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7. The EU–US WTO Steel Dispute: the Political Economy of Protection and the Efficacy of the WTO Dispute Settlement UnderstandingRobert Read

The steel Safeguard Measure imposed by the United States on 5 March 2002 is an exemplary case of the distortionary impacts of protectionism, resulting from the attempts of the Bush Administration to appease domestic lobbying. The controversial imposition of this Measure against several of its leading trade partners, including the EU, occurred at a time when the United States was attempting to maintain a broad international diplomatic coalition with these same countries in response to the events of 11 September 2001. It is perhaps ironic that this steel Measure came about at almost the same time as the EU decision to terminate the European Coal & Steel Community (ECSC), introduced 50 years earlier to provide supra-national co-ordination of the coal and steel industries in the six founding Member States.

This chapter provides a brief overview of the origins of the US steel Measure and the subsequent development of the dispute between the United States and several of its key trading partners. It begins with a brief outline of the domestic US context of the dispute. This is followed in Section 7.2 by a summary of recent WTO steel cases between the United States and the EU. Section 7.3 summarises the WTO rules on Emergency Safeguard Action with respect to GATT Article XIX and the WTO Agreement on Safeguards. The details of the US Action on steel in March 2002 are presented in Section 7.4. This is followed by a consideration of the US Action on steel in the context of the political economy of protection. Section 7.6 considers the domestic impact of the steel Measure and the subsequent exemption of many previously affected product categories. The evolution of the WTO steel case is then summarised in Section 7.7 and the critical elements of the decision by the Dispute Panel are outlined. The final section provides some concluding comments concerning the case.

The EU–US WTO Steel Dispute: US Protectionism and the WTO DSU

7.1 THE US STEEL SECTOR

During the course of the US presidential election campaign in 2000, George W. Bush promised to help the beleaguered steel industry in Ohio and West Virginia. With the November 2002 mid-term elections for the US House of Representatives finely balanced, the Republicans wanted to win the key steel-producing states of Ohio and Pennsylvania. The US Action on steel imports through the introduction of Emergency Safeguard Measures in March 2002 can therefore be seen to be an attempt to assuage a key domestic political swing constituency. US trade policy on steel however, is more complex in that various protective measures were taken during the first Clinton Administration in the early 1990s and which persisted into 2002.

The US steel industry is characterised by an almost dualistic sectoral structure with large-scale integrated mills producing basic steel and bulk products alongside smaller mini-mills producing small batch niche steel products. The mini-mills tend to be profitable specialised enterprises utilising advanced technology to produce high value added output. Many of the large integrated mills are loss-making producers of standard steel products that are reliant on old technologies. It is these integrated mills that are located mainly in the states of the north-eastern ‘rust-belt’.

The primary problem of the US integrated mill sector is that many firms have failed to complete the fundamental restructuring of the sector begun in the 1980s. This required investment in new cost-reducing technologies, the closure of capacity and consolidation. Even during the boom years of the mid- to late 1990s, the high costs of many integrated mills stifled their profitability and constrained new investment. Although steel production is a large-scale capital-intensive activity, the US steel industry comprises many relatively small firms that are below the critical size necessary to be internationally competitive. Two-thirds of US output is produced by 12 firms, with an average annual output of 8.5 million tonnes each. In the substantially larger EU market, the same share is taken by just six firms producing an average of nearly 27 million tonnes each (CEC, 2001).

The strength of the US dollar during the boom period of the 1990s reduced the cost of imported steel and steel products, leading to the increased penetration of imports in the domestic market. This occurred in the face of the United States imposing anti-dumping duties and countervailing duties against several trade partners, including the EU. Nevertheless, in a climate of global over-capacity in steel production, US output between 1993 and 2000 expanded by nearly 15 per cent (19 million tonnes) while that in the EU fell by 1 per cent (2 million tonnes) (CEC, 2001). The United States also became a significant net importer of steel

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The WTO and the Regulation of International Trade

during the 1990s, reaching a peak of 34 million tonnes in 2000 with import penetration of 30 per cent. Between 1997 and 2000, the EU switched from being a substantial net exporter of steel to a net importer with import penetration reaching 16 per cent of the market (CEC, 2001). The subsequent deterioration of the US economy after 2000 exposed the underlying economic weakness of the least competitive parts of its domestic steel industry, primarily the integrated mills. This was accompanied by a decline in the value of the Dollar and falling imports of steel – from 34 million tonnes in 2000 to 23.5 million tonnes in 2001 (almost ten per cent) – prior to the initiation of the 2002 steel Action.

7.2 RECENT PROTECTIVE ACTION ON STEEL BY THE UNITED STATES

The 2002 US action on steel in imposing emergency safeguards on imports from designated countries needs to be viewed in the context of the recent history of US action on steel imports and world global steel output. The 2002 complaint (WTO DS248) was the fourth steel case brought by the EU against the United States at the WTO in less than four years. The United States had lost the ‘British Steel’ case (WTO DS138) against the EU in May 2000 and two further Panel Decisions were still pending at the time (WTO DS212 and DS213). The EU launched a further ‘sunset review’ case against the United States in July 2002 (WTO DS262).

US Countervailing Duties on UK Steel (WTO DS138) (the ‘British Steel’ Case)

This action was brought by the EU against the United States in July 1998 and concerned US countervailing duties on steel imports from the UK in response to government subsidies paid to the British Steel Corporation prior to its privatisation in 1988. The core of the British Steel case was the extent to which a ‘new’ firm derives benefit from subsidies paid to a now ‘defunct’ entity (WTO, 1999). This benefit is evaluated with respect to the level of subsidies embodied in the existing assets of newly privatised firms. The sale or privatisation of these assets at market prices therefore eliminates the value of any previous subsidies. The WTO Disputes Panel decision, confirmed by the Appellate Body in May 2000, found against the United States on the grounds that British Steel had been privatised at market prices, such that countervailing duties could not be justified (WTO, 1999, 2000a). The Panel also found that the United States’ legal provision concerning

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changes in ownership [Section 771(5) of the US Tariff Act of 1930] was inconsistent with the WTO Agreement on Subsidies & Countervailing Measures (CEC, 2002a).US Countervailing Measures on Certain EU Products (WTO DS212) (the ‘EU Privatisation’ Case)

This case was brought by the EU against the United States in November 2000 on the basis of the WTO Panel findings in the British Steel case. It comprised 14 cases of countervailing duties imposed by the United States on exports by particular EU firms which were either formerly state-owned or had acquired state-owned assets. Thirteen of these cases related to steel firms (WTO, 2000b). The nine EU steel firms affected were GTS and Usinor-Sollac S.A. (France), A.G. Dillinger Hüttenwerke Saarstahl (Germany), Acciai Speciali Terni S.p.A., Cogne Acciai Speciali S.r.l. and ILVA S.p.A. (Italy), Aceralia S.A. (Spain), SSAB Svenskt Stal A.B. (Sweden) and Corus plc. (UK). In the light of the British Steel decision, the United States would have expected to lose this case. This was confirmed in July 2002 by the WTO Panel Decision and by the Appellate Body in December 2002 (WTO, 2002a, 2002b).

US Countervailing Duties on German Corrosion-Resistant Carbon Steel Products (WTO DS213) (the ‘Sunset Review’ and ‘de minimis’ Case)

This case was brought by the EU against the United States in November 2000. It challenged the findings of a US Department of Commerce ‘sunset review’ of countervailing duties on imports of corrosion-resistant steel made by Thyssen Krupp Stahl A.G., Stahlwerke Bremen Gmb.H., EKO Stahl Gmb.H. and Salzgitter A.G. in Germany. Article 21.3 of the WTO Agreement on Subsidies & Countervailing Measures requires countervailing duties to be reviewed after a maximum of five years (‘sunset review’) and removed unless there is a threat of further injury. The US Department of Commerce concluded that there was a further threat of countervailable subsidies being reimposed and so implemented a countervailing duty of 0.54 per cent. Under Article 11.9, duties of less than 1 per cent ad valorem are regarded as being de minimis (negligible) and should therefore be removed. The original duties were imposed by the United States under the GATT 1947 rules but the EU argued that the Department of Commerce’s actions should conform to the GATT 1994 and the WTO Agreements (WTO, 2000c). The WTO Panel Report found in favour of the EU although one Panel Member dissented on the application of de minimis to sunset reviews (WTO, 2002c). The majority Panel Decision on the applicability of de

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minimis to sunset reviews was reversed by the Appellate Body on appeal (WTO, 2002d).

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US Sunset Reviews of Anti-Dumping and Countervailing Duties (WTO DS262)

This case was lodged by the EU against the United States in late July 2002 on the grounds that some US legislation on sunset review breaches WTO provisions. Legislation on non-co-operation, the definition and application of de minimis and the cumulation of imports were cited specifically (WTO, 2002e).

OECD Measures to Reduce Global Over-Capacity and Restructure International Steel Production

The United States, along with the EU, has been at the forefront of international efforts to reduce and rationalise the global steel industry. The first of a series of meetings was convened under the OECD High-Level Steel Initiative in September 2001 for the major industrialised countries to consider the problems of over-capacity in the global steel industry. There have since been six further High-Level meetings, the latest in October 2003. The Initiative was precipitated by the sharp downturn in the world steel market in 2001 after growth during the 1990s. Critical problems of over-capacity and historic low prices have created financial difficulties for many leading firms and increased protectionist pressures. Successive meetings have paid particular attention to three critical areas of concern: the technology and economics of the steel sector; the effects of the 1997 Asian Crisis; and the identification of uneconomic production facilities and the principal factors impeding their closure. The OECD has taken the lead in international efforts to restore normal competitive market conditions in steel and so strengthen the multilateral trading system (OECD, 2003a, b).

