, since domestic demand exceeded what US companiescould supply by more than 15 percent. Moreover, about a quarter of the imports were semifinishedsteel brought in by the domestic steel industry itself for further finishing. US steel shipments wereat a record level, and domestic steel mill capacity utilization—a key measure of industry health—was above 90 percent.By the fall of 1997, however, George Becker, president of the United Steelworkers ofAmerica, was becoming uneasy about how the domestic industry would be affected by thegrowing financial crisis in Asia. Demand for steel in Asia had collapsed, making the US marketmore than usually attractive, and regional currency devaluations in steel-making countries likeSouth Korea and Japan were resulting in even cheaper foreign steel. Becker met with the Clintonadministration to voice his concerns, but the data did not yet support his contention that risingimports and falling prices might spiral out of control. After all, the steel industry’s 1997 financialresults were the best in more than 15 years.By the summer of 1998, though, the Asian crisis, coupled with an economic collapse inRussia, began to have a serious impact on the global steel market. As a backlog of steelaccumulated, much of which would formerly have gone to Asia, prices fell worldwide and a hugevolume of low-priced steel—in particular, hot-rolled steel from Japan, Russia, Korea, and Brazil—poured into the US market.66 US imports of Japanese hot-rolled steel for the year would eventually show a 381 percent increase over 1997.Imports in a few categories rose to nearly 40 percent of the US market,about double what they had been the year before. Despite a booming domestic economy, USsteelmakers faced the choice of following prices down or giving up market share. Even Nucor, themini-mill whose low-cost production had helped make it the nation’s second largest steelmaker,wrote to Commerce Secretary William Daley in August to warn that unfairly priced imports weretaking a dangerous bite out of the US industry’s profitability. “When Nucor came and said it washurting,” one former official says, “that got the attention of people in the administration.”For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.08To combat the sudden surge of imports, the United Steelworkers of America union beganto work several fronts simultaneously. In September, it launched “Stand Up for Steel,” a $4 millionadvertising and public relations campaign designed to implicate steel imports, and to exertpressure on political representatives. “In this great economy when everybody else was doing well,we had to penetrate and push through with the message that there was a major American industryand a lot of employees that weren’t sharing in the good fortune,” says William Klinefelter,legislative and political director for the United Steelworkers of America. “We had to say that wewere under attack. We had to get that message home.”That same month, the Steelworkers Union began bombarding Congress and the Clintonadministration with requests for legislative and executive action.7 According to Klinefelter, theunion was convinced that only a comprehensive solution could provide the quick and far-reachingaction that the steel industry needed to avoid plant closures and job losses. While a legislativequota limiting imports was its clear first choice, the union also considered the likely effectivenessof a Section 201 trade case. “I think we all realized that the dumping cases were not going to beenough, that we had to shut off more products from every place,” Klinefelter explains. “So that’swhen the idea of the 201 case came up amongst us.” In particular, the union wanted the Clintonadministration to self-initiate a 201 case. If the administration brought the case, union officialsreasoned, the president would be more likely to grant significant relief should it succeed.8The US steel industry, however, disagreed with the union position on quotas and 201.9Industry didn’t speak out against the union’s efforts, since it didn’t want to sour relationswith the union, but it also didn’t directly support them. For its part, a dozen steel companies fileddumping cases September 30 on hot-rolled steel against Japan, Russia, and Brazil, as well as acountervailing duty case against Brazil. The union, which was also hedging its bets, joined in thefiling.Since the Reagan and Bush-imposed voluntary restraint agreements ended in the early 1990s,dumping cases had become the main remedy for industry. Section 201 cases, while morecomprehensive than dumping cases, carried a number of risks, steel representatives say. They weredifficult to bring; the injury standard was high; and relief was at the discretion of the president,who was often constrained by foreign policy considerations. “In the last 20 years, no majorindustry had gotten relief under 201,” says Alan Wolff, a partner at Dewey Ballantine whorepresented a group of major US integrated steel firms.7 Although the crisis had become apparent the previous month, Klinefelter says, the union delayed the letter-writingcampaign because “nothing happens in Washington in August.”8 Although it was most common for industries to request a 201 investigation, unions, the president, the United StatesTrade Representative, the House Committee on Ways and Means, and the Senate Finance Committee were allauthorized to initiate.9 According to William Barringer, the second-tier firms were the only ones pushing for 201 along with the unionsbecause they were desperate for any form of comprehensive relief. “At the end of the day, what they were reallylooking for was a political solution—a bailout,” Barringer says.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.09Becker and Klinefelter met with leading members of the Congressional Steel Caucusthrough the fall. Although the steel crisis hit late in the year for Congress to react, the House,among other legislation, approved a non-binding resolution calling for a one-year ban on unfairsteel imports from ten countries, including Japan, Russia, and Brazil. In addition, Senators JohnRockefeller (D-WV) and Arlen Specter (R-PA) introduced a bill that would make it easier to bring aSection 201 case. “What I was trying to tell the administration with these resolutions,” saysKlinefelter, “was that if you don’t do something, don’t think that Congress won’t act, because theCongress will act.”The administration had its own reasons to respond. “There is a lot of merit to the argumentthat foreigners have subsidized their steel industries,” says one former Clinton official. “Whilethere is a huge amount of latent political support for free trade, the Republicans and the Democratsalso compete in being tough against unfair trade.”The Early Clinton Administration ResponseDuring the fall, as the steel crisis worsened, the Clinton administration tried to reduce theonslaught of imports without resorting to market-closing measures. US Trade Representative(USTR) Charlene Barshefsky in October urged the European Union (EU) to accept more Russiansteel, and pressured Japan, which was responsible for almost half of the import surge, to begincutting its steel exports.10In addition, Commerce streamlined its dumping investigations and instituted a new“critical circumstances” policy that allowed it to impose duties retroactively on whateverpreliminary margins were eventually determined, rather than waiting until the margins had beenassessed for duties to take effect. On November 23, after the ITC found injury in the dumping casesfiled against Japan, Russia, and Brazil, Commerce announced it would apply retroactive duties toaffected imports that had entered the US beginning November 12.11But such actions didn’t comprise a policy. Since August there had been frequentinteragency meetings of top officials involved in the steel issue to discuss what to do. In particular,administration representatives debated the wisdom of bringing a 201 case, the only comprehensiveimport remedy the administration could impose that was WTO-compatible. Principals’ meetings—chaired by National Economic Council head Gene Sperling, who coordinated steel trade policy—consisted of Cabinet-level officials such as Treasury Secretary Robert Rubin; Commerce SecretaryWilliam Daley; USTR Charlene Barshefsky; Chairman of the Council of Economic Advisers JanetThe threat of dumping dutieshelped drive December steel imports down by one-third from the previous month.10 Although the EU talks were largely fruitless, imports of Japanese steel fell by almost 50 percent in December inresponse to the dumping case and administration negotiations.11 This policy helped stop importers from rushing in products targeted by a dumping action before duties had beenassessed and imposed.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.010Yellen; and White House Chief of Staff Erskine Bowles, usually accompanied by their deputies. Butmuch of the real work occurred in the deputies meetings, chaired by Deputy Assistant to thePresident for International Economics Lael Brainard. These sessions normally included DeputySecretary Lawrence Summers; Under Secretary of Commerce for International Trade David Aaron,backed up by Assistant Secretary for Import Administration Robert LaRussa; USTR GeneralCounsel Susan Esserman; State Department Assistant Secretary Alan Larson; Deputy NationalSecurity Adviser James Steinberg; and Council of Economic Advisers (CEA) member RobertLawrence.According to inside observers, the policy positions of agencies and individuals werelargely predictable. Officials at the Commerce Department and USTR, who were meeting regularlywith industry lawyers and officials, wanted to pursue all legal mechanisms that might help thetroubled steel industry, and were considering both the union’s request for a Section 201 action andregulatory changes that might make it easier for the industry to win trade relief. While USTRthought industry should bring the 201 case, some Commerce officials felt the administrationshould consider self-initiating an investigation. “It was an emergency measure—that’s what it wasdesigned for,” says then Commerce Under Secretary David Aaron. “We were in an emergency, andI felt that was the right way to go.”Officials at the White House, meanwhile, including President Clinton; Chief of StaffBowles, later replaced by John Podesta; and Deputy Assistant to the President Karen Tramantano,were sympathetic to the steelworkers’ plight. But the White House was also very concerned aboutthe message that self-initiating a Section 201 case would send. “If we did this, it would beinterpreted that we had gone protectionist,” Aaron explains. “The Democrats felt vulnerable [tothat charge] as a national party. They kept saying, ‘We have the right to do this, it’s accepted in theWTO, and maybe it’s even the best