US Steel Decision Sends EU-US Trade Relations Spiralling Downwards

The latest shock to the Trans-Atlantic trade relationship

The announcement by the United States last week of its intention to impose unilateral safeguard measures of up to 30% on imports of steel products to protect its steel industry, marks a decisive new stage in the recent progressive deterioration of trade relations between the US and the EU. By itself, the decision would have strained relations between the two trade partners at the best of times. The American measures, however, come at a time when both sides have engaged in a series of controversial measures that have antagonised the other side.

Neither side is blameless in contributing towards the explosive cocktail of trade measures that penalise the commercial interests of the other. The EU, for its part, has:

• Approved controversial legislation imposing VAT on on-line services supplied to European consumers from outside its territory;
• Proposed new legislation that will impose penalties on non-EU airlines allegedly engaging in unfair pricing practices; and
• Dragged its heels in complying with WTO rulings against it, most notably in both the Bananas and Hormones cases.

Most significantly, the European Union has requested the WTO to determine how much compensation is due after the international trade regulator declared that US export subsidies under its Foreign Sales Corporations (FSC) legislation were illegal. The EU claims that it is entitled to around $4 billion in compensation in the form of suspension of concessions given by the EU to the US in previous rounds of WTO multilateral negotiations. The final figure will undoubtedly be less, but, equally, will probably set a new record for WTO-approved compensation. The WTO arbitrator's report on compensation is expected on 28 March 2002.

The United States, however, cannot claim to be innocent of engaging in unilateral protectionist acts. In the same period, the United States has imposed definitive anti-dumping duties on exports from the EU of enriched uranium (estimated to be worth US$ 500 million) and delayed the adoption of implementing legislation to comply with adverse WTO reports concerning its copyright and anti-dumping laws. On top of this, the new safeguard measures on steel products will effectively shut out EU steel producers from the US market.

Taken together, these developments have set the stage for the return of the bitter trade conflicts that characterised the relationship between the two trading partners in the mid-1980s. The fall-out from the decaying bilateral trade relationship will undoubtedly affect companies and industries on both sides of the Atlantic, particularly if the EU presses ahead with its claim for compensation before the WTO in the FSC Case and imposes punitive tariffs on US products in response. Equally, the EU is poised to adopt its own safeguard measures to protect its own steel industry from an expected influx of non-EU steel. Many EU and US companies that have nothing to do with these disputes are potentially exposed to the damaging side-effects that may well emerge.

Who is right in the US Steel Decision?

The arguments of the US and the EU for and against the adoption of safeguard measures are relatively simple. The United States believes that its safeguard measures on steel products imposed under Section 201 of the US Trade Act are compatible with the 1994 WTO Agreement on Safeguard Measures. The European Union believes they aren't.

Not surprisingly, the answer probably lies in the middle of these two extremes. The United States unquestionably has authority to impose these measures in the event of increased quantities of a product actually causing, or threatening to cause, serious injury to a domestic industry. The US also argues that the steel decision is consistent with its own domestic safeguard laws as well as the WTO disciplines. At a general level, the United States' position is correct.

The devil is, however, in the detail, and here the EU is likely to prevail. It is not the right of the US to impose these measures that the EU finds objectionable, but the way it has been done and, specifically, the methodology and analysis that has been applied in reaching this determination. In this respect, the US decision is open to challenge against the applicable WTO standards on a number of technical grounds, including the following:

• The underlying investigation by the US International Trade Commission may be fundamentally flawed as regards the injury analysis conducted by that agency;
• The exclusion of its NAFTA partners from the scope of the measures may be considered inconsistent with WTO requirements that such measures should be imposed on a non-discriminatory basis (except possibly developing countries);
• Even measured in absolute or relative terms towards US domestic production, the profile of foreign imports does not seem to meet the required criteria of "increased quantities" set out in WTO law;
• Arguably, the US has failed to exhaust the proper consultation and notification requirements set out in the WTO Safeguard Agreement prior to the adoption of the measures in question.

Consequently, on balance, the EU is likely to prevail in any WTO dispute settlement procedure initiated against this decision. The US track record for defending its safeguard laws in the WTO is certainly not good and neither is its record in anti-dumping and countervailing duties against steel imports in general. The critical question is whether prevailing in the WTO will help the EU steel industry, or EU industry in general for that matter.

Assessment of the options open to the EU in the Steel Case

Viewed from any perspective, the options open to the EU to deal with the problems caused by the US steel decision are not good in either the short or medium term. Assuming that the EU will wish to abide by the WTO rules, there are three possible options available. None of these options is mutually exclusive of the others.