At the initial meeting, the major steel producing countries pledged to reduce global excess steel capacity by cutting back annual production by 115 million tonnes by 2005. This figure has since been raised to 140 million tonnes, around 13 per cent of global capacity, out of total excess capacity estimated at 180 million tonnes. Excess capacity of 105 million tonnes was closed between 1998 and 2002. The recovery of steel consumption, with 4 per cent growth recorded in the first half of 2003, means that the capacity gap is now closing more rapidly (OECD, 2003c). The December 2002 High-Level Meeting launched preparatory discussions paving the way for the elimination of many market-distorting subsidies through the drafting of a Steel Subsidies Agreement. This Agreement has yet to be finalised and may, ultimately, be brought under the auspices of the WTO, possibly as part of the Doha Round (OECD, 2003b).

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7.3 THE WTO REGULATIONS AND EMERGENCY SAFEGUARD ACTION

Until the completion of the Uruguay Round of multilateral trade negotiations and the creation of the WTO, the rules governing safeguards were dealt with solely by Article XIX of the 1947 GATT Agreement on Emergency Action on Imports of Particular Products. One of the outcomes of the Uruguay Round negotiations, incorporated into the Marrakesh Declaration of 1994, was the institution of several additional multilateral agreements to supplement the GATT 1994 Agreement. These further refined the rules governing the conduct of international trade on specific issues of importance or concern. Among others, these agreements include the Agreement on Safeguards which contains a further 14 Articles.

GATT Article XIX: Emergency Action on Imports of Particular Products

The original GATT 1947 Article XIX, incorporated into the GATT 1994 Agreement, is widely known as the Safeguard Provision or Escape Clause. Article XIX provides a means by which a signatory country can cite domestic injury:

… as a result of unforeseen developments [arising from any product being imported] in such increased quantities … as to cause or threaten serious injury to domestic producers of like or directly competitive products … and to the extent and for such time as may be necessary to prevent or remedy such injury as justification for the suspension of concessions. [GATT 1947, Article XIX.1(a)]

Article XIX is argued to perform two roles. It is a ‘safety-valve’ in the event of unanticipated consequences of the trade liberalisation process. It also incorporates some degree of flexibility into the GATT system by allowing member countries to protect sensitive sectors from imports on a temporary basis (see Trebilcock and Howse, 1999).

By its very nature, Emergency Action is necessarily a temporary phenomenon. Limits on the duration of any such measure however, were not included in the provisions of the GATT Article XIX but were only introduced in 1994 as part of the Agreement on Safeguards. Further, any such ameliorative action to protect sensitive domestic producers ought to be non-discriminatory in that it should apply uniformly to imports from all member states. Any discriminatory application of Emergency Action (selectivity) is open to abuse in that it would permit particular exporting

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countries to be targeted. Such action however, is a ‘second-best’ solution in that it may create additional trade distortions, such as the deflection of trade. Both of these points are discussed at length in Trebilcock and Howse (1999). Although the application of Emergency Action was intended to be non-discriminatory, this was not enshrined in the provisions of Article XIX but rather was introduced as part of the Agreement on Safeguards in 1994.

Paragraphs 2 and 3 of Article XIX relate to the procedures for the implementation of Emergency Action and the responses permitted by affected parties. Paragraph 2 requires that any country taking action under Paragraph 1 should give written notice to the affected exporting member countries. They should also provide an opportunity for consultations prior to or, if not practicable, immediately after any such action (GATT 1947, Article XIX.2).

Paragraph 3 outlines the conditions under which the parties affected by the Emergency Action are permitted to retaliate through the suspension of reciprocal concessions. In the event of the consultations under Paragraph 2 failing to resolve the matter, the party initiating the action is free to continue. The affected parties then have 90 days within which to suspend, with 30 written days notice, ‘substantially similar concessions or other obligations … of which the Contracting Parties do not disapprove’ [GATT 1947, Article XIX.3(a)]. If Emergency Action is taken without prior consultation and causes or threatens serious injury to an exporting country, the latter is free to suspend concessions ‘as may be necessary to prevent or remedy the injury’ notwithstanding the provisions of subparagraph 3(a) [GATT Article XIX.3(b)]. The provisions relating to consultation and compensation were substantially revised and extended in the 1994 Agreement on Safeguards.

The WTO Agreement on Safeguards

The WTO Agreement on Safeguards was one of several additional and complementary agreements to the GATT 1994, concluded as a result of the Uruguay Round of negotiations and which came into effect in 1995. The primary purpose of most of these supplementary agreements is to clarify, modify and reinforce the disciplines, procedures and workings of the GATT Articles in the light of the experience accumulated since 1947.

The Agreement on Safeguards limits the scope of Emergency Action to that of serious injury as a result of increased quantities of imports (Article 2.1) and requires that its application is non-discriminatory (Article 2.2). Any action can only be taken as a result of an investigation by a competent authority (Article 3) and that any investigation provides detailed and robust

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evidence in support of its case that serious injury is, or would be, attributable to increased imports (Articles 4.1 and 4.2).

Safeguard Measures may only be applied ‘to the extent necessary to prevent or remedy serious injury’ with any quotas set at a level not below a representative recent three-year average (Article 5.1). These quotas may be discriminatory to the extent that import shares are allocated according to recent levels [Article 5.2(a)] or subject to the departure permitted in Article 5.2(b) where there is a disproportionate rise in imports from certain countries.

Certain types of Safeguard Measure are prohibited or have been eliminated under Article 11, including voluntary export restraints (VERs) and orderly marketing arrangements (OMAs) [Article 11.1(b)]. These were all to be phased-out by 31 December 1998 (Article 11.2), with the exception of EU imports of Japanese cars – terminated 31 December 1999 (Annex to the Agreement on Safeguards).

In an emergency, Provisional Safeguard Measures in the form of tariffs may be applied for no more than 200 days (Article 6). The duration of a Safeguard Measure is limited to four years (Article 7.1) but may be extended under certain conditions (Article 7.2) and is subject to an overall time limit (Article 7.3), progressive liberalisation after 12 months (Article 7.4) and limits on its reimposition (Articles 7.5 and 7.6). Special conditions apply to developing countries with respect to the application of Safeguard Measures to their exports (Article 9.1) as well as their own implementation of such measures (Article 9.2).

Article 8 of the Agreement on Safeguards deals with the issue of concessions and expands upon Paragraph 3 of Article XIX of the GATT 1994. Countries applying Safeguard Measures must maintain a substantially similar level of concessions for exporting countries, that is, offsetting compensation, to be agreed after consultations between the parties (Article 8.1). In the event of a failure to agree, the affected parties may suspend equivalent concessions [Article 8.2, reiterating Article XIX.3(a)] but only after three years, so long as use of the measures conforms to the provisions of the Agreement.

Article 10 of the Agreement on Safeguards terminated all pre-existing GATT Article XIX actions by 31 December 2002. Those actions initiated prior to the entry into force of the WTO Agreement (1 January 1995) were to be terminated no later than five years after this date (31 December 1999) or no later than eight years after they were first applied, whichever was the later.

The procedure for the notification of Safeguard Measures and consultation between parties are dealt with in Article 12 of the Agreement under the auspices for the Committee on Safeguards established under

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Article 13. This Committee is responsible for monitoring the implementation and performance of the Agreement on Safeguards, deliberating on compliance, assist in consultations, reviewing concessions, reviewing notifications [Articles 13.1(a) to (g)] and the surveillance of the operation of the Agreement (Article 13.2). The requirements of the 11 paragraphs of Article 12 include notification of the initiation of an investigation, its findings and the decision on Safeguard Measures (Article 12.1), provision of the evidence (Article 12.2), an opportunity for consultation (Article 12.3), details of provisional measures (Article 12.4), notification of the results of consultations and mid-term reviews (Article 12.5), the domestic legal standing of any Safeguard Measures (Articles 12.6 and 12.8) and non-governmental measures (Article 12.9). Article 14 provides for the settlement of any disputes arising under the Agreement on Safeguards to be dealt with according to the DSU under Articles XXII and XXIII of the GATT 1994).

7.4 THE 2002 US EMERGENCY SAFEGUARD ACTION ON STEEL AND STEEL PRODUCTS

The WTO Agreement on Safeguards requires that protective measures may only be applied after investigation by a competent authority (Article 3) that provides detailed and robust evidence of serious injury caused by imports (Articles 4.1 and 4.2). In response to complaints of serious injury resulting from imports into the United States, the US Trade Representative (USTR) may trigger a Section 201 investigation by the US International Trade Commission (USITC), the competent US authority. The USITC Report, including recommended action, is then presented to the President, who has three months to decide upon the policy response.

The USITC Section 201 Steel Investigation

In June 2001, the US Trade Representative (USTR) Robert Zoellick launched a Section 201 investigation by the US International Trade Commission (USITC) into the difficulties faced by the US steel industry. The objective was to establish whether foreign imports were causing injury and therefore whether they merited the imposition of safeguard measures.

The USITC investigation covered imports with a combined value of some $17 billion, more than half of total US imports of steel in 2001. The preliminary findings of the USITC investigation, published in October 2001, found that 85 per cent of the imported products subjected to scrutiny caused

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serious injury to the US industry (USITC, 2001). Further, US steel prices were found to be at 20-year lows and around 30 per cent of the industry (by capacity) was in bankruptcy, with losses accumulating for both integrated producers and mini-mill manufacturers. The initial USITC Section 201 Report was followed by two Supplementary Reports.

The USITC Report found 16 categories of items in four broad steel product groups to be causing serious injury, detailed in Table 7.1. These products comprised some 60 per cent of EU exports of steel to the United States, worth a total of $4 billion. Many of them were already subject to pre-existing protective measures in the form of anti-dumping and countervailing duties. Any additional action by the United States would therefore effectively involve ‘double protection’.