solution, but it would send a terrible signal.’” Adds Klinefelter:“We had tremendous access to the administration. But the philosophical mindset was for freetrade. They did not want to send any signal that they were deviating from that.”Not surprisingly, most of the economists—members of the National Economic Council, theCouncil of Economic Advisers and the Office of Management and Budget—and agenciesconcerned with foreign policy, such as the State Department and the National Security Council,wanted to support free trade to the extent possible.But the most powerful voice was that of Treasury Secretary Robert Rubin. Rubin’shandling of national and international economic issues over the last four years had given him a“stature within the administration that was beyond anything the other members of the Cabinetcould possibly reach,” according to one well-placed observer. In the midst of the deepening Asianfinancial crisis—considered by many officials to be the world’s worst financial crisis in 50 years—Rubin’s paramount concern was to avoid any action that could further destabilize financial marketsand lead to inevitable repercussions on the US economy. Part of that effort was keeping the USFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.011open to steel. “Any signals we sent that we would be closing our markets could really destabilizethe markets, especially in Asia,” says one former White House official. “The US was the importerof first and last resort during that time period, so we recognized the problem in steel could havemuch larger ramifications.”Rubin’s conviction that the US needed to keep accepting steel imports set him solidlyagainst a Section 201, whether self-initiated by government or filed by industry. “You have to givehim credit for the way in which he handled the whole crisis, and the way the people on the Hilland the people overseas had confidence in his ability to handle it,” the union’s Klinefelter says.“But we were coming to him and saying, ‘Mr. Secretary, what you’re doing may be good for theoverall economy, but it’s going to have a flashback on us.’”Due to the differing administration perspectives, reaching consensus on a cohesive steelpolicy was not easy. One official remembers appearing along with union head George Beckerbefore the Senate Steel Caucus November 30 and worrying because the administration didn’t havea comprehensive strategy to announce, beyond promising a steel action plan by early January, asrequested by a congressional resolution. “At the time, we were saying vigorous trade lawenforcement, immediate forays with countries around the world, and bilateral initiatives to havethem keep down their exports,” the official recalls. “I was quite concerned at the time that it wasn’tsufficient, but there were a lot of debates within the administration about what to do.”Meanwhile, the union and the second-tier steel companies continued to press forcomprehensive relief. According to the American Iron and Steel Institute, the average price permetric ton for all steel imports had dropped more than 20 percent between January and October to$400, the industry had lost 10,000 jobs over the previous year, and steel mill capacity utilizationhad fallen to 74 percent. Alarmed by the continuing slide, USTR counsel Susan Esserman calledindustry representatives into her office. “I said, ‘Let’s go over a 201 case. If you’re interested in a201 case, we’re interested in working with you.’” But the response, she says, was decidedlyunenthusiastic. Lawyers for the integrated steelmakers, on the other hand, say they felt it was up tothe Clinton administration to take the lead. “We met with Sue Esserman and our feeling was it’s awholly discretionary statute, and the president can do what the president wants to do,” recountslawyer Alan Wolff. “If the president was not committed to the notion that relief was warranted, itwould be something of a fool’s errand to go ahead.”Perhaps more to the point, the steelmakers’ lawyers didn’t believe that a comprehensive201 case was winnable at the time, both because the import surge was most pronounced in just afew categories, such as hot-rolled steel and wire rod, and because there wasn’t a long enoughhistory of import penetration and injury. Although overcapacity had forced prices and profitsdown, and US steel imports for the year had increased 37 percent over 1997, domestic companieshad shipped 102 million tons of steel in 1998 despite lower overall employment—a productionlevel that was topped in the previous 20 years only by the peak year of 1997—and eleven of the topFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.01213 steel companies were still profitable. “If you have diminished profits in a cyclical, capitalintensiveindustry during the peak of the business cycle, is that injury?” asks Wolff. “The ITC hasnever found that. So our feeling was that the statutory criteria as interpreted by the ITC could notbe met.” He adds however, that had the Clinton administration chosen to self-initiate, it wouldhave improved the case’s chances “significantly.”Although the Clinton administration continued to debate the merits of a 201 case throughthe end of 1998, Rubin’s opposition to market restraints carried the day. “Clearly he did not wantto send any signals to our Asian trading partners,” Klinefelter of the union recalls. “Theireconomies were in danger of serious collapse. If we could absorb some of that pain, he felt oureconomy was strong enough and we were robust enough that we could do it.” He adds: “I thinkthey felt that we’d weather it. The world economy would stabilize, the imports would go down,and we’d be back to normal.”The January Steel Plan and the Negotiated AgreementsOn January 7, 1999, the Clinton administration delivered the steel action plan promised theprevious year. Titled, “Report to Congress on a Comprehensive Plan for Responding to theIncrease in Steel Imports,” the program included a demand that Japan cut steel exports to the USback to pre-crisis levels; a system of earlier import monitoring, since, as one former administrationofficial says, “There was the sense that somehow this crisis had occurred and we hadn’t known itwas happening;” $300 million in tax relief for steelmakers, spread over five years; financialadjustment assistance for out-of-work steelworkers and hard-hit steel mill communities; and acontinued commitment to strongly enforce all US trade laws. “The Clinton administration’sposture could be characterized as, ‘We will aggressively implement the laws, but we are not goingto go beyond them,’” says Robert Lawrence, who that March joined the Council of EconomicAdvisers chaired by Janet Yellen as one of its two members. “We will neither change the laws norviolate them.”Klinefelter, who says the January steel plan “was not considered a bold new way to go,”met with John Podesta and Karen Tramantano to reiterate the union’s strong support for 201.Although he got no definitive answer, Klinefelter says, it was clear the administration would notself-initiate.12Industry also objected to the import agreements that the Clinton administration announcedone month later. Since September 1998, Russian steelmakers and government officials—alarmed byNor were steelmakers pleased. Instead of faster import monitoring, industry formonths had been lobbying for a licensing system similar to Canada’s, which didn’t restrict importsbut required a license or permit to import, allowing faster and more accurate tracking of productsentering the country.12 According to Klinefelter, “The Clinton administration had a way of never saying no, but never saying yes.”For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.013the sharp industrial and economic declines in that country—had been pleading with theadministration not to impose dumping orders on Russian steel, even publishing a full-page letterto Vice President Al Gore in The Washington Post. In February, Commerce announced two tentativedeals with Russia: an agreement suspending the dumping case on hot-rolled steel, and acomprehensive agreement covering all other steel exports. Hot-rolled imports were to be cut backto 750,000 tons a year, with a minimum price ranging from $255 to $280 per metric ton. Bothagreements, which were to remain in effect five years, returned steel exports to pre-crisis levels.Former Assistant Secretary for Import Administration Robert LaRussa, who led theRussian negotiations, says the deals were designed to protect US steel companies while still givingRussia more access to the US market—and to much-needed foreign currency—than it would havehad under the dumping order. According to foreign steel attorney William Barringer, the USgovernment had another strong motivation in negotiating: “Russia can export three things:weaponry, oil, or steel. There was a lot of pressure within the administration not to shut theRussians out of this market for fear that they would ship other products.”The US steel industry, however, saw the agreements as another example of the Clintonadministration’s willingness to sacrifice steel to some other agenda. “Suspension agreements arealways done to help the foreigner,” says one US steel lawyer. “They are never done to help thedomestic industry.” In a May 24 letter to Commerce Secretary Daley, almost two dozen steelexecutives expressed their opposition to the agreements. “Foreign policy and other objectives donot have a place in the administration of the antidumping laws,” they wrote, adding later, “Ifforeign aid is to be granted to Russia, it should not be at the expense of a single Americanindustry.”Ironically, because steel prices didn’t rebound as much as expected after 1998, LaRussasays, the minimum prices set as part of the suspension agreement effectively excluded Russian hotrolledsteel from the US market, contrary to administration intentions. Nevertheless, the US steelindustry challenged both the Russian agreements and a similar suspension agreement negotiatedwith Brazil, charging that they allowed imports in at dumped prices, and questioning Commerce’scommitment to enforcing the dumping laws. The administration’s actions apparently pleasedalmost no one. Russian steelmakers and American steel users also attacked the agreements,claiming they were too restrictive to allow needed trade.The 1999 Steel LegislationAs the administration worked with foreign trading partners—negotiating agreements withRussia and Brazil, pressuring Japan and Korea to cut exports and correct market-distortingpractices, and appealing again to the EU to buy more Russian steel—the Steelworkers Union wastackling a separate set of initiatives. In a January 8 letter to President Clinton, union PresidentGeorge Becker wrote that given the limitations of the January steel plan, “…we now have no choiceFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.014but