Option 1: Request and receive compensation from the United States

WTO law permits the European Union to request compensation from the United States, in the form of suspension of tariffs on other EU products imported into its territory. This compensation should be equal to the financial levels of damage caused to EU steel exporters.

Simply because of the quantum of such a request, it is highly unlikely that the United States will accede to it. The political ramifications of doing so should not be excluded. Hence, the US will most likely reject such a claim and instead exacerbate the situation by responding that the EU should establish its claim in full before the WTO if such compensation is due.

Option 2: Suspension of substantially equivalent concessions

The EU can unilaterally decide to impose retaliatory measures against US imports and not necessarily in the steel sector. This could take the form of increased tariffs on US imports.

The problem here is that authority to take such action is subject to a technical requirement imposed by the WTO Safeguards Agreement that such action should be delayed for a period of three years, unless the safeguard measures in question are incompatible with the terms of that Agreement. Here, ironically the EU must gamble on the success of a WTO challenge to the compatibility of the US decision in order to secure the legitimacy of its own countermeasures.

Option 3: Initiate formal Dispute Settlement Proceedings in the WTO

This option has in fact been exercised. The EU has requested consultations with the United States in the WTO over the merits of the steel decision. This is effectively a mandatory pre-litigation step that must be exhausted before a full review of the WTO-compatibility of the measures can be carried out. Undoubtedly the EU will pursue this option until the measures are withdrawn.

Unfortunately, this is a long-term solution to the problem. By the time the case is decided by a WTO panel and then referred to the WTO Appellate Body and finally compensation, if any, is authorised, the US measures will probably have expired. The WTO is vague on whether retroactive compensation can be claimed, but, on balance, this is unlikely.

Conclusions on available options

The options available to the EU are therefore not particularly attractive. It is, of course, open to the EU to deviate from the WTO strictures and retaliate in the form of illegal action, but, in the medium to long term, this would be most detrimental to the EU's interest in securing a sustainable and reliable international framework for carrying out multilateral trade relations. The EU would therefore be well advised to tailor its response in line with the applicable international standards.

Why is the Steel Decision damaging for EU and US industries outside this sector?

The present debacle, and the various disputes that have recently emerged, should be of concern to all companies involved in trade between the EU and the US for four reasons.

First, the trend is markedly towards a breakdown in what was recently seen as a revival of EU-US trade relationship that had seen signs of deterioration in the mid-1990s. The personal chemistry between EU Trade Commissioner Pascal Lamy and his US counterpart, Robert Zoellink, was hoped to have been the start of a new era. This is especially true in relation to kick-starting the Doha Development Round of trade negotiations. However, the unilateral pursuit of national (and supranational) interests by both trading partners has obviously placed this relationship under immense strain.

Second, even if the EU is authorised to adopt compensatory measures (either as a consequence of the FSC dispute or because of the US steel decision), history has taught that it is often innocent commercial bystanders that are penalised by such action. This issue is dealt with in more detail in the next section.

Third, the political pressures on both sides of the dispute will test the WTO dispute settlement procedures to its limits, possible exposing the fragility of this system as a whole. The United States in particular can be expected to engage in similar kinds of delaying tactics that the EU used in the Bananas and Hormones cases to prolong, as far as legally possible, a final determination on the merits of the dispute and the terms of final compensation due, if any.

Finally, the WTO's Doha Round of Multilateral Trade Negotiations is still very much in its infancy. Discussions are expected to continue for many years. Naturally, on-going trade disputes between the two main members of this organisation do not bode well for the fostering of a constructive atmosphere for the carrying on of fruitful, if delicate, trade negotiations.

Previous illustrations of the damage caused by retaliatory measures

The EU has two possibilities to introduce increased tariffs on US products. First, it is entitled to adopt its own safeguard measures in response to the US steel decision and the EU steel industry has already lodged a request for such protection. Second, it is anticipating imminent permission from the WTO to adopt compensatory measures as a direct result of the WTO findings in the US FSC export subsidy case.

It is the second form of measures that presents the greatest threat to other EU and US industries outside the steel sector. History shows that the knock-on effect of these kinds of measures impact on sectors far removed from those engaged in the principal dispute. The Bananas and Hormones disputes well illustrate this point.

The Bananas Precedent

In 1997, a WTO dispute settlement panel, and then subsequently the WTO Appellate Body, found that the EU's import regime for bananas was illegal under the WTO rules. The EU prevaricated in adopting measures to comply with these WTO decisions and ultimately, the United States (one of the complainants) obtained WTO-approval for the suspension of concessions against EU products to a value of US$ 191.4 million per year. This compensation took the form of an increase in US tariffs on EU imports to American customers.