Table 7.1 USITC Recommended and Actual Protection for Steel

Product Category USITC Tariff Recommendation (%) Imposed (%)

Carbon & Alloy Flat ProductsSlab TRQ+20 TRQ+30Flat Products1 20 30Tin Mill Products u 30

Carbon & Alloy Long ProductsHot-Rolled Bar 20 30Cold-Finished Bar 20 30Rebar 10 15

Carbon & Alloy Tubular ProductsCertain Tubular Products ? 15Carbon Alloy Fittings & Flanges 13 13

Stainless & Tool Steel ProductsStainless Steel Bar 15 15Stainless Steel Rod ? 15Stainless Steel Wire u 8

Notes:u – divided on whether injury caused; ? not stated; TRQ – Tariff rate quota; 1includes plate, hot-rolled and cold-rolled sheet and coated sheet.

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Source: US International Trade Commission (2001).

The members of the USITC investigation, while unanimous in their findings of serious injury being caused, differed concerning the appropriate remedy. They recommended tariffs, ranging from 20 to 40 per cent, as well as quotas. The affected steel companies and labour unions submitted requests for tariffs of 40 per cent while half of the House of Representatives wanted quotas on steel imports.

The USITC Report also proposed that further assistance be provided to steel workers and affected communities through the National Emergency Grants programme, including effective job training and direct assistance with the industry’s legacy costs. These legacy costs comprise an estimated $13 billion of contract commitments by struggling steel firms, primarily integrated mills, in the provision of health-care and pensions coverage for their employees. The magnitude of these legacy costs – the result of unionisation and long-standing labour contracts in the integrated mill sector – has been a major impediment to the restructuring of the sector. The newer mini-mill sector generally operates with more flexible labour contracts and has opposed US Government funding of legacy costs in the integrated mill sector. The USITC recommendations for action on steel were to use Emergency Safeguards to deal with the penetration of steel imports and leave the legacy cost problem to be dealt with by the US Congress (Zoellick, 2002a).

The Presidential Action on Steel

On 5 March 2002, President George W. Bush responded to the recommendations of the USITC Report by announcing the unilateral imposition of a combination of 30 per cent temporary tariffs and some tariff quotas, effective 20 March for three years. These were introduced as emergency safeguard measures against:

Surges in foreign imports, … to ensure that American industries compete on a level playing field [given] the harm from 50 years of foreign government intervention in the global steel market [in terms of 30] bankruptcies, serious dislocations and [20,000] job losses [from the] glut of cheap imports, global over-capacity and … falling prices leading to falling profitability [and] to give the US steel industry time to restructure without harming the US economy. (Bush, 2002)

The category-by-category details of the final USITC tariff recommendations and those imposed by President Bush are shown in Table 7.1. It is clear that,

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in the event, with only limited exceptions, President Bush decided to impose a tariff that was significantly higher than that recommended by the USITC Commissioners. This was intended to provide the domestic industry with ‘breathing space to restructure and become newly competitive’ (Zoellick, 2002a).

In accordance with international trade rules, the margins of protective relief were to be reduced periodically during the period of the measure – three years in the case of the steel safeguards. This is less than the four years maximum recommended by the USITC and permitted under Article 7.2 of the WTO Agreement on Safeguards. The first annual reduction in the steel Safeguard Measures was made on 21 March 2003, when they were reduced by an average of at least 20 per cent (US Department of Commerce and Office of the USTR, 2003).

Exceptions to the US Emergency Safeguard Action

In the USITC Second Supplementary Report, published in February 2002, the United States announced that it would also be making certain exceptions to its Safeguard Action on steel and steel products (USITC, 2002). These exceptions applied to those countries with which it had free trade agreements, that is, the members of NAFTA (Canada and Mexico) together with Israel and Jordan. Tariff exclusions were also made for Australia and South Korea, along with ‘generous’ tariff quotas for Brazil and Russia, based on import levels in 2000. The principal exporters of steel and steel products affected by the US Emergency Safeguard Action were therefore China, the EU and Japan.

At the same time, the USITC and the US Department of Commerce announced that they were willing to consider objections to the emergency measures on steel and steel products submitted by US consumers of steel, as well as by foreign producers and trade partners, with a time limit of 120 days (by 3 July 2002). This procedure was entirely voluntary, to the extent that it was not required under either US Law or WTO rules. The underlying justification for this flexibility was the limited availability of some steel products in the US market. Exclusions could therefore be granted to ensure that US consumers were not harmed by the Safeguard Action. The subsequent exclusion of particular steel products from the US Emergency Safeguard Action is discussed in Section 7.5.

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7.5 THE POLITICAL ECONOMY OF THE US ACTION ON STEEL AND STEEL PRODUCTS

The implementation of the US Emergency Safeguard Action on steel products in March 2002 by the Bush Administration can be seen to have been the culmination of several inter-related cumulative factors. These were: the poor international competitive position of the domestic US steel industry, particularly the integrated mill sector; the downturn of the US economy at the end of the 1990s; the strength of the steel industry lobby both within and outwith Congress; and political expediency, given the forthcoming mid-term Congressional elections in November 2002. None of these factors accord with the conditions of Article XIX.1 of the GATT 1994 or Article 2.1 of the Agreement on Safeguards, permitting the use of Emergency Measures to prevent domestic harm as a result of a surge of imports.

The US Case for Emergency Safeguard Action on Steel and Steel Products

The fundamental justification for the Emergency Safeguard Action by the United States was set out in the statements of both President Bush and USTR Robert Zoellick. Their arguments for the unilateral tariff were framed in terms of Article XIX.1 of the GATT 1994 and Article 2.1 of the Agreement on Safeguards. They cited the damage being done to the domestic steel industry by a surge in imports of 16 categories of steel product (listed in Table 1) from the EU, China and Japan, among others, and emphasised the temporary nature of the measures (Articles 6 and 7.1). Further, their statements reiterated the commitment of the United States to free trade and a liberal international order, including the rules-based conduct of international trade under the WTO.

These official statements also emphasised the extensive use of unfair trading practices by steel exporters to the United States and that the Action was ‘launched to restore market forces to world steel markets’ (Bush 2002). In this context, USTR Robert Zoellick referred to the heavy use of subsidies by the EU (totalling $50 billion since the 1970s) and China ($6 billion in 2001), the high import penetration of the EU and Japan in the US market ‘even though they are no more productive’ and the use of similar Safeguard Measures by the EU against steel imports from Russia and Ukraine (Zoellick, 2002b).

There is certainly some merit in the argument that international trade in steel and steel products is characterised by a high degree of government

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intervention and unfair trading practices. These criteria however, do not fall within the purview of GATT Article XIX.1 or Article 2.1 of the Agreement on Safeguards and so cannot be used as legal justification for the use of Emergency Measures. Unfair trading practices, including the use of subsidies for state-owned industries such as steel, are covered by specific Articles in the GATT 1994 and the Agreement on Subsidies & Countervailing Measures. The WTO rules specifically require Member countries to request action on the basis of the appropriate Agreements and Articles rather than using retaliatory measures such as tariffs and tariff quotas.

The arguments presented by the USITC to justify their recommendations for action on steel against the EU and the other plaintiffs in the dispute – Brazil, China, Japan, Korea, New Zealand, Norway and Switzerland – do not appear to conform to the requirements of Article XIX.1 of the GATT 1994 and Article 2.1 of the Agreement on Safeguards. The precise details of the WTO steel case brought against the United States by the EU and other countries are presented in Section 7.6.

In the absence of compelling evidence in support of the Article XIX Action by the United States, it is pertinent to consider the grounds for this action in more depth in the context of the political economy of protection. The steel industry’s domestic economic, political and social prominence have been powerful underlying factors in the US Action. The USTR Zoellick’s description of intervention and trade distortions in steel being justified (elsewhere) by countries’ desire for ‘commanding heights’ industries (Zoellick, 2002b) appears to be equally applicable to the case of the United States. This suggests that the political economy approach to protection is likely to provide a rich framework for the analysis of the 2002 US Action on steel.

The ‘Demand’ for Steel Protection in the United States

US steel production, particularly in the integrated mill sector, is characterised by features generally associated with a declining industry – high costs, out-dated technology, low profitability and increasing domestic market penetration by imports. The industry’s perilous position was exacerbated by the onset of the economic downturn in the US economy in 2000, necessitating urgent support if the restructuring or ultimate closure of the weakest firms was to be deferred. Many of the threatened steel plants were located in the old industrial states of Ohio, Pennsylvania and West Virginia that had been badly affected by relatively high unemployment and industrial decline since the 1970s and had missed out on the economic recovery of the 1990s. Intense pressure to stave off further unemployment

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and firm closures came from the labour unions, employers, industry associations – notably the American Iron & Steel Institute – and local political representatives.

The proponents of the emergency tariffs on the 16 steel product categories identified in the USITC investigation argued that the action would provide sufficient leeway for the affected steel firms without having a major impact on general economic recovery and growth in the United States (USITC, 2001). Further, the American Iron & Steel Institute was quoted as claiming that the impact on consumer prices would be minimal and that there would be no meaningful employment effects on steel-consuming Industries (BBC, 2002). USTR Zoellick however, admitted that the tariff would raise domestic US steel prices by between 6 and 8 per cent (Zoellick, 2002a).

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The ‘Supply’ of Steel Protection in the United States

It can be argued that the timing and nature of the US Safeguard Measures on steel and steel products owed more to political expediency than to being a strategy to deal with the fundamental economic problems of the sector. By their very nature, the Measures could only be a temporary panacea for the ills of the US steel industry in that they did not address the sector’s underlying lack of investment and competitiveness. Many of the affected steel plants were located in key marginal states that President Bush and the Republican Party needed to win in the November 2002 mid-term elections if they were to have a chance of securing a majority in both Houses of Congress. Political necessity therefore required prompt intervention by the President in a manner that at least appeared to be assisting the US steel industry. The USITC also recommended that the political ‘hot potato’ of the steel industry’s problematic $13 billion legacy costs – on which the restructuring of the industry was dependent – be referred to Congress. This delay in the financing of restructuring came at a time of US fiscal restraint in order to fund the substantial tax cuts pledged in the 2000 Presidential election.