to work with our supporters in Congress, of which there are many, to pass into law theabsolutely vital relief which the Administration is apparently unwilling to provide—legallybinding quantitative restraints which reduce steel imports to their pre-crisis levels.”Becker could confidently speak of congressional support. Much of the union’s clout camefrom its close ties to the more than 120 House and Senate members of the Congressional SteelCaucus. More important than these sheer numbers, committed Caucus members like congressmenPeter Visclosky (D-IN), Jack Quinn (R-NY), and Philip English (R-PA), and senators Arlen Specter,John Rockefeller, and Robert Byrd (D-WV) were senior legislators in a position to cast swing voteson key pieces of legislation. “We have people in the right places to deliver a message and to delivermembers when you have a vote,” says Klinefelter. “I talked with Rockefeller’s office andVisclosky’s office every day. That’s how a union with less than 200,000 members could be aseffective as we were.”Starting in January, both the House and the Senate debated several pieces of union-backedsteel legislation. Key among these was the Steel Recovery Act, introduced by Peter Visclosky andJack Quinn. While the bill included a number of provisions, its main thrust was a quota cutting allsteel imports over a three-year period to the average monthly volume during the three yearspreceding July 1997. The administration immediately spoke out in opposition. To impose a quotaunilaterally without an injury determination was a violation of the rules of the WTO and, asCommerce’s Aaron says, “was completely antithetical to the administration’s philosophy of moreliberalized trade.” Adds a former White House official: “The president and the vice president felt itwas important to use the trade remedies we had negotiated assertively, but that we should make itclear that we were operating within WTO consistency, and that we expected other countries to dothe same.” The House, however, seemed to feel no such compunction. As one former official putsit: “One of the marvels of the American system of government is that we can sign an internationalagreement, the Congress can implement that agreement, and the Congress can violate thatagreement. Domestic law has precedence over international treaties.”In place of the quota bill, USTR and the White House worked quietly with RepresentativeSander Levin (D-MI) on legislation that would change Section 201—making it easier for petitionersto prove injury—and charge the ITC with addressing the problem of anticompetitive practices inforeign steel markets. The purpose of Levin’s bill, says attorney Barringer, “was to try to giveCongress an alternative to a quota bill, so members could still say, ‘We’re helping steel.’” Theadministration wasn’t united in support of the bill, however. One insider says some officialsargued the 201 injury standard should be lower, so that dumping cases wouldn’t be overusedrelative to 201; others argued that it was appropriate for dumping standards to be lower, since theydealt with unfair trade; and some said “any rewriting of our laws to look less pro-trade would be avery bad thing for world confidence and stability.”For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.015While the union supported Levin’s bill, it threw its real weight behind the quotalegislation, working the issue hard. “We had 1,000 or more members in 150 congressionaldistricts,” Klinefelter explains. “If we have 1,000 or more members in any congressional district,we’re going to be a factor.” Industry, which didn’t want to support legislation in violation of theWTO, remained quiet.13On March 17, the House passed the quota bill by a vote of 289 to 141, short of the twothirdsmajority needed to override a presidential veto. While Klinefelter describes the vote as asignificant victory, others say it was more symbolic than substantive. “The union’s hope was thatthe votes in Congress, especially the House, would push the ITC, the Commerce Department, andothers to consider their trade actions more favorably,” says Finance Committee economist GregMastel. Adds William Barringer: “It was a free vote for House members, because they felt itprobably would be blocked in the Senate, but if it wasn’t blocked in the Senate, it would be vetoedby the president.”The administration, for its part, spoke out against the quota bill, oneofficial recounts, but did not expect to prevail. Although the pro-free trade Republican leadershipmight ordinarily have been expected to block quota legislation, congressional sources say, SpeakerDennis Hastert (R-IL) asked that the act be allowed to come to a vote in order to put Clinton in theawkward position of opposing a union-backed bill.As administration officials were quick to point out, however, the last thing PresidentClinton wanted was to have to veto legislation backed by key Democratic allies and a powerfulconstituency like the steel union. Democratic Senator John Rockefeller of West Virginia, who hadbeen a close friend of Clinton’s since the two were governors, had been pushing the president toself-initiate a 201 case since the previous fall.14 According to Ellen Doneski, Rockefeller’s legislativedirector, the senator was opposed to WTO-incompatible quotas, and had earlier refused to backsuch legislation. When it became clear that Clinton wouldn’t bend on the 201, though, Rockefellerintroduced a Senate version of the House quota bill.15This time, the administration launched a serious assault, holding press conferences,courting the Steel Caucus, and meeting with individual senators and lobbyists. “After the vote inthe House, the administration was all over the Hill,” recalls Klinefelter. In making its case againsttrade barriers, the administration was joined by free trade advocates in Congress; domestic steelusers concerned about quota-induced steel shortages and inflated prices; and even a coalition offarm groups, which sent a letter to the Senate in mid-June warning that a steel quota would likelyspur foreign retaliation against US agriculture exports.13 Weirton Steel, a struggling second-tier integrated mill, was one of the only companies to publicly endorse the bill.14 West Virginia-based Weirton and Wheeling-Pittsburgh, the 8th and 9th largest of the integrateds, were two of thesteelmakers most in danger of failing, and Rockefeller believed only a comprehensive solution could save them.15 Like the House, the Senate considered several steel bills, including a measure similar to Levin’s bill, but the quotabill garnered the most attention.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.016Even during the earlier House bill debate, the administration had been poring over importfigures, looking for evidence that the already imposed dumping cases and bilateral negotiationshad ended the import surge, thus making a quota unnecessary. “The questions we kept askingwere, ‘Will the industry recover, and when will the industry recover,” says then Council ofEconomic Advisers (CEA) member Robert Lawrence, “hoping that would take off the politicalpressure and, indeed, help the industry.” Because of a buildup of inventories, Lawrence says, thedomestic industry didn’t bounce back as quickly as some had expected. But by May, CommerceSecretary Daley was able to announce an encouraging drop in imports and an increase in domesticprices. By mid-June, although Klinefelter insists “there was not much truth to it,” Daley wasdeclaring at every opportunity that the crisis was over.16On June 22, the Senate effectively killed the quota bill in a procedural vote. Improvedimport levels were only part of the picture. Senators generally were more attuned to foreign policyconsiderations and less likely to pass this kind of special interest legislation, observers say, in partbecause they had to report to broader constituencies.17Although the quota effort died and none of the measures in the House or Senate to changeSection 201 advanced, one piece of legislation went through that summer that pleased the unionand at least a segment of the domestic steel industry. Senator Robert Byrd, a senior member of theAppropriations Committee, attached an amendment to an emergency appropriations bill allocating$1 billion to establish the Emergency Steel Loan Guarantee Act. Under the act, troubledsteelmakers that met certain requirements could get loans from private lenders that Treasurywould guarantee for up to 85 percent of the loan amount. Critics charged that the amendment, alsobacked by fellow West Virginia Democrat Senator Rockefeller, was a blatant effort to bail outfailing steel mills in West Virginia, in particular Weirton. “Senator Rockefeller has two major steelmanufacturers,” says legislative director Doneski, “and what he didn’t want to have occur was forthe steel market to stabilize after one or two bankruptcies in West Virginia.”“It is a much more difficult place for us tooperate,” says Klinefelter, “because we just don’t have enough people in enough states to controlthe Senate.” Even some of the bill’s staunchest supporters admit they never expected it to pass inthe Senate. Instead, they say, it was a necessary exercise to show the union and concernedcompanies that a quota bill was not doable, and that it was time to try something else.The Clinton administration didn’t like the amendment, but it also didn’t go out of its wayto fight it. Ironically, the Byrd amendment may have been most unpopular among segments ofindustry. The better performing mini-mills and those companies that had undergone successfulrestructuring didn’t want to see uneconomic competitors kept afloat by government subsidies, thusadding to the problem of excess inefficient capacity.16 Although import levels had not returned to 1997 levels, they were well below the surge that began in August 1998.17 Even senators from strong steel states also typically represented exporting businesses or major steel users.