Among specific EU sectors that suffered as a result of increased US tariffs (sometimes up to 100%) were bed linen, bath products, folding cartons and boxes for luxury goods, lead acid batteries, luxury handbags and wallets, lithographs and coffee-making machines. Companies such as The Body Shop, Louis Vuitton and Gucci were a few of the many EU manufacturers who found that their exports to the US were subject to prohibitive increased tariff duties.

Ecuador, another complainant against the EU in the Bananas case, was also found by the WTO to be entitled to compensation to a value of US$ 201.6 million per annum. Instead of increasing tariff rates on imports of European products (because these were insufficient), Ecuador was authorised to suspend its commitments towards the EU in relation to: (i) the access by EU suppliers of wholesale trade services to its service market under the GATS; and (ii) the suspension of commitments to the EU under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPs) in relation to copyright rights, geographical indications and industrial designs. As a result, the rights of European companies to seek the protection of intellectual property rights in Ecuador were impeded.

The Hormones Precedent

Again in 1998, the WTO Appellate Body ruled that an import ban maintained by the EU on imports of US beef from cattle treated with growth-stimulating hormones, was unjustified under the WTO rules. Permission for compensation was sought by both the United States and Canada from the WTO and given to the value of US$ 116 million and CN$ 11.3 million, respectively.

In pursuit of this authority, in July 19, 1999, the United States announced the final list of products on which the United States imposed 100% ad valorem duties. The products targeted by these measures were mainly food products, ranging from various meats to mustard. The French wine industry was particularly hard hit by these new duties and saw its market share in the United States decline at a spectacular rate.

Who is most exposed?

(1) Non-EU Steel Producers and Exporters

The European Commission has now evaluated the request from the EU steel industry for such measures and presented a proposal to the EU Safeguards Committee (composed of representatives from each of the 15 EU Member States) on 12 March. It is highly likely that provisional safeguard measures will be imminently imposed.

The main problem in the adoption of safeguard measures by the EU is that they must also follow the rules contained in the WTO Safeguards Agreement. Hence, these measures should be imposed not only against US producers but also against producers from Japan, Brazil, Korea, Russia, etc. The existence of bilateral trade agreements with some of these countries may influence the design of the measures, but, on the whole, the countries affected will be bystanders to the main issues in hand.

(2) US Manufacturers, Exporters and Their EU Sales Networks

Evidently, the adoption of compensatory measures by the EU in either the FSC Case or as a result of the US Steel Decision will hit US manufacturers and exporters hardest. It may well also disrupt the marketing efforts of these companies inside Europe as well as their sales.

While the level of compensation that may be approved in the FSC Case is widely expected to be far less than the US$ 4 billion requested by the EU, it will undoubtedly be a large sum. The EU will be entitled to draw up a list of US imports that can be subjected to increased tariff duty rates. The value of these imports, on an annualised basis, should equal the amount of compensation authorised. Consequently, it may well be the case that increased EU tariffs are imposed on a significant proportion of US exports to the EU although the precise amount cannot be determined at this stage.

In theory, the EU is required to suspend concessions and impose tariffs on imports from the same sectors in which the illegal behaviour occurred. This now presents a problem in predicating which US goods may be hit, for two reasons:

- the illegal US export subsidy was generally available to all exporting US companies. Hence, the EU alleges that US aircraft manufacturers, software companies, heavy industrial machinery producers and even photographic film manufacturers were among the principal beneficiaries. The commercial activities of the recipient companies therefore span many sectors;

- while the EU is supposed to refrain from engaging in any linkage with other trade disputes when drawing up its proposed compensatory measures, politically at least, it must surely be difficult to avoid singling out the interests of US companies causing the EU trade problems.

(3) EU Importers and Industrial Users of US Products

European importers, distributors and industrial users of US products are also exposed, because they will have to pay higher duty rates on the importation of US-made goods.

All these elements lead to the same conclusion. The deterioration of EU-US trade relations will adversely affect many US and EU companies that have nothing to do with the steel industry and who have had no interest in US export tax subsidies. Both EU importers and consumers will also feel the damage caused by increased duties on US goods. This scenario could possibly have been avoided, if the US had not taken such a draconian decision to protect its steel industry. Earlier, the EU had indicated that it would be prepared to engage in meaningful discussions to try to settle the US Foreign Sales Corporation export tax dispute. Any residual goodwill on the part of the EU must now surely have evaporated.

For more information please contact David Marks on 020 7367 2136 or at [email protected]