An Article XIX Emergency Safeguard Action, in the form of a unilateral tariff plus quotas on steel imports, was therefore an attractive policy option. It offered a fiscally neutral strategy to provide the domestic US steel industry with a temporary reprieve by targeting low cost imports. Further, the term-structure of the gains and losses of such an Action meant that the benefits were immediately visible while any costs would be delayed and more dispersed. The costs of any adverse WTO Panel decision however, are borne by exporters through the nullification or impairment of benefits imposed by affected trade partners. This would not, in all probability, have any direct link to steel. Further, the domestic public perception of such retaliatory action might not be linked to the steel issue at all.

In any event, an Article XIX WTO complaint against the United States might possibly have been staved-off or averted by means of diplomatic effort, citing the (by definition) temporary nature of the action and domestic political pressures. This consultation process between the affected parties, as required under Article 12.3 of the Agreement on Safeguards, took place in Geneva on 11 and 12 April 2002 but failed to secure a resolution to the dispute.

The US Choice of Protective Measure for Steel

An additional dimension to this discussion relates to the decision by the United States to use Article XIX and the Agreement on Safeguards as the

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grounds for action on steel. The initiation of Safeguard Actions has tended to be relatively infrequent in comparison with alternative trade remedies – such as anti-dumping and countervailing actions as well as VERs (Trebilcock and Howse, 1999), prior to their elimination under Article 11 of the Agreement on Safeguards. It is pertinent therefore to ask why the United States chose to implement Safeguard Measures rather than initiate an Anti-Dumping or Countervailing Action against the EU, among others. This question becomes especially significant given that a major contention of the United States was that its principal trading partners were making extensive use of subsidies and government intervention in steel.

Many of the EU steel products being imported by the United States were, prior to 5 March 2002, already the targets of other protective remedies, in the form of anti-dumping and countervailing duties, and subject to other WTO complaints (WTO DS212 and DS213) (see Section 7.2). Articles 7.5 and 7.6 of the Agreement on Safeguards impose strict time limits on the application and re-imposition of countervailing and anti-dumping duties. The United States was therefore constrained in the extent to which it could engage in additional anti-dumping or countervailing action on particular steel products. Further protection would amount to ‘undue double protection’ (CEC, 2001).

The issue then becomes a question of what alternative legally permissible actions under the WTO rules were available to the United States to justify its protective action against steel imports. The original GATT 1947 contained two ‘catch-all’ articles which acted as safety valves by providing some temporary flexibility to Member states to protect sensitive sectors; Article XIX on Emergency Action on Imports of Particular Products (discussed in detail in Section 7.3) and XII on Restrictions to Safeguard the Balance of Payments. Article XII was designed primarily to assist developing countries experiencing Balance of Payments crises. In its expanded form in GATT 1994, it would be well nigh impossible for the United States to justify sector-specific action on steel imports under Article XII, in spite of its sizeable trade deficit.

GATT Article XIX is more than usually opaque in defining the grounds for emergency measures in terms of ‘unforeseen developments’ in imports, such that it has been open to very broad interpretation. One of the principal reasons for the creation of the Agreement on Safeguards, as part of the wide-ranging Uruguay Round negotiations, was the need to remove some of this opacity by clarifying critical areas of ambiguity. The Agreement on Safeguards is a substantially more complex regime for regulating the use of Emergency Measures than Article XIX (see Section 7.3).

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The scope for interpretation in Article XIX suggests that the US Safeguard Action of 5 March 2002 on steel would probably have been sustainable. This action however, is the first undertaken by the United States since the Agreement on Safeguards came into force in 1995. The greater rigour of this Agreement, in defining the precise circumstances under which Safeguard Measures are permissible, coupled with a more effective Disputes Settlement Mechanism, suggested that the 2002 US Action on steel would be unsustainable at the WTO.

7.6 THE DOMESTIC IMPACT OF THE US STEEL MEASURES

The US Action enjoyed popular domestic support within the industry and from many whose livelihoods were dependent upon primary steel production. Support however, was by no means unanimous. Many steel-consuming firms opposed the tariffs, primarily because of their knock-on effects on production costs at a time of sluggish economic growth. This opposition was co-ordinated by several consumers’ organisations. The Consuming Industries Trade Action Coalition (CITAC), a US consumer lobby group, contended that the measures will cost far more jobs in steel-using industries than they would save in the steel industry itself.

This divergence in support for the measures merely reflects the standard differential effective impact of upstream protection. While the immediate effect of the steel tariff was to protect US firms and jobs by raising domestic prices, its indirect impact raised the cost of steel inputs in downstream steel consuming industries, with adverse knock-on effects on the firms’ performance and employment. As result, the debate within the United States therefore focused on the relative magnitudes of their beneficial and adverse impacts; the key issue being the aggregate employment effect of the steel tariffs.

The Direct Impact of the Measures on US Steel Producers

The imposition of an import tariff has well-known direct effects on the domestic market price of the product targeted and also, by implication, on producing firms. The precise magnitudes of these effects are determined by the elasticities of supply and demand of the affected products and the availability of domestic substitutes. The most favourable impact (an optimal tariff) is when domestic demand is relatively inelastic (any price rise has a less than proportionate impact on demand), domestic supply is relatively

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elastic (the supply response to any price rise is more than proportional) and domestic output and imports are close substitutes (any price rise leads to substantial switching in favour of domestic firms).

The principal objective of the steel measures was to grant temporary financial relief to inefficient firms in the form of higher domestic prices for steel by reducing US imports substantially below their 2001 levels and increasing the domestic share of consumption. An initial ex ante study undertaken for CITAC, based upon the USITC tariff recommendations in Table 7.1, estimated that an anticipated 9.2 per cent rise in steel prices would save some 8900 steel jobs at a cost of $450000 each (Francois and Baughman, 2001). In another study, steel tariffs of 15 to 20 per cent were estimated to cost $2 billion and save 3500 jobs – at a cost of $584000 each (Hufbauer and Goodrich, 2002).

The most comprehensive study of the actual impact of the Emergency Safeguard Measures on the steel producing industry in the United States is the USITC Mid-Point Report to the President and Congress, published in September 2003 (USITC, 2003a). The Report analyses market developments for each of the eleven broad steel product headings targeted by the Action, coupled with firm-level questionnaire responses and submissions from interested parties. In the 18 months following the imposition of the tariffs, the US steel industry underwent major restructuring and consolidation. This included several large mergers and acquisitions, the closure of out-dated plant, substantial investment in new capacity, increases in output, capacity utilisation and productivity and the introduction of more flexible labour contracts. Not all of these developments were viewed by the USITC as being the direct result of the steel Action. A US Government agency, the Pension Benefit Guaranty Corporation, also acquired more than $8 billion in unfunded pension liabilities from nine steel firms (USITC 2003a).

At the sectoral level, the steel measures had a relatively consistent and predictable impact. Reduced imports from targeted sources (generally between 20 and 50 per cent) were replaced by imports from elsewhere and increased purchases of domestic output. The impact on Tin Mill Products and Rebar was substantially greater, with falls of nearly 63 per cent and 78 per cent respectively in imports from targeted sources – possibly because of easily available alternative supplies (USITC, 2003a).

The recovery of the US steel industry however, was constrained by weak demand as a result of the general economic downturn in the United States. This was compounded by the across-the-board rises in domestic steel prices. New construction activity, a major end-user of steel products, was particularly weak. The financial performance of US steel firms during this period was mixed. In spite of increased domestic sales of the protected products at higher prices, operating margins deteriorated in Carbon Alloy &

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Tubular Steel and Stainless & Tool Steel products plus Rebar. The performance of Carbon Alloy & Tubular Steel was aggravated by the impact of rising costs resulting from a higher rate of protection on its steel inputs – 30 as opposed to 15 per cent. The negative margins in the latter two sectors actually worsened during the period (USITC, 2003a).

The Indirect Impact of the Measures on US Steel Consumers

The indirect effects of a tariff are determined by the magnitude of its effective impact and this, in turn, is determined by the position in the production process of the good being protected. The adverse effective impact is greatest when a large tariff is imposed on an important intermediate input into several downstream industries; as, for example, in the case of steel. The greater the share of the protected input in the cost of downstream output, the greater the proportionate effect of the tariff being passed on to the price of the final goods, for example, cars. The ability of downstream industries to pass-on these cost effects depends upon their market structures and the elasticities of demand for their final products.

The ex ante study by Francois and Baughman for CITAC estimated that, on the basis of the recommended USITC tariffs, some 74500 jobs would be lost, including 15300 in steel-consuming industries, as a result of an anticipated 9.2 per cent rise in prices (Francois and Baughman, 2001). In an ex post study, the same authors investigated the actual impact of the price rises during 2002, caused partly by the steel tariffs. They found that almost 50000 jobs had been lost in the Fabricated Metals, Machinery & Transport Equipment sector and just over 197000 in all steel-consuming industries (Francois and Baughman, 2003). This job loss figure is greater than the 187500 employed in the US steel industry as a whole. The broad range of the CITAC findings is confirmed by Hufbauer and Goodrich (2003a), who ascribe some 39 per cent of the rise in US steel prices in 2002 to the measures, with a direct employment effect estimated at around 19500 jobs (Hufbauer and Goodrich, 2003b). The findings of these studies have been hotly disputed by the US steel producers’ organisation, the American Iron & Steel Institute, which claimed that jobs were created in both upstream and downstream industries (Morici, 2003).