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.017With a recovery in steel apparently underway, calls for a government launched 201investigation mostly subsided. A flurry of trade cases worked through the system—industry hadfiled dumping cases in cold-rolled steel, steel beams, and two different sizes of pipe, as well as twoSection 201 cases in pipe and wire rod. Meanwhile, some observers blamed the failure of the WTOMinisterial in Seattle that fall in part on the unwillingness of the US to allow discussion ofdumping laws. LaRussa and Aaron of Commerce, however, say that countries opposed tolaunching a new trade round called for new dumping negotiations, knowing that the US wouldrefuse, and that they could then blame the collapse of the ministerial on US intransigence.A Brief Recovery—A Further FallFor the steel industry, the year 2000 began with some promise. Imports had fallen, at leastin some key categories, and the US economy was strong. Domestic demand for steel in autos andconstruction was booming, and steel mill capacity utilization had increased markedly from the1998 slump. Still, steel industry profits remained low. Prices had not fully recovered, nor didimports drop to their pre-1998 level.In July, Commerce released the Global Steel Trade Report, a steel market study promisedthe previous year after the failure of the quota legislation. Because the report had been modifiedthrough an inter-agency review, with particular care not to include anything that could harm thepresidential candidacy of Vice President Gore, the recommendations were “pretty limp,” saysDavid Aaron, who left Commerce in April . “I would have liked to have seen them recommend a201 and an international initiative. I felt that having talked to some of the foreign steel people andcountries that they would not take us seriously without at least starting a 201.” He adds: “Once wegot to this report, all the easy things we could do ourselves, apart from 201, had been exhausted.”Nevertheless, industry and the union embraced the document, which summarized unfairand uneconomic practices in other countries, and how those had affected the US steel industry andthe problem of global overcapacity. Klinefelter, who calls the report “an incredibly valuabledocument,” says, “It was the first time that our government had ever laid out what our tradingpartners were doing to us in a systematic fashion in regard to steel.”By the time the report came out, however, another downturn had begun. Due in part toprice increases announced by domestic producers earlier in the year, steel imports had risen inearly 2000. After the nation’s industrial sector began to slow in May, steel buyers cut back onimports, but even so, weakened domestic demand for steel drove down plant capacity utilizationrates once again. Excess inventory and flagging sales soon took a toll on prices: By the fall, hotrolledsteel was selling for only $180 a ton, about half what it had gone for in the early spring. SteelFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.018company stock prices also plummeted, drying up available sources of capital.18By the beginning of October, with the presidential campaigns of Gore and Texas GovernorGeorge W. Bush running neck-and-neck, and both candidates struggling to lock in keyconstituencies, union head George Becker began meeting with Karen Tramantano and JohnPodesta, pleading for the Clinton administration to self-initiate a 201 case.The steel slump,coming as it did just two years after the surge of imports in 1998, hit particularly hard. “You hadthem getting absolutely hammered in ‘98, you had a little bit of a recovery going into 2000, then thebottom fell out, so [the integrated steelmakers] didn’t really have any reserves left,” says a formerSenate Finance Committee staffer.19The chorus of calls for the administration to self-initiate was understandable. Althoughsome Clinton representatives had insisted all along that a Section 201 case brought by industrywould have as much chance of success as one self-initiated by government, virtually no one in theunion or in industry agreed. Instead, most observers concurred, having the administration selfinitiatechanged the equation in important ways. First, self-initiation demonstrated that thepresident had already concluded that imports were the cause of serious injury. “It’s a signal to thetrading partners, it’s a signal to the ITC, it’s a signal to the courts who may be looking at anappeal,” says former ITC Commissioner Thelma Askey. “It’s a lot different when theadministration says, ‘We think that given all the considerations of the broader economy, thiswarrants our backing.’”In an October 16 letterto President Clinton, the union and more than 70 representatives of steelmakers and related firmswrote: “We need a clear public recognition that once again there is a crisis devastating the domesticsteel industry and that the existing orders affecting the industry must remain in place. We needyou to immediately impose meaningful restraints on steel imports from offending non-WTOcountries. Finally, given this extraordinary circumstance, we need the Administration toimmediately initiate a comprehensive case under Section 201 of our trade laws. Only through theseactions can we stop the onslaught we are facing.” Members of Congress, in support, began workingon legislation calling on the administration to self-initiate a 201 case.In addition, if the administration brought the case and it was successful, industrypresumably could count on the president using his discretion to impose a significant trade remedy.Finally, and perhaps most important, some observers say, if the ITC ruled against the 201, thepresident might still feel bound to provide industry with some meaningful relief. “What it all boilsdown to was putting the president on the hook for a comprehensive solution,” says WilliamCorbett, then on the staff of the National Economic Council, “so that regardless of the outcome at18 One former administration official recalls the head of a major steel firm shouting in a meeting that the value of ashare of stock had fallen to less than a cup of latte.19 As an indication of the union’s desperation, Becker even appealed to the administration to provide steel industryprotection under a national security provision, but that, one official says, “didn’t have a chance in hell,” since onlya fraction of US steel capacity went to the military.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.019the ITC, the president of the United States is responsible for assisting the industry out of its crisis.”Given how few comprehensive solutions existed, Corbett says, any such relief could easily runafoul of WTO rules concerning quotas or subsidies.The union appeal, coming as it did just weeks before the presidential election, put theadministration on the spot—as it was no doubt intended to do.20But in a letter to Clinton the following day, the Executive Committee of the CongressionalSteel Caucus complained that the time for more studies was over. “As you know, a Section 201action would result in a comprehensive investigation of steel imports, similar to the investigationyou already propose,” the letter read in part. “Any remedy proposed at the end of thisinvestigation would be implemented at the discretion of the President. If the next President feelsaction is unwarranted, he could choose not to act.” On the same day, however, the ConsumingIndustries Trade Action Coalition, a group of steel-using companies formed in 1999, wrote Clintonarguing that the steel industry had exaggerated the impact of imports, and that severe traderestraints would hurt far more companies and employees than it would help.“We could say, ‘No, we won’tinitiate,’” says former CEA economist Robert Lawrence, “but that would put a big wedge betweenGore and the steelworkers. But if we said, ‘Yes,’ we would be labeled protectionists.” In mid-October, the principals began meeting again in earnest on the steel issue, and Gene Sperlingconvened meetings among Becker, various steel industry CEOs, and the major economic policymakers in the administration to further analyze the crisis. In an October 25 letter to Becker, JohnPodesta assured the union head that the president was still reviewing Section 201 relief, and thatUSTR was simultaneously consulting with countries including the Ukraine, Taiwan, India, andChina about moderating their steel exports.According to White House insiders, the ensuing administration debate on immediate selfinitiationof a 201 centered on three main areas of concern: the political ramifications of anydecision on the upcoming election; the likelihood of the ITC reaching a positive finding; and thebroader economic impact—both in the US and abroad—of such a trade-limiting measure. Whilethose involved say the short-term political effect was given the least attention, administrationstrategists concluded there was more to lose than gain by initiating. “We had the steelworkers onour side in the campaign already,” says David Aaron, formerly of Commerce, “so we weren’tgoing to get anything out of it, except that we would hand Bush an issue to say that we wereprotectionist.”A more critical question, insiders say, was whether a 201 case would even be winnable.According to former CEA member Lawrence, because imports were subsiding, it would be hard to20 Economist Greg Mastel notes that elections had played an important role in past steel trade policy decisions.President Reagan, for example, endorsed voluntary restraint agreements during his re-election campaign. “Unionsand companies are both aware in elections that they have some unique influences,” Mastel says, “and they usethem.”For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.020prove they were the major cause of the industry’s distress. Moreover, just six months earlier, theITC had ruled against industry during the injury part of a dumping case on cold-rolled steel—acase with lower injury standards than a 201.21Perhaps most significant, however, was the fact that industry had also apparentlyconcluded that the case wasn’t ripe. Despite the steel company signatures on the letter to Clintoncalling for self-initiation of a 201, industry lawyers at a USTR meeting held soon after that includedEsserman, Lawrence, and Klinefelter “spent most of the time saying there was no case to be made,”recalls one participant. Esserman, who says she would have had to rely on steel company data tojudge whether a 201 case could succeed, says government would not have considered selfinitiatingwithout the full support of industry. “It was disquieting to know that the industrylawyers most familiar with the facts did not think it was a good option,” she recalls. “There was animmense interest coming from the White House and from various agencies to do something thatwould be genuinely helpful, and not simply a political stunt.”Given that a few steel product areas were still doingreasonably well, that industry had only posted one quarter of bad economic results, and thatcertain product segments were already protected by dumping orders, winning a comprehensivecase appeared unlikely. “It seemed to me that the immediate problems of the steel industry werecaused by a combination of too much capacity and a slowdown domestically,” Lawrence recalls.“The biggest source of their injury was not imports.”Finally, although Robert Rubin had left Treasury, his successor, Lawrence Summers, wasequally adamant that a Section 201, even though temporary, would be bad for the US economy andwould send the wrong message to foreign trading partners, possibly spurring retaliatory traderestrictingmeasures. “If you looked at US economic interests overall in the eight years under theClinton administration, it was pretty clear that regular predictable access to foreign markets was anenormous part of our economic success,” explains one administration official. “As the world’slargest exporter, our vulnerability to retaliation was very high in a lot of industries that employ asmany or many times more workers than steel.”One final issue influenced the decision. According to many observers, Bill Clinton wasacutely aware of his legacy. While he was proud of his trade record overall, including suchsignificant accomplishments as winning approval of the North American Free Trade Agreement,the president had been discouraged by his failure to get fast-track negotiating authority, whichwould have strengthened his ability to negotiate trade agreements.2221 The ITC decision provoked outrage among industry and union representatives, who claimed the commission hadrelied on an inappropriate econometric model in making its decision, rather than the usual analysis of marketconditions. In a letter of complaint to President Clinton, Becker and three steel executives pointed out thatCommerce had already found dumping margins ranging from 16 to 80 percent, and that the volume of cold-rolledimports had doubled between 1996 and 1998 to 2.2 million tons.Self-initiating a 201 case, in22 Fast-track negotiating authority would give Clinton the ability to negotiate trade agreements that Congress couldeither vote down or approve, but could not amend. The authority increased the willingness of foreign governmentsto negotiate with the US.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.021the eyes of some, would have further sullied Clinton’s free trade credentials. “He didn’t want toadd another black mark to his second term record on trade,” says one insider.Election day arrived November 7 without a decision to self-initiate. “We were pushingthem, pushing them, pushing them, trying to get Al Gore elected,” says Klinefelter. “We weretelling them that they had to do something very visible for Gore for us to bring back to those steelstates. They wouldn’t do it.”The Post-Election TransitionThe results of the 2000 presidential election were mired in controversy over vote-countingirregularities in Florida. Even after it became clear that George W. Bush would be the nextpresident, however, the Section 201 debate lingered on. Klinefelter, who notes that Bush narrowlywon normally Democratic West Virginia, says the results might have been different if the Clintonadministration had self-initiated a 201. “It would have gone a long way if he could have walkedinto West Virginia saying that this administration has initiated a 201 to save the basic steelindustry,” he says. Although industry remained ambivalent about the trade case, union and SteelCaucus representatives who had Clinton’s ear still hoped they might convince the president to selfinitiate.“We pushed on 201 with Clinton right up to the end,” says Rockefeller legislative directorEllen Doneski.Within the administration, there were also still a few individuals who believed Clintonshould bring a 201. Domestic steel industry results, after all, had continued to deteriorate.Wheeling-Pittsburgh filed for bankruptcy in November, followed by LTV, the nation’s third largeststeel producer, at the end of December.23In the final analysis, however, many of Clinton’s top policymakers still didn’t believe that aSection 201 was a legitimate response. Although the steel industry was unquestionably suffering,Lawrence says, the downturn was primarily due to the weakening US economy. “We thought itwasn’t good policy, because we thought we couldn’t make the case that these people merited it,”he explains. “Our hearts bled for the steel industry, but we didn’t think they were being damagedby imports.”Moreover, some 201 supporters claimed that selfinitiatingwould be a politically astute move—an argument that Senator Rockefeller maderepeatedly. “We could easily have used the logic that we will show our friends in the steel industrythat we care about them,” says Robert Lawrence. “We will send this thing to the ITC and put hugepressure on the next Republican president to give them protection.”The union never gave up on its push for 201. According to Klinefelter, on January 19, sixhours before the administration left office, he and Becker went to the White House to make a final23 A number of smaller companies had already filed.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.022pitch to Summers, Podesta, and a few others. Instead of a trade case, though, Klinefelter says, allthe union won was a letter from Clinton to the chairman of the ITC, urging him to look hard at themerits of a 201 case. In the letter, Clinton summarized the administration’s steel initiatives, notingthat it had processed more than 100 dumping and countervailing duty cases involving steelproducts since 1998; negotiated the Russian agreements; initiated consultations with Japan, Korea,and other significant steel exporters; and completed the global steel study, among other measures.“In spite of these efforts, however,” the president concluded, “our analysis of the current andprospective import situation and recent events in the steel industry lead us to believe that Section201 relief may be warranted in the near future. Therefore, I urge the International TradeCommission to proceed urgently, on its own motion or upon the motion of industry, union,Congressional or Executive Branch petitioners, to provide effective relief for the US steel industry.”For the union, it was too little, too late. According to one outgoing administration official,George Becker was particularly bitter, declaring, “You didn’t give us any help at all.”The Case for a 201Although many Democratic members of the Steelworkers Union and Congressional SteelCaucus didn’t have established relationships with newly inaugurated President George W. Bush orhis Cabinet, the change of administration didn’t slow their efforts to win protection from steelimports. Senator John Rockefeller, for example, wrote President Bush within days of hisinauguration urging him to self-initiate a Section 201, and soon met with Vice President DickCheney, Commerce Secretary Donald Evans, and White House political staff. “The Senator hasmade the case to those whom he thought would be sensitive not just to the economic or thebusiness or the trade argument, but the political argument,” says Ellen Doneski. “They’re certainlyinterested in winning West Virginia again.”The quickly worsening condition of the steel industry also spurred a new round oflegislation. On March 1, representatives Peter Visclosky and Jack Quinn introduced the SteelRevitalization Act of 2001, a sprawling four-pronged bill that dwarfed the congressmen’s 1999quota bill. In addition to a more restrictive quota provision, the act increased the funds availableunder Senator Byrd’s loan guarantee program to $10 billion and upped the governmentguaranteedpercentage from 85 to 95 percent; set a 1.5 percent surcharge on all steel to bankroll alegacy cost fund that companies could draw on for retirees’ health care; and established a $500million grant program to encourage consolidation within the domestic steel industry by fundingenvironmental cleanups and restructuring.2424 Only one company, Geneva Steel, had received funds under Byrd’s original loan guarantee program, in partbecause applicants looked like such bad risks that commercial banks didn’t want to assume responsibility for evena 15 percent portion of the loan.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.023Finally, in a reversal of its former position, the steel industry joined the union andCongress in calling for comprehensive relief. “One is driven by the circumstances in which onefinds oneself—the factual and policy bases for getting relief in a section 201 case were nowsatisfied,” sums up steel lawyer Wolff. In March, a broad-based coalition of steel associationscalled for the administration to self-initiate a 201 case, or to find some other WTO-compatible wayto restrict imports.25Driving industry to unity was an accelerating decline that went well beyond the bad newsof 1998, as demand for steel dried up along with the slowing domestic economy. Even withimports down, capacity continued to exceed demand, and hot-rolled and cold-rolled sheet pricesfell that spring to their lowest point in 20 years. A total of 18 steel companies had filed forbankruptcy since the end of 1997, and about 23,500 workers had lost their jobs. Moreover, betweenNovember 2000 and June 2001, more than seven million net tons of capacity in the US shut down.“It’s a fair assessment to say that the domestic industry was being absolutely devastated,” says aninside observer. “You can argue about whose fault it was, but the reality is you had a quarter of theindustry in bankruptcy, you had seven million tons of it shut down as a result of actualliquidations, and you had stock valuations that had fallen through the floor.”While mini-mills and integrated steel companies still disagreed about whethergovernment should help with legacy costs and restructuring, they were united on the need forprotection from excess global steel.Adding to industry’s interest in a Section 201 was the reality that dumping cases no longerseemed adequate to stem imports. As quickly as a dumping order shut off product supply fromone country, another steel entrant stepped up exports of the same product to fill the gap. Despitethe earlier successful hot-rolled steel dumping cases brought against Japan, Russia, and Brazil, forexample, imports of hot-rolled steel crept up again in 2000 until a group of companies led byNucor filed a second round of cases against 11 countries, including India, South Africa, China, andthe Ukraine. “The global steel market is much more elastic than it used to be,” says Klinefelter.“People know how to shop around, and these items can be made in any country in the worldwhere there is a steel mill, so things move much more quickly than they used to.”Industry may also have felt that the ITC would be more receptive to a 201 case than at anyother time in recent history. At the end of his tenure, President Clinton had decided not to renominateCommissioner Thelma Askey at the urging of the Steelworkers Union and theCongressional Steel Caucus, whose members claimed Askey’s aggressive free-trade stance hadearned her the commission’s worst voting record on trade relief for steel. Although President Bushhad attempted to re-appoint Askey, he withdrew her nomination after encountering oppositionfrom legislators whose support was critical to moving his tax bill through the House Ways and25 The coalition included the American Iron and Steel Institute, the Cold Finished Steel Bar Institute, the Committeeon Pipe and Tube Imports, the Specialty Steel Industry of North America, and the Steel Manufacturers Association.