In a companion study to its Mid-Point Report on the steel industry, the USITC published in September 2003 an analysis of the impact of the Emergency Safeguard Measures on US steel-consuming industries (USITC, 2003b). Both studies use a similar analytical methodology, the latter supplemented by a computable general equilibrium (CGE) model using 1997 benchmark US input-output data. The CGE model results suggest that the aggregate domestic welfare impact of the US steel Action was in the

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range between plus $65.6 million and minus $111 million, with a central estimate of $41.6 million. The impact on GDP was a decline of $294.3 million in the returns to capital and $386 million in the returns to labour, together with increased tariff revenue of $649.9 million (USITC, 2003b). Given actual tariff receipts of $294 million, the USITC results greatly understate the real magnitude of the adverse effects on domestic prices and US steel imports (Hufbauer and Goodrich, 2003b).

Although the aggregate impact on GDP of minus $30.4 million is almost negligible, the redistributive effects are much more substantial. US Government revenue has benefited at the expense of reduced private sector profits and wage payments, including unemployment. The principal industry-level effects were found to be increased supply problems, difficulties in passing on increased raw material costs, job losses – albeit at a lower rate than in 2001–2002 – and declining international competitiveness. Overall sales and some firms’ profits increased. The domestic steel-consuming industries most adversely affected were motor vehicle parts and some steel fabricating activities (USITC, 2003b).

The steel measures were not the sole cause of rising prices and job losses in US steel-consuming industries. By the time that the measures were introduced, the US steel market was already tightening as a result of cuts in production capacity and output coupled with a recovery of demand and increased uncertainty regarding the President’s likely action. In the first two quarters of 2002, US steel prices rose steeply – notably hot-rolled sheet by 81.8 per cent and cold-rolled sheet by 69.4 per cent – although the rises over 2002 as a whole were much lower – 27 per cent and 19 per cent respectively (Francois and Baughman, 2003).

Many US steel-consuming industries are highly atomistic – some 98 per cent of the 193000 steel-using firms have less than 500 employees (US Small Business Administration, 2000). As price-takers, the steel price rises had a severe impact on their costs, profit margins and employment. The squeeze in the major domestic steel-consuming industries, such as cars and defence equipment, was much smaller because of their greater monopsonistic bargaining power and use of long-term supply contracts. The declining international competitiveness of US output of steel-using products also led to a shift in demand towards imported manufactures. These effects however, were partly mitigated by the weakening of the dollar, which also raised the cost of imported steel.

The tightening of the US steel market and the substantial consequent price increases in the first half of 2002 also had several additional effects as steel users attempted to minimise or evade the tariffs. There was a suspected increase in trade deflection, whereby affected steel products entered the United States through third countries to avoid the duties, particularly via its

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NAFTA partners Canada and Mexico. The American Iron & Steel Institute also expressed concern about ‘substantial transformation’ in third countries for customs reclassification, in-bond shipments re-crossing NAFTA borders to obscure their origin and circumvention, whereby products are classified falsely (American Iron & Steel Institute, 2002).

Subsequent Product Exclusions from the US Emergency Safeguard Action

When the steel tariffs were introduced, the US Department of Commerce and the USITC announced that they would consider objections on a case-by-case basis within 120 days. The principal criteria for the granting of such exclusions were (US Department of Commerce & Office of the USTR, 2002):

Whether the product was being produced in the United States. Whether substitution of the product was possible. Whether qualification requirements affect the requestor’s ability to use

domestic products. Inventories. Whether the requested product was under development by a US

producer who would imminently be able to produce it in marketable quantities.

In the event, a total of 1022 separate product exclusions had been made by the US Department of Commerce and the Office of the USTR by the time that the final round of exclusions was announced in March 2003. The initial 120-day time limit on the submission of objections was extended by 60 days by Presidential Proclamation, until 31 August 2002, during which six rounds of exclusions covering 727 separate items were announced. A further (and final) list of exclusions covering 295 separate items was published in the Annual Review on 21 March 2002.

The USITC Section 201 investigation identified a large number of specific sub-categories of steel imports that were found to be causing injury. These findings formed the basis of the USITC recommendations for Emergency Safeguard Action (USITC, 2001), acted upon by President Bush. The large number of subsequent exclusions however, suggests that the original recommendations were severely undermined by their virtually blanket application to a broad range of tariff headings and lack of analytical precision at the individual product level. This point was a key element in the EU complaint to the WTO.

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This broad-brush targeting of US steel product imports had several effects. The steel measures were applied to products that were not causing injury and/or were not available inside the United States, further antagonising its trade partners and affected exporting firms. The mis-specified tariffs also had an adverse domestic impact on US users of affected steel products through large short-term price hikes and temporary shortages, possibly including lay-offs and job losses. In addition, the exclusion process required the affected US firms, many of which were relatively small, to divert scarce resources to lobbying.

The exclusion process was also subject to an apparent bias in that some half of the exclusions (by volume) applied to unfinished steel imports (Hufbauer and Goodrich, 2003a). The United Steelworkers of America (USWA) alleged that integrated steel firms were effectively outsourcing their raw steel inputs for domestic processing behind the tariff barriers, so increasing their profits at the expense of US jobs. Further, the exclusion process appears to have been used by domestic mini-mills and integrated mills as a strategic tool to influence each others’ steel input costs. It was also used in a similar fashion by some foreign firms to gain a foothold over their rivals and earn quota rents (Hufbauer and Goodrich, 2003a). The extensive nature of the exclusion process also damaged the credibility of the USITC Section 201 investigation and the Emergency Safeguard Action, not only at the WTO but also in the broader public sphere.

7.7 THE EU–US STEEL DISPUTE AT THE WTO

Prior to the US imposition of the Emergency Safeguard Measures on steel on 5 March 2002, the EU and several other targeted countries had already threatened retaliatory action. The EU also signalled in advance its intention to mount a legal challenge at the WTO if tariffs were imposed upon its steel exports to the United States. Responding to the publication of the preliminary USITC findings in October 2001, the EU stated that there had been a downward trend in its steel exports to the US in most categories since 1999 and a particularly heavy fall in carbon alloy and flat steel products in 2001, comprising 55 to 60 per cent of the total (CEC, 2001). Further, since the mid-1990s, the EU had switched from being a substantial net exporter to being a net importer of steel products. Both President George W. Bush and USTR Robert Zoellick explicitly recognised the likelihood of retaliatory action by the EU but its threats failed to deter the imposition of the steel tariffs (Bush, 2002; Zoellick, 2002b).

This Section outlines the evolution of the EU–US WTO steel dispute and its subsequent resolution in December 2003. The EU was not the sole

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plaintiff in what, effectively, became a class action involving seven other countries. These were Japan (WTO DS249), Korea (WTO DS251), China (WTO DS252), Switzerland (WTO DS253), Norway (WTO DS254), New Zealand (WTO DS258) and Brazil (WTO DS259). The critical focus however, is on the EU’s dispute with the United States (WTO DS248). A chronology of the dispute is provided in Table 7.2.

Table 7.2 Chronology of the EU–US Steel Trade Dispute

23 December 1999 WTO Panel Report on Countervailing Duties (‘British Steel’) (WTO DS 138)

10 May 2000 WTO Report of the Appellate Body on Countervailing Duties (‘British Steel’) (WTO DS 138)

5 June 2001 USITC Section 201 investigation launched23 October 2001 USITC Section 201 preliminary findings published4 February 2002 USITC Section 201 Second Supplementary Report published5 March 2002 Safeguard measures imposed by US on steel imports7 March 2002 EU Requests WTO consultations under the DSU20 March 2002 Japan and Korea Request WTO consultations under the

DSU26 March 2002 China Requests WTO consultations under the DSU27 March 2002 EU announces its own temporary safeguard measures for

steel3 April 2002 Switzerland Requests WTO consultations under the DSUApril 2002 Norway Requests WTO consultations under the DSU11-12 April 2002 Consultations between parties, Geneva8 May 2002 First EU Request for the Establishment of a Dispute

Panel for steel22 May 2002 US blocks EU’s first Request for a Dispute Panel for steel22 May 2002 Second EU Request for the Establishment of a Dispute

Panel for steel3 June 2002 Establishment of WTO Panel on Steel (WTO DS 248)7 June 2002 USTR publishes first list of exclusions for 61 steel products14 June 2002 Inclusion of Japan and Korea in WTO Panel on Steel17 June 2002 USTR publishes second list of exclusions for 46 steel

products24 June 2002 USTR publishes third list of exclusions for 116 steel

products11 July 2002 USTR publishes fourth list of exclusions for 23 steel

products15 July 2002 Procedural Agreement for a single WTO steel Panel

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19 July 2002 USTR publishes fifth list of exclusions for 14 steel products19 July 2002 EU postpones the application of its ‘short’ list of trade

sanctions31 July 2002 WTO Panel Report on Countervailing Measures (steel

privatisation) (WTO DS 212)31 July 2002 WTO Panel Report on Countervailing Duties (steel, de

minimis and sunset review) (WTO DS 213)12 August 2002 USTR publishes sixth list of exclusions for 37 steel

productsTable 7.2 continued

22 August 2002 USTR publishes seventh list of exclusions for 178 steel products

24 September 2002 EU suspends its ‘short’ list of trade sanctions21 March 2003 USTR Annual Review includes further exclusions for 295

steel products11 July 2003 WTO Panel Report on Definitive Safeguard Measures on

Steel Imports (WTO DS 248)September 2003 USITC publishes its Mid-Point Reports on the domestic

impact of the steel tariffs10 November 2003 WTO Report of the Appellate Body on Definitive

Safeguard Measures on Steel Imports (WTO DS 248)

4 December 2003 President George W. Bush removes the remaining steel tariffs

The EU WTO Steel Case Against the United States (WTO DS248)

The response of the EU to the US Emergency Safeguard Action was almost immediate in that it submitted a complaint to the WTO in the form of a Request for Consultations with the United States on 7 March 2002. This document provides a summary of the alleged breach of obligations by the United States (WTO, 2002f), explained and analysed at length in the EU’s first written submission to the WTO Panel (CEC, 2002a). The initial complaint by the EU to the WTO was followed by complaints from Japan and Korea on the 20 March, China on 26 March and then Switzerland and Norway in early April.