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.024Means and Senate Finance committees.26 According to many observers, Askey’s replacement,Dennis Devaney, was seen as a more reliable vote for protection.27A Plan for Steel“The union has changed thecomplexion of the commission sufficiently so that it is very difficult for them to lose,” says onecritic.Given the steel industry’s clear sense of desperation, the steel issue was “up front andcenter” for the new Bush administration, according to one official, who says there was also“intense pressure from the Hill,” even from legislators who had always opposed a quota concept.Commerce Secretary Evans, Treasury Secretary Paul O’Neill, and USTR Robert Zoellick took thelead, aided by CEA Chairman Glenn Hubbard, spending hours with Wall Street analysts to studythe industry.28On the surface, steel’s chances of getting the Bush administration to act on a 201 mighthave seemed low, in view of the Republican Party’s historic support of free-trade principles, andBush’s specific focus on issues of free trade and non-interference in markets during his campaign.But some observers, noting that the Republican administrations of Reagan and George Bush seniorhad implemented the arguably protectionist voluntary restraint agreements, claimed that Bushmight feel free to act precisely because of his free-trade reputation. “After all, it took Nixon to go toChina,” says Peder Maarbjerg, legislative director for Representative Peter Visclosky. “It tookClinton to reform welfare. Bush already had all the business people on his side.” Adds Rockefelleraide Doneski: “The Republicans weren’t afraid to look like they were willing to use our trade laws,because nobody is going to accuse them of being anti-free trade.”Meanwhile, the National Security Council and the National Economic Council doledout research assignments to the various agencies.Even with industry’s support, the question remained of whether a case could be made thatimports were the primary cause of injury, as required under Section 201. Preliminary Commercefigures at the end of May showed that steel imports through March were 6.2 million metric tons, amore than 30 percent decrease from the year earlier period. In order to implicate imports in thecurrent industry slide, a 201 case would have to employ a five-year trend line encompassing theearlier 1998 import surge. Considering that steelmakers had never fully recovered from the 1998crisis, though, 201 supporters argued that linking the two downturns was legally sound.By May, the Bush administration—convinced that the steel industry needed some kind ofintervention—was seriously grappling with the possibility of self-initiating a 201. To do so could26 Bush nominated Askey instead to be director of the US Trade and Development Agency, a government agencydedicated to encouraging US exports to developing and middle-income countries.27 After not re-appointing Askey, Clinton had put Devaney on the ITC as a recess appointment.28 Steel got unusual high-level attention, some insiders say, because few sub-Cabinet level positions had been filled.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.025bring significant political rewards. USTR Robert Zoellick believed a 201 case could serve as anolive branch to the union and the Steel Caucus, insiders say, improving the president’s chances ofwinning trade promotion authority—formerly known as fast-track. With trade promotionauthority, Bush would be in a better position to pursue two key goals— negotiating a Free TradeArea of the Americas and launching a new WTO trade round.29 “His hope was not to get thesupport of the unions for either of those endeavors,” says foreign steel attorney William Barringer,“but to make steel a non-issue in at least launching those initiatives.”30White House Senior Advisor Karl Rove and other political strategists were also reportedlypushing for a 201, arguing that it would help Bush promote non-trade issues—such as tax cuts andeducation reform—as well as build support in key electoral states in preparation for the nextpresidential election. Klinefelter says the strategy was sound. “In 2004, Bush could go intoPennsylvania, Ohio, Indiana, Illinois, and West Virginia and say, ‘I’m the president who savedyour job.’ Now it doesn’t make any difference what the leadership of the Steelworkers Union saysabout the next Democratic presidential candidate. If Bush comes through on this 201, he’s going toget our guys.”But insiders insist political motives were taking a backseat to policy considerations. Evans,O’Neill, and Zoellick were more interested in tackling the global steel industry’s chronic issues ofsubsidies and inefficient excess capacity than they were in blocking imports, observers say. Butthey reasoned that a 201 case could provide temporary relief, while helping to persuadesteelmakers—both domestically and abroad—to address the industry’s deeper problems. Officialsweren’t sure what form such discussions should take, or whether they should be bilateral ormultilateral, but they resolved to pursue some form of international steel negotiations. “Peoplerealized that if we didn’t act, there was a good chance we were going to get steel quotas orsomething else that was going to gum up the works in terms of a broader trade agenda,” oneofficial says.While still deliberating at the end of May, the White House got an unexpected prod.Rockefeller and other steel-supporting members of the Senate Finance Committee had wanted thecommittee to take the initiative and launch a 201 since the beginning of the year, but RepublicanChair Charles Grassley (R-IA) had blocked progress on the motion. After Senator James Jeffords(R-VT) defected from the Republican Party, however, giving control of the Finance Committee tothe Democrats, the new chair, Montana Democrat Max Baucus, vowed to move ahead. Had theFinance Committee been first to initiate, many observers say, the Democrats would have grabbedmuch of the political capital to be gained from the action.29 A Free Trade Area of the Americas agreement would lower tariffs and encourage open borders within the WesternHemisphere.30 The likely impact of a 201 self-initiation on long-held congressional stands on trade, however, was debatable. Asone former Clinton official says: “The Democrats in Congress still have to work with the unions. I don’t know thatthe unions are just going to roll over and say, ‘Go ahead and get your fast track and sign your WTO agreement.’”For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.026The administration, however, moved first. In a step that took industry, the union, andCongress by surprise, President Bush announced June 5 that his administration would self-initiatea 201 investigation for 33 types of steel imports.31A Measure of ProtectionDeclaring that, “The US steel industry has beenaffected by a 50-year legacy of foreign government intervention in the market and direct financialsupport of their steel industries,” Bush also announced that his administration would conduct twosets of international steel negotiations—one to eliminate inefficient excess global capacity, and alonger term effort to reduce market-distorting subsidies. “They sat down and they actually cameup with a coherent plan, not all of which we had suggested,” says steel lawyer Wolff. “The Clintonadministration really never came to grips with what could be done, although, to be fair, its optionswere more limited. By the time the Bush administration acted, the crisis had fully arrived, andmore tools were clearly available.”President Bush’s unanticipated announcement elicited an immediate and powerfulresponse. “It is an important message that the United States will not allow its steel industry to bedestroyed by illegal steel imports,” declared James G. Bradley, president of Wheeling-Pittsburgh.32Those opposed to trade barriers and special protection for steel, however, reacted withanger and concern, accusing the Bush administration of caving in to union and industry pressure.“A Section 201 investigation is a very serious step,” Janet Kopenhaver, executive director of theConsuming Industries Trade Action Coalition—the steel users group—declared in a writtenstatement. “If it results in restricting steel imports, it could severely impact US consumers and steelconsuming industries, but won’t solve the US industry’s basic problems.” Similarly, in letters sentto Zoellick, Evans, and O’Neill, the president of the American Institute for International Steelwrote, “Our firm belief is that the current difficult conditions the US steel industry finds itself instems from living in a protected steel market for over 30 years and benefiting from subsidyprograms provided by federal, state and local governments. Simply put, protectionism andsubsidies do not create competitive industries.”For the union and Steel Caucus representatives who had invested so much time and energy duringboth the Clinton and Bush administrations, the action was a long awaited payoff, and a welcomesign of the new president’s receptiveness to steel concerns. “I was so frustrated with the Clintonpeople, and disappointed in the way that they dealt with this,” says Klinefelter. “I’ve got to say,this Bush administration seems to care more about working people. They care more about jobs, andthat’s what working people are about.”31 The Senate Finance Committee later filed a 201 case structured on the administration’s case as evidence of Hillsupport.32 Leslie Wayne, “A Significant Lift for a Long-Ailing US Industry,” The New York Times, June 6, 2001.