The grounds for the EU’s steel complaint was that the US Action breached its obligations under several Articles of the GATT 1994 and the Agreement on Safeguards. The eight key issues were:

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That the United States acted without demonstrating ‘unforeseen developments’ as required under GATT Article XIX.1(a). The lack of such demonstration and the failure to allow time for consultation also violated Article 3.1 of the Agreement on Safeguards.

That no recent ‘sharp and significant’ increase in imports was demonstrated, consistent with the measurement methodology of Article 2.1 of the Agreement on Safeguards. The US claims were not supported by the facts – imports of eight targeted products decreased.

That specific products were grouped without establishing that they were all like products or directly competitive with imports, as required under Article 2.1 of the Agreement on Safeguards. This undermined the identification of like or directly competitive products, leading to the comparison of different domestic products within each product group and the protection of unaffected domestic producers, inconsistent with Articles 2.1, 4.1(c) and 4.2(a) of the Agreement on Safeguards.

That serious injury, by providing insufficient trade and financial performance data, was not demonstrated so that the US measures were therefore inconsistent with Articles 2.1, 2.2, 4.1(a), (c) and 4.2 of the Agreement on Safeguards.

That no genuine and causal link was established in that the United States did not: i) distinguish between the impact of imports and other factors; ii) demonstrate a causal link between the injury and each of these factors; iii) distinguish injury caused by countries excluded from the Action, in violation of Articles 2.1, 3.1, 4.2(b), (c) of the Agreement on Safeguards.

That the United States did not use a proportionate remedy by failing to prove injury, in violation of Article 5.1 of the Agreement on Safeguards.

That the United States did not respect the principle of parallelism between the imports investigated and the measures imposed and with respect to the products covered and their geographical origin, in violation of Articles 2.1, 2.4, 4.2 and 5.1 of the Agreement on Safeguards.

That the United States did not set forth the findings and arguments of its investigation adequately nor did it provide an adequate demonstration of serious injury and causal link, as required by Articles 3.1 and 4.2(c) of the Agreement on Safeguards.

The plaintiffs also argued that these violations repeated inconsistencies in previous WTO cases concerning the use of safeguards by the United States

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(Wheat Gluten – WTO DS166, Lamb – WTO DS177 and 178, Line Pipe – WTO DS202 and 225, Underwear – WTO DS24, Shirts & Blouses – WTO DS33 and Cotton Yarn – WTO DS192) (CEC et al., 2002). They were thus inconsistent with the objective of further trade liberalisation resulting from the 2001 Doha Ministerial Declaration.

Article 4 of the WTO DSU requires joint consultations to take place between the parties to a dispute prior to any legal action. These took place on 11 and 12 April 2002 between the United States, the EU, Japan, Korea, China, Switzerland and Norway. In this meeting, the plaintiffs voiced their concern about the systematic abuse of safeguard instruments by the United States and called upon it to terminate its WTO-incompatible safeguards immediately (CEC et al., 2002).

The DSU permits parties failing to resolve a dispute after consultations to request the formation of a WTO Panel within 60 days of the initial complaint (that is, 6 May 2002 for the EU). The EU’s initial request for the formation of a WTO Panel to rule on the legality of the US steel safeguards on the grounds outlined above was made on 8 May (WTO, 2002g). This first request was blocked on 22 May by the United States, as was its right, at a special meeting of the Dispute Settlement Body (DSB). At the next meeting of the DSB on 3 June, the EU made a second request for a WTO Panel, automatically leading to its establishment. Subsequent requests for the formation of WTO steel Panels by other plaintiff countries resulted in a Procedural Agreement under Article 9 allowing for the consideration of all complaints by a single Panel (WTO, 2002h). The plaintiffs were joined by Brazil shortly after this Agreement.

Retaliatory Action by the EU Against the US Emergency Safeguard Measures

As outlined in Section 7.3, Article 8 of the Agreement on Safeguards outlines the level of concessions and other obligations to be made by countries applying safeguard measures. The Article includes the potential for compensation and retaliatory action by the affected exporting countries. Countries using safeguards are required to ensure equivalent concessions to affected exporting countries through agreement on the means of compensation (Article 8.1).

In the event of no agreement being reached after 30 days, affected exporting countries are permitted to suspend the application of substantially equivalent concessions or obligations. This must be done no later than 90 days after the imposition of the safeguard measure – by 3 June 2002 for the EU in the case of steel – upon 30 days written notice and approval by the WTO Council for Trade in Goods (Article 8.2). This right to suspension

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however, should not be exercised for the first three years of a safeguard measure, provided that it is the result of an absolute increase in imports and that the measure conforms to the provisions of the Agreement on Safeguards (Article 8.3).

The day after the United States imposed the steel tariffs, EU Trade Commissioner Pascal Lamy announced that retaliatory action would be taken to protect the EU steel industry and its workers, while remaining within the framework of the WTO. The EU’s retaliatory action had three elements (CEC, 2002b):

To protest against these measures at the WTO, along with other affected countries, including the lodging of a formal complaint (discussed above).

To protect the EU from steel diverted to it from the US market through the implementation of a temporary safeguard measure.

To seek compensation from the United States under Article 8 of the Agreement on Safeguards, equivalent to the amount of EU exports affected and, if necessary, a suspension of tariff measures vis-à-vis the United States.

The EU imposed temporary safeguard measures on its own steel imports on 27 March for an initial period of six months, to last no longer than those of the United States. The temporary safeguard measures were product-specific and comprised a tariff quota (on a first come – first served basis) applied to 15 steel products, based upon historic levels of imports 1999–2001 plus 10 per cent, together with tariffs ranging from 14.9 per cent to 16 per cent (CEC, 2002c, d).

The EU argued that, in contrast to the US Action, these measures were a legitimate response to a surge in its steel imports – which rose by 73 per cent between 1997 and 2001. This surge was the result of the significant decline in US steel imports between 1999 and 2001 and the diversionary impact of the US safeguard measures on the EU market – the world’s second largest importer of steel after the United States (CEC, 2002d). The EU finally introduced its definitive safeguard measures on 27 September for seven steel products out of 21 originally proposed, while three were still under investigation.

On the issue of compensation, the EU estimated that it was entitled to around €2.407 billion per annum for the lost value of trade concessions resulting from the imposition of the US steel safeguard (CEC, 2002e). The failure of the United States to provide broadly equivalent trade concessions would expose it to the possible suspension of its own concessions by the EU.

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The EU and Japan assured their rights to suspend trade concessions vis-à-vis the United States by notifying the WTO of their intention do so within the required 90-day limit.

The other parties to the WTO steel complaint took a more conciliatory stand with respect to compensation and the suspension of trade concessions. China, Norway and Switzerland stated that they would only take action against the United States after three years (March 2005), in accord with Article 8.3, or after a binding Panel Decision on the WTO incompatibility of the steel safeguards. Australia, Brazil and New Zealand formally agreed with the United States that their right to suspend concessions and other obligations be extended until March 2005 at the end of the required three year period (Bridges Weekly Trade News Digest, 2002).

Article 8.2 of the Agreement on Safeguards permits countries to retaliate if they fail to agree on adequate compensation. The legal grounds for immediate retaliatory action by the EU (and Japan), rather than after three years, lies in the wording of Article 8.3. This Article distinguishes between temporary and absolute rises in imports and also whether a safeguard measure is in conformity with the provisions of the Agreement. In this context, critical elements of the EU (and other) complaints were that there had been no absolute increase in US steel imports and also that the US steel measures were not WTO-compatible. Immediate retaliatory action was therefore legal. This issue was not pursued further by the other plaintiff countries.

Not surprisingly, this interpretation of Article 8.3 provoked a strong reaction from the United States because

‘it will encourage other WTO members to ignore the dispute settlement process, which both Europe and Japan have vigorously defended in dispute settlement cases before the WTO, … [and] strike at the heart of the multilateral trading system’ (United States, 2002).

The WTO compatibility of immediate retaliatory action by the EU and Japan however, could only by established by a Dispute Panel decision on the relevant points of the conformity of the US Action with WTO disciplines.

The details of the EU’s retaliatory measures against the United States were published in EU Council Regulation 1031/2002 on 13 June 2002 (CEC, 2002f). The priority of the measures was to target imports of steel as well as other products, where appropriate, to a value equivalent to the import duties collected by the United States on the affected EU steel products. The targeted products were grouped into the so-called ‘short’ and ‘long’ lists (see Annexes I and II to the Regulation), the former being a specific sub-set of

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the latter, with annual tariff revenue values of €379 million and €606 million ($390 million and $625 million) respectively.

Under Article 3.2 of the Regulation, the ‘short’ list of retaliatory measures was to be applied not later than 12 October 2002, given ‘economically meaningful’ product exclusions by the United States [Article 3.2(a)] and August 2002 in their absence [Article 3.2(b)]. The ‘long’ list of retaliatory measures was to be applied from 20 March 2005 [Article 4(a)] or from the fifth day after a decision by the DSB that the US steel safeguard was WTO incompatible [Article 4(b)]. The products targeted by both lists were specifically chosen because they were important exports by key marginal states in the 2004 Presidential Election. The EU valuation of $625 million in US duty revenues from steel is very close to the figure estimated by the USITC in its 2003 Mid-Point Report ($649.9 million) but substantially greater than the actual tariff revenue of $294 million in 2003 reported by Hufbauer and Goodrich (see Section 7.6).

The EU postponed its imposition of the ‘short’ list of trade sanctions against the United States on 19 July 2002 after the USITC announced its fifth list of product exclusions from the steel measures. These exclusions were deemed by the EU to be economically meaningful, so delaying the application of the short list until at least 12 October. By the time of the announcement of the sixth round of exclusions on 22 August 2002, some 50 per cent of EU steel exports had been exempted from the US safeguards (CEC, 2002g).

In a Council Decision of 24 September 2002, the EU decided to suspend the application of the ‘short’ list of trade sanctions against the United States, given the alleviating impact of the US product exclusions on the adverse effects of the steel safeguard measures (CEC, 2002h).

The 2003 WTO Panel Decision on Steel (WTO DS248)

The WTO Panel dealing with the steel dispute published its findings on 11 July 2003 (WTO, 2003a). The main conclusion of the Panel was that the safeguard measures imposed by the United States were inconsistent with the GATT 1994 and the Agreement on Safeguards and, as such, nullified or impaired the benefits to the EU (and the other plaintiffs).

The findings were presented in a single Panel Report, amid strong opposition from the United States, with separate annexes detailing the specific findings for each plaintiff in the case (WTO, 2003c, Annexe A for the EU). The WTO Panel Report runs to almost 1000 pages and, as such, it is only possible to provide an outline summary of the principal findings with respect to the EU complaint. The presentation of these findings follows the

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structure of the Panel Report, which groups the key points under five headings. The findings are summarised in Table 7.3.

Table 7.3 The WTO Steel Panel Findings (DS248)

1. Unforeseen DevelopmentsThe USITC did not provide a sufficiently comprehensive and coherent explanation of how the unforeseen developments resulted in increased US imports (WTO, 2003a, 10.146) such that arguments concerning unforeseen developments did not need to be examined (WTO, 2003a, 10.148, 10.149).WTO Decision – Complaint upheld

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Table 7.3 (continued)

2. Increased ImportsThe USITC did not provide a reasoned and adequate determination for Carbon Flat-Rolled Steel, Hot-Rolled Bar and Stainless Steel Rod (WTO, 2003a, 10.186, 10.208 and 10.277). For Tin Mill Products and Stainless Steel Wire, individual USITC Commissioners provided alternative and irreconcilable explanations using different product definitions (WTO, 2003a, 10.200 and 10.263). An increase in absolute or relative imports was demonstrated for Cold-Finished Bar, Rebar, Welded Pipe, Flanges and Stainless Steel Bar (WTO, 2003a, 10.221, 10.228, 10.239, 10.249 and 10.257).WTO Panel Decision – Complaint partially upheld

3. CausationThe USITC failed to separate, distinguish and assess the nature and extent of the injurious effects in the causal link between increased imports and serious injury in the cases of Carbon Flat-Rolled Steel, Hot-Rolled Bar, Cold-Finished Bar, Rebar, Welded Pipe, Flanges and Stainless Steel Bar (WTO, 2003a, 10.417, 10.445, 10.469, 10.487, 10.503, 10.536 and 10.569). There was compelling, although inadequate, causal analyses in the cases of Hot-Rolled Bar, Rebar, Flanges and Stainless Steel Bar (WTO, 2003a, 10.444, 10.486, 10.535 and 10.568). Tin Mill Products and Stainless Steel Wire were not considered. The Panel rejected the complaint against Stainless Steel Rod (WTO, 2003a, 10.586).WTO Decision – Complaint upheld in the main

4. ParallelismThe USITC failed to establish reasonably and adequately that the imports did not cause or threaten injury in the cases of all the ten product categories (WTO, 2003a, 10.609, 10.623, 10.633, 10.643, 10.653, 10.660, 10.670, 10.680, 10.692 and 10.699).WTO Decision – Complaint upheld

5. Additional FindingsThe WTO Panel did not address all of the claims made by the plaintiffs for reasons of judicial economy, including: the proper definition of the imported product; like product and the domestic industry; serious injury; the consistency of product exclusions with the principle of parallelism; claims relating to Articles 5, 7, 8 and 9 of the Agreement on Safeguards; and Articles I, X, XII, XIX (except with regard to unforeseen developments) and XXIV of GATT 1994 (WTO, 2003a, 10.700).

Source: WTO (2003a).

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The WTO Panel Interpretation of the Application of the Agreement on Safeguards

The first section of the Panel findings concerns its consideration of the application of the Agreement of Safeguards. Under the Agreement, countries have the right to take safeguard measures in exceptional circumstances, defined broadly (WTO, 2003a, 10.13). It is necessary however, to distinguish between the (conditional) right to implement a safeguard measure and the application of a chosen measure. The former depends upon the cause or threat of injury to domestic industry while the latter is concerned with how the safeguard measure is applied – that is, only to the extent necessary to prevent or remedy serious injury or facilitate adjustment. A WTO Panel’s objective is therefore to establish the former prior to the consideration of the latter (WTO, 2003a, 10.14). With reference to the determination of injury and the standard of review by the USITC, the burden of proof lies with the plaintiffs to demonstrate that these do not meet the requirements of the Agreement on Safeguards.

1. Unforeseen Developments

The WTO Panel found that the USITC Reports did not provide a sufficiently comprehensive and coherent explanation of how the unforeseen developments resulted in increased US imports (WTO, 2003a, 10.146). Further, such a demonstration should be performed for every safeguard measure for each specific product (WTO, 2003a, 10.147). The Panel therefore found that the remaining plaintiffs’ arguments concerning unforeseen developments did not need to be examined since the USITC, as the competent authority, did not provide a reasoned and adequate explanation of the unforeseen developments (WTO, 2003a, 10.148, 10.149). All of the US safeguard measures were therefore found to be inconsistent with the requirements of GATT Article XIX:1(a) and Article 3.1 of the Agreement on Safeguards (WTO, 2003a, 10.150).

2. Increased Imports

The issue of absolute and relative trends in US steel imports from 1996 was analysed by the WTO Panel for the ten product groups on a product-by-product basis, as defined in the USITC Reports. The Panel found that the USITC Reports did not provide a reasoned and adequate determination in the cases of Carbon Flat-Rolled Steel, Hot-Rolled Bar and Stainless Steel Rod and was therefore inconsistent with Article 2.1 of the Agreement on Safeguards (WTO, 2003a, 10.186, 10.208 and 10.277). In the cases of Tin

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Mill Products and Stainless Steel Wire, the USITC Commissioners provided alternative and irreconcilable explanations based on different product definitions. The Panel therefore found that the analysis of the USITC, as the competent authority, was inconsistent with Article 2.1 of the Agreement on Safeguards in that it did not provide a reasoned and adequate determination in these cases (WTO, 2003a, 10.200 and 10.263). In the remaining cases – Cold-Finished Bar, Rebar, Welded Pipe, Flanges and Stainless Steel Bar – the Panel found support for the USITC arguments under Article 2.1 of the Agreement on Safeguards on the basis of increased absolute or relative imports (WTO, 2003a, 10.221, 10.228, 10.239, 10.249 and 10.257).

The EU’s argument of a lack of parallelism and definition of like product in the cases of Welded Pipe and Flanges was viewed by the Panel as a separate issue to be dealt with under the examination of the relevant Articles (see 4. Parallelism below).

3. Causation

The issue of causation between US steel imports and domestic injury from 1996 was analysed by the WTO Panel for the ten product groups on a product-by-product basis, as defined in the USITC Reports. The Panel found that the USITC, as the competent authority, failed to separate, distinguish and assess the nature and extent of the injurious effects in its explanation of the causal link between increased imports and serious injury in the cases of Carbon Flat-Rolled Steel, Hot-Rolled Bar, Cold-Finished Bar, Rebar, Welded Pipe, Flanges and Stainless Steel Bar. The USITC Reports were therefore inconsistent with Articles 2.1, 3.1 and 4.2(b) of the Agreement on Safeguards (WTO, 2003a, 10.417, 10.445, 10.469, 10.487, 10.503, 10.536 and 10.569. In spite of these adverse findings, the Panel found compelling, although inadequate, causal analyses in the cases of Hot-Rolled Bar, Rebar, Flanges and Stainless Steel Bar (WTO, 2003a, 10.444, 10.486, 10.535 and 10.568).

In the cases of Tin Mill Products and Stainless Steel Wire, where the USITC Commissioners based their findings on divergent product definitions, the Panel found that the measures were inconsistent with Articles 2.1, 3.1 and 4.2(b) of the Agreement on Safeguards. The Panel also found that, in the case of Stainless Steel Rod, the USITC causation analysis was not inconsistent with the requirements of the Agreement on Safeguards (WTO, 2003a, 10.586).

4. Parallelism

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The issue of parallelism relates to the correspondence between the determination of injury by a product and the application of a safeguard measure to this product – that is, like products. The EU also requested that the WTO Panel consider the US use of geographic exemptions for its partner countries with whom it was in a custom union (Canada and Mexico in NAFTA, together with Israel and Jordan). This required the Panel to investigate whether the USITC had explicitly established that imports from non-FTA sources alone caused or threatened serious injury (WTO, 2003a, 10.598).

The issue was again analysed by the WTO Panel for the ten product groups on a product-by-product basis, as defined in the USITC Reports. The Panel found that the USITC, as the competent authority, failed to establish reasonably and adequately that imports of the excluded partner countries did not cause or threaten injury in the cases of all ten product categories. As a result, the Panel found that the US action was inconsistent with the requirements of parallelism under Articles 2 and 4 of the Agreement on Safeguards (WTO, 2003a, 10.609, 10.623, 10.633, 10.643, 10.653, 10.660, 10.670, 10.680, 10.692 and 10.699).

5. Additional Findings

The WTO Panel did not address all of the claims made by the plaintiffs for reasons of judicial economy. These claims included: the proper definition of the imported product; like product and the domestic industry; serious injury; the consistency of product exclusions with the principle of parallelism; claims relating to Articles 5, 7, 8 and 9 of the Agreement on Safeguards; and Articles I, X, XII, XIX (except with regard to unforeseen developments) and XXIV of GATT 1994 (WTO, 2003a, 10.700). This is because the Panel argued that it was under no obligation to examine all of the claims made by a plaintiff. If a measure was found to be inconsistent with a particular provision, a Panel generally did not need to establish whether it was also inconsistent with other provisions (WTO, 2003a, 10.702).