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.027Foreign trading partners also expressed their strong displeasure, in particular, EUrepresentatives, who blamed US steel woes on the fact that industry had shirked the painful andacross-the-board consolidation undertaken by European steel firms over the last two decades. FiveEU steelmakers were among the world’s ten largest steel producers, EU officials noted as proof ofEuropean industry reform, while the largest American producer, U.S. Steel, came in at numbereleven. “The cost of restructuring in the US steel sector should not be shifted to the rest of theworld,” European Trade Commissioner Pascal Lamy asserted in a statement. “The imposition ofsafeguard measures would risk seriously disrupting world steel trade.”33On June 22, Robert Zoellick formally self-initiated the 201 action on behalf of theadministration, with an ITC decision expected four months later. How the ITC would rule wasdebatable, particularly given the fact that many observers in mid-2001 still questioned whether theproper conditions existed to bring a 201 case. Nevertheless, in October 2001, the ITC gave a clearvote in favor of safeguards, ruling that imports were injuring US steel producers in 16—or almosthalf—of the 33 categories under investigation. In December, the commissioners recommendedremedies ranging from moderate quotas to prohibitive tariffs of 30 to 40 percent.34During January and February, the Bush administration was flooded with appeals. Theseranged from an EU proposal that—in lieu of tariffs—the US impose a tax on both domestic andimported steel shipments to help cover industry legacy costs and aid in restructuring, to a lettersigned by 140 Congress members advocating across-the-board tariffs that would run a full fouryears. On March 6, 2002, after intensive consultations with political and economic advisers,President Bush announced what many observers termed a carefully balanced compromise. The USwould impose three-year safeguards on ten of the 12 categories of steel imports, with tariffsranging from a low of 8 percent for stainless steel rod to a high of 30 percent for flat-rolled andthree other categories of steel. The tariffs, which went into effect March 20, were slated to dropeach year of the three-year remedy period.It would be upto the president to decide on the exact remedy, if any.Softening the blow, however, were a number of exclusions. All countries with free tradeagreements with the US were excluded—most notably Canada and Mexico—as were developingnations with imports to the US of less than 3 percent of the domestic market.3533 Alan Cowell, “Swift Condemnation of US on Steel,” The New York Times, June 7, 2001.In certain categoriesof steel, these exclusions amounted to as much as 35 percent of imports. Also excluded werecertain steel products that US manufacturers didn’t make or weren’t interested in makingthemselves. Over the next few months, the Bush administration promised to evaluate the manyhundreds of further requests for exclusions it had received, both from domestic steel makers andusers, and from foreign petitioners.34 The actual remedy recommendation covered 12 categories, since the ITC combined five groups into one.35 In addition to Canada and Mexico, Israel and Jordan had free trade agreements with the US, and more than a dozendeveloping countries qualified for the exclusions.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.028The World ReactsThe reactions of various constituencies to the tariffs were, for the most part, predictable.Although the remedies were not as extreme as those sought by most of the domestic steel industry,and while the decrease in tariffs during years two and three of the 201 action would reduce theimpact of the safeguard remedy, the majority of US steel producers—in particular integrated millsand mini-mills, who benefited most from the trade restraints—declared themselves satisfied. “Thisis protection in substance as well as appearance,” said Robert Miller, chief executive of BethlehemSteel.36However, domestic steel consumers and free trade advocates—including manyconservatives normally supportive of Bush and his policies—charged that the tariffs were blatantlyprotectionist, would damage US steel-using industries more than they would help steel producers,and were adopted for purely political reasons, such as gaining support prior to the Novembermidterm elections, and positioning Bush for the 2004 presidential election.37 “Sometimes politicsdominates good economic decision-making in the best of administrations,” said Gerald O’Driscoll,director of the Heritage Foundation’s Center for International Trade and Economics. “This ispurely a political decision. There is no economic justification for it.”38Moreover, many observers claimed that since every safeguards measure challenged in theWTO to that point had been declared illegal, the Bush administration knew full well that the 201eventually would be found to violate WTO law. However, during the almost two years it wouldlikely take for the dispute settlement process to reach any conclusion, the tariffs would have ampletime to block steel imports to the clear benefit of the domestic steel industry.Foreign trading partners, meanwhile, expressed outrage. According to the WTOSafeguards Agreement, a country was allowed to impose tariffs without retaliation as long as therewas a documented increase in imports and the tariffs were limited to 3 years. According to the EU,however, steel exports to the US had fallen over the last eight years, and it declared its intention toeither get immediate compensation from the United States to account for lost trade or begin itsown retaliation against US exports. Japan and other countries also announced plans to retaliate. Inearly June, as predicted, the EU requested a WTO dispute settlement panel to consider itscomplaint against the 201 action, and it was soon joined by seven other countries.3936 David E. Sanger, “Bush Puts Tariffs of as Much as Thirty Percent on Steel Imports,” The New York Times, March6, 2002.37 The 201 action appeared to bring quick and concrete political dividends for the administration. In July 2002,Congressional Steel Caucus support helped the administration win trade promotion authority—perhaps its top tradegoal—by a narrow margin. Trade promotion authority became law in August 2002.38 Richard W. Stevenson, “Steel Tariffs Weaken Bush’s Global Hand,” The New York Times, March 6, 2002.39 The complainants, in addition to the EU, were Brazil, China, Japan, Korea, New Zealand, Norway, andSwitzerland.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.029Over the next few months, as domestic steel-using companies appealed to theadministration for relief and foreign governments accused the US of being anti-free trade, USTRcontinued to consider requests for exclusions. The EU was particularly assertive, and it backed upits requests with an ongoing threat to impose tariffs worth $335 million on a select list of USexports in advance of any WTO decision.40A Period of ConsolidationIn part to ease cross-Atlantic tension, and to make it lesslikely that the EU would retaliate early, USTR over the course of the summer excluded a significantnumber of EU products from tariffs, as well as granting requests from Japan, US steel producersand users, and others. By the time a large batch of exclusions was announced in August 2002, abouta quarter of steel that could have been affected by 201 had been exempted, according to USofficials. In large part because of the exclusions, the EU in the fall of 2002 agreed to postponeretaliation until the WTO dispute panel issued its ruling.When the Bush administration first announced the Section 201 action, it had insisted thatany industry protection would be accompanied by parallel efforts to trim down excess globalcapacity and reduce market-distorting subsidies. With the tariffs in place, serious questionsremained about what the three prongs of the administration’s plan might achieve, and about howthey would interact. For example, while the ostensible purpose of the 201 case was to provide thedomestic steel industry with comprehensive, short-term relief from imports that would allow it aperiod of recovery, Bush administration officials also hoped to use the case as a lever to encouragesteel companies to take a hard look at their own operations and pursue restructuring at home.“Before they actually did this, Evans, O’Neill, and Zoellick sat down with the CEOs and the unionsand said, ‘Look, if we do this, you guys have to make good on the restructuring element of this,’”says one close observer. “We’re not in this for market protection; we’re in this to solve thefundamental underlying problem that has brought us here in the first place.”In June 2002, Zoellick and Commerce Secretary Evans sent a letter to domestic steel makersasking them to submit consolidation progress reports in September as well as the following March,at which point 201 would have been in place one year. The reports, the letter said, should include“measures to consolidate and rationalize operations, reduce costs, enhance efficiency, increaseproductivity, improve quality and service, and develop new products and markets.”41Meanwhile, even before the ITC ruled on Section 201, the US had brought the twinproblems of global overcapacity and market-distorting practices before the steel committee of theOrganization for Economic Cooperation and Development (OECD). The committee took up theissues during the fall of 2001, but some foreign participants complained that the timing of themeetings, coming as the Bush administration was debating the extent of 201 remedies, was40 An interim panel decision wasn’t expected until late that year at the earliest.41 “Administration Sets Mileposts for Steel Industry Restructuring,” Inside US Trade, June 28, 2002.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.030intended to force international compliance with the threat of high tariffs. Even so, the groupproduced a communiqué in mid-December 2001 declaring that governments of steel-producingcountries should initiate policies supportive of restructuring and consolidation. Therecommendation was purely voluntary, however, and did not hold participants to any concretecourse of action.The effort to address subsidies was even less productive. While the steel committee metseveral times during 2002, a US proposal at a September 2002 meeting to draw up an internationalagreement curbing subsidies met with widespread resistance, in part because representatives ofother countries insisted that the US’s antidumping and countervailing duty laws would need to bepart of that discussion, a move the United States refused to consider.42In the US, meanwhile, the steel industry appeared to agree on the need for restructuring,but called for more government help to make it possible. In September 2002, steel companies begansubmitting reports on the impact of 201 on their operations, and on their current and future plansfor restructuring, as USTR Zoellick had requested. But companies also used the reports as anopportunity to criticize the number of tariff exclusions granted by the government so far, and torestate the importance of keeping the Section 201 tariffs in place for a full three years, declaringthat corporate consolidation efforts—while promising—had barely gotten underway.43In fact, though, due to a number of factors, the US steel industry was restructuring,consolidating, and—for most of those companies that survived—becoming more profitable. In theyear-and-a-half following the announcement of 201 in March 2002, nine more US steel companieswent bankrupt, taking at least some inefficient capacity off the market.Moreover,integrated steel makers continued to request government help with legacy costs, and also stressedthe need for new labor agreements with steelworkers that would aid in cost-cutting andconsolidation.44 At the same time, steelprices were rising worldwide as the world economy recovered and as demand for steel grew,particularly in China. In the US, overall steel imports dropped by about 30 percent just during2003, both because of the Section 201 tariffs and because the weak US dollar made the domesticmarket less attractive to foreign producers (for steel imports from January 1996 to September 2003,see Exhibit 1).4542 Although the OECD committee kept meeting into 2004, participants eventually dropped the steel subsidies talks infavor of informal consultations after members were unable to overcome key differences.Another critical development, observers say, was the government’s assumption of43 There was a real chance that the Bush administration would lift the tariffs at the halfway point, particularly if theWTO panel ruled against the Section 201 action and the EU began retaliations.44 Two companies, National Steel and Calumet Steel, were teetering on the edge and fell over even before 201 wasformally initiated. The other seven were Birmingham Steel, Cold Metal Products, Bayou Steel, Kentucky ElectricSteel, EvTac Mining, Weirton Steel, and WCI Steel. Gary Clyde Hufbauer and Ben Goodrich, “Next Move inSteel: Revocation or Retaliation?” International Economics Policy Briefs, Institute for International Economics,October 2003.45 Ron Scherer and Adam Parker, “Big Steel’s Surprise Comeback,” Christian Science Monitor, December 5, 2003.