The US WTO Appeal on Steel

Almost immediately after the publication of the WTO Panel Report on steel, the United States announced that it was appealing against the findings and that the Safeguard Measures would remain in place (US Department of State, 2003). The principal grounds for the US appeal were: that the WTO Panel findings with respect to unforeseen developments, the application of safeguard measures, determination of injury, causal link and parallelism were based upon error and erroneous findings on issues of law and legal

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interpretation of Article XIX of GATT 1994 and the Agreement on Safeguards (WTO, 2003b). In addition, the United States claimed that the Panel was not objective and did not set out the basic rationale behind its findings and recommendations.

The WTO Appellate Body published its Report on 10 November 2003 (WTO, 2003c). The WTO Panel findings were upheld with respect to the United States having failed to provide a reasoned and adequate explanation of unforeseen developments resulting in increased imports and parallelism in all cases and the determination of injury in the cases of Carbon Flat-Rolled Steel, Hot-Rolled Bar and Stainless Steel Rod [WTO, 2003c, 513(a), (b) and (e)].

The findings relating to the determination of injury and causal link in the cases of Tin Mill Products and Stainless Steel Wire, where the product definitions were inconsistent, were reversed [WTO, 2003c, 513(c) and (d)].

The Appellate Body found it unnecessary to consider the Panel finding as to whether the United States acted inconsistently with Articles 2.1, 3.1 and 4.2(b) of the Agreement on Safeguards, with respect to all cases except Tin Mill Products and Stainless Steel Wire, because the USITC had failed to demonstrate causal link [WTO, 2003c, 513(f)].

The United States was found to have failed to substantiate that the WTO Panel was not objective and the Appellate Body was satisfied that the Panel set out the basic rationale of its findings [WTO, 2003c, 513(h) and (i)]. The Appellate Body therefore recommended that the United States bring its steel safeguard measures into conformity with its obligations under the WTO.

The Removal of the US Steel Safeguard Measures and the Conclusion of the Trade Dispute

The publication of the adverse WTO Appellate Body Report on the US steel Safeguard Measures generated considerable controversy in the United States. It also presented President George W. Bush with a critical policy dilemma amid fears of a major trade war with the EU. While domestic US steel users and consumers welcomed the WTO Decision and urged the President to remove the safeguards, there was trenchant opposition from the domestic steel industry, among others.

Retaliatory action by the EU was permitted under the WTO DSU within 30 days after the publication and acceptance of the Appellate Body Report. President Bush therefore had until 10 December 2003 to decide upon his course of action before the EU’s retaliatory measures were implemented. The President’s policy dilemma was intensified by the US products targeted by the EU in its ‘long’ list of retaliatory measures. This list

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included exports of Florida citrus, Louisiana rice, California nuts and North Carolina pyjamas, along with a large number of steel products (Crutsinger, 2003). The products on the ‘long’ list had been specially selected by the EU because of their significance to key marginal states in the 2004 US Presidential Election. The President was therefore faced with a ‘negative sum’ domestic policy game that required an irreconcilable choice to be made between two different sets of key marginal states. In addition, the United States also came under substantial international pressure to abide by the agreed WTO rules on trade, which it had been instrumental in negotiating.

On 4 December 2003, USTR Robert Zoellick announced that the US steel Safeguard Measures were to be lifted on the grounds that the Action had worked, that the US economic situation had improved and that the domestic costs of the measures now outweighed their benefits (Zoellick, 2003). At the eleventh hour therefore, President Bush avoided a major potential trade war and the possible electoral consequences of EU retaliation in favour of upholding the international rules on trade. In so doing, he was forced to eschew the unilaterally protectionist sentiments of the domestic steel lobby and, possibly, sacrifice the key marginal steel states of Ohio, Pennsylvania and West Virginia in the 2004 Presidential Election.

7.8 THE EU–US STEEL DISPUTE: SOME CONCLUSIONS

This chapter outlines the key developments in the evolution of the steel dispute between the EU and the United States and its final resolution in December 2003. Its relatively speedy resolution is important in both the specific and broader contexts. The steel dispute pitched the world’s two leading traders against each other in an acrimonious dispute that could possibly have threatened the very existence of the multilateral regulation of international trade by the WTO. In the process however, it can be argued that the WTO Dispute Settlement Understanding (DSU) has emerged stronger and more credible as a result.

The fundamental problem facing the global steel industry is chronic over-capacity and excess supply, resulting from the rapid expansion of output in many emerging economies. The steel industry in many industrialised countries has been under severe cost pressures for several decades, leading to widespread restructuring – plant and firm closures along with substantial job losses – often aided by explicit or implicit state intervention. While the EU has made significant progress in restructuring its own steel industry in the last 20 years or so, successive US Administrations have delayed this process. Instead, they have relied on a series of

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countervailing duty and anti-dumping actions against cheap imports to protect the outdated and inefficient domestic large-integrated steel mill sector. The recent recession, which began in the United States in 2000 at the end of the long economic boom of the 1990s, can be seen as having brought matters to a head in the domestic steel sector after years of inaction. This necessitated US Government intervention via the 2002 steel Safeguard Measures.

The WTO Panel Report acknowledges that there was some merit in the USITC claims that the US steel industry was adversely affected by the increasing encroachment of imports. Nevertheless, it is evident that the primary motivation of the steel Safeguard Measures was to appease the protectionist sentiments of a domestic industry lobby, comprising both steel producers and labour unions, with significant political influence in the key marginal rust-belt states of Ohio, Pennsylvania and West Virginia. The WTO Panel findings indicate that the resultant protection was over and above that justified by the USITC investigation in terms of its product coverage and the magnitude of the tariff measures implemented. Further, President Bush imposed greater actual protection in many cases than the levels recommended by the consensus of the USITC Commissioners. The US steel Action however, probably achieved its initial political objectives, given that the Republican Party made critical gains in these key marginal states in the November 2002 mid-term elections to the House of Representatives.

Steel products are important intermediate inputs into a wide range of downstream manufacturing activities. Increased protection of a major upstream industry has important negative effective protection effects on consumers of the affected products. Any analysis of the economic impact of the US steel Action must therefore consider its indirect domestic effects. The major analytical studies of these indirect effects, including that of the USITC in September 2003, find significant negative downstream effects on steel users and final consumers. The critical debate has therefore been over the relative magnitudes of the positive direct effects on the steel industry and the negative indirect downstream effects. There is a substantial degree of consensus in the findings of the various studies of these effects, including the USITC Report of September 2003. All of the studies conclude that the indirect costs of the steel Safeguard Measures outweighed their benefits in terms of both employment and aggregate welfare. The US steel Action also had important domestic distribution effects, away from the private sector – in terms of firm revenues, profits and jobs – in favour of the US Government in the form of increased tariff revenue. Further, the Measures will almost certainly, although perhaps inadvertently, have increased the cost of the 2003 Iraq War to the US taxpayer.

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The primary reason for the success of the EU and the other plaintiffs in the WTO case was that the United States failed to demonstrate sufficient justification for its Safeguard Action under the WTO Agreement on Safeguards. This finding has two inter-related components:

There was insufficient evidence to support the US case in terms of unforeseen developments, increased imports (either absolute or relative), causation and parallelism.

For those steel products for which supporting evidence was provided, the US case was fatally flawed by shortcomings in the investigative methodology utilised by the USITC. In most part, this was because the USITC investigation was not product-specific and did not explicitly exclude other possible causal factors. The only exception to this was for Stainless Steel Rod.

The WTO Panel was also unhappy about the use of inconsistent product definitions for Tin Mill Products and Stainless Steel Wire by different US Trade Commissioners in deciding their course of action. As a result, the Panel found against the United States in all of the complaints involving these products, although this interpretation was reversed on appeal. The WTO Panel findings therefore raise important issues concerning the conduct of the US investigation by the USITC, the competent authority. This is particularly relevant in the light of the argument that the steel Safeguard was an expedient means to tackle the political and economic demands of the influential domestic steel constituency. This expediency is also reflected in the ‘broad-brush’ product coverage of the steel Safeguard Measures, greatly criticised by the EU and other plaintiffs as well as by the WTO Panel in its Report. This view is supported by the lengthy and substantial exclusion process conducted by the USITC and the US Department of Commerce in the first six months of the steel Measures.

A more constructive outcome of the 2002–2003 steel dispute between the EU and the United States is that the case highlights the power and incisiveness of the WTO dispute settlement system over that of the GATT 1947. Under the GATT 1947 system, the United States would have been able to veto any adverse Panel findings with impunity, leaving the Safeguard Measures in place until their natural expiration in March 2005. Instead, there were just 21 months between the initiation of the US Action on steel and its eventual removal in December 2003. This demonstrates both the greater speed and effectiveness of the WTO DSU in processing the complaint, expediting the Panel Report, the referral to the Appellate Body and the final resolution of the dispute. In so doing, the United States ‘blinked’ in that it opted to back out of prolonging an acrimonious trade dispute with

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potentially devastating global economic consequences. Instead, it chose to adhere to the primacy of the WTO as the arbiter of the rules under which international trade is conducted.

It is certainly conceivable that the EU–US steel dispute constituted a potentially lethal challenge to the continued survival of international trade regulation under the WTO system. In retrospect, the final resolution of the dispute may be seen as fatally curtailing the current US preference for unilateral action over multilateral co-operation. A recent Congressional background report on US–EU relations views the EU as the only global challenger capable of forcing the United States to acquiesce in its unilateral actions. It can be argued that it was the threat of effective sanction by the EU after the publication of the Appellate Body Report that resulted in the United States removing its Safeguard Measures. Nevertheless, even if there is an element of truth in this view, the fact that the world’s largest single economy has been compelled to move into conformity with its WTO obligations suggests that the efficacy of the WTO’s DSU has strengthened the multilateral trade system.

NOTE

The author is grateful for encouragement and comments from Bill Kerr and Nick Perdikis.

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