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.031the legacy costs of some key companies. In March 2002, the Pension Benefit Guaranty Corporation,the federal agency that insures private pension plans, took over pension obligations for LTV Steel,and in December it assumed the obligations of the failing Bethlehem and National steelcompanies.46Higher steel prices, the federal agency’s assumption of these crippling legacy costs and, insome cases, cost-cutting new labor agreements with the Steelworkers union made the assets ofmany of these bankrupt steel companies attractive to profitable steel producers, and resulted in awave of consolidation.47 The newly formed International Steel Group bought LTV’s assets as LTV’spension obligations were lifted in early 2002, and in 2003 it went on to buy the assets of Bethlehem,Weirton, and Georgetown Steel. U.S. Steel bought National Steel’s assets, and Nucor bought theassets of Birmingham Steel, as well as Trico Steel, which was a joint venture between LTV and twointernational steel companies.48Supporters of Section 201 attributed much of the domestic steel industry’s gains to thebreathing room provided by the safeguard action, insisting that without the stability, increasedinvestor confidence, and subsequent access to capital markets made possible by the tariffs, UScompanies would not have been able to make the progress they did in eliminating old facilities,consolidating, and reinvesting. But free trade advocates argued that there was no direct causalrelationship between 201 and the industry restructuring. Consolidation, they argued, onlyhappened in the face of bankruptcy, and the tariffs, if anything, had slowed that process bycontributing to higher steel prices that may have helped some weak companies stay afloat.Post-consolidation, the three newly expanded companies wereexpected to be more productive and better able to compete against large foreign producers inEurope and Asia. Indeed, by late 2003, the US steel industry seemed on its best footing in years.The WTO RulesAs the US steel industry underwent a recovery, the case against the Section 201 action wasworking its way through the protracted WTO dispute settlement process. In May 2003, as manyobservers had predicted, the WTO dispute panel ruled that the safeguards imposed by the US in allten steel categories were illegal. According to the almost 1,000-page report, the ITC in reaching itsconclusions had failed to meet four main conditions required under WTO rules. For the top importcategory of flat-rolled steel, and four other kinds, for example, the report claimed that the UShadn’t shown import increases since 1998, and, in fact, that there had been a general downwardtrend. Another requirement was that increased imports be the result of unforeseen developments, aclaim for which the ITC failed to provide adequate documentation, the panel said. In every46 Assuming the liabilities of those three steel companies cost PGBC $7.1 billion.47 The union struck new labor agreements with ISG and U.S. Steel, for example, to aid the acquisition of bankruptsteel company assets and salvage jobs that might otherwise be lost.48 Hufbauer and Goodrich.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.032category but one, the WTO concluded that import surges were not the primary cause of theindustry’s malaise. Finally, the panel ruled that the ITC in reaching its injury findings should nothave included imports from countries—such as the NAFTA partners—whose products ultimatelywere excluded from the safeguards.In August the US appealed the ruling, attacking both the WTO’s findings and, in somecases, the procedures it used to reach them. A decision on the appeal was expected in October.Meanwhile, in September the ITC issued a mid-term assessment—a requirement of the 201process—on the impact of the measure on steel makers. To the dismay of the steel industry, the ITCsimultaneously issued a report examining how the safeguard action had affected steel users, areport requested by House Ways and Means Committee Chairman Bill Thomas (R-CA).According to the reports, it was difficult to weigh the exact impact of the tariffs on eithersteel users or producers independent of other economic factors. However, both supporters andopponents of 201 welcomed the reports’ conclusions as a validation of their positions. Althoughsteel makers complained, USTR Zoellick indicated that the president would consider both reportsin assessing whether to continue the 201 case for its full three-year term or to conclude it early.Pressure was building to make such a decision soon. Although the EU had held off on retaliation,in large part due to exclusions covering many EU exports, it had made it clear that if the US appealbefore the WTO failed and the tariffs remained in place, the EU would retaliate in December with$2.2 billion in tariffs on US goods.49In November, the WTO Appellate Body finally issued its ruling, upholding almost all ofthe major findings of the initial panel ruling. It was not immediately clear how President Bushwould react. Although the administration was bombarded by appeals from members of Congress,foreign trade officials, steel users, steel makers, and steel union representatives, it stayed largelysilent on its plans. On December 4, though, as the EU prepared to start its retaliation, Bushannounced he was terminating 201 at its mid-term point, ending some 20 months of steel importtariffs. According to Bush’s written statement, the tariffs had “now achieved their purpose, and asa result of changed economic circumstances, it is time to lift them.”50Most observers concluded that the negative WTO Appellate Body ruling and the prospectof punishing EU tariffs on US exports killed administration enthusiasm for the tariffs. But USTRZoellick claimed the decision was based, instead, on changed global economic circumstances,including higher steel prices in the US brought about in part by increased demand in Russia andChina, as well as the drop in imports. In addition, Zoellick said, the September ITC report49 Particularly targeted on the tariff list were products from politically important states, such as textiles from theCarolinas and Florida orange juice. Although the US claimed there could be no retaliation until an arbitration panelruled on the timing and amount of the retaliation, the EU claimed it could act immediately if and when the WTOruled that the safeguards were illegal.50 “U.S. Promises Self-Initiation of Trade Cases after Steel Tariff Repeal,” Inside US Trade, December 5, 2003.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.033indicated that continuing the 201 action would begin to have an adverse impact on steel usingcompanies in the US. In any event, with the tariffs lifted, the EU and others dropped theirretaliation plans.The Section 201 case remained controversial to the end. “The American steel industry andits workers were depending on President Bush for the chance to complete its restructuring andconsolidation,” declared Steel Caucus member Representative Peter Visclosky. “Unfortunately, hisDecember 4 decision will not allow that to happen and further clouds the future of the domesticsteel producing industry.” But an editorial in The Independent of London, which credited the EUretaliation threat and criticism from US steel-using industries with having forced Bush’s hand,noted: “Mr. Bush’s retrograde measure will surely be looked back on as a 20-month aberration inthe long story of progress towards global free trade.”51Exhibit 151 “The Steel Victory Must Open up Fair Trade As Well As Free Trade,” The Independent, December 6, 2003.For the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.Standing up for Steel _____________________________________________ C15-02-1651.034Source: U.S. Department of CommerceFor the exclusive use of A. Chen, 2015.This document is authorized for use only by Aiyi Chen in Industrial Organization II: Fall 2015 taught by Erich Muehlegger, University of California – Davis from September 2015 to December2015.

ECN121B – Industrial Organization II page 1 of 1Prof. MuehleggerCase Write-up: Standing up for SteelDue: In-class before first case discussionInstructions:Read the case “Standing up for Steel” in the case packet and briefly respond to the case question(s) below.You are welcome to discuss the case as a group, but each person must write their own response. Responsesthat are identical will not receive credit.Based on your reading of the case, respond to the following question(s):(a) Who are the winners and losers from steel tariffs?(b) Referencing the class on political economy, what explains why the U.S. government might enact a policy like steel tariffs?(c) Big steel firms were initially against the steel tariffs, despite the fact that they would seem to benefit from higher domestic steel prices. Later, they change their stance to favor steel tariffs. later favored steel tariffs. What might explain why they weren’t in favor of steel tariffs throughout the period?

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Our essay writers are graduates with diplomas, bachelor’s, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college diploma. When assigning your order, we match the paper subject with the area of specialization of the writer.
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You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
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