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Mom, apple pie, and steel. At least that’s how boosters of the beleaguered U.S. steel industry are framing their arguments before the International Trade Commission, which last week finished eight marathon days of hearings on whether to erect trade barriers to protect domestic steel. Held at the request of President George W. Bush, the hearings are something of an anomaly for the ostensibly free-trade administration, which was swayed by pleas from an industry in crisis — and its vociferous supporters on Capitol Hill. But in the wake of the Sept. 11 attacks, the political dynamics of steel protectionism have undergone a fundamental shift. On one hand, the attacks underscore the need for a secure supply of domestic steel for national defense. “Our country needs a steel industry,” said Sen. Orrin Hatch, R-Utah, one of more than 35 members of Congress who testified in favor of import restrictions at the hearing. “In the years ahead in this nation’s battle against terrorism, it may be essential — and is certainly preferable — that the U.S. is able to build the necessary weapons and materiel from domestic steel production sources.” At the same time, many of the countries that export steel to the United States — Russia, India, and Indonesia, for example — have assumed heightened importance as strategic allies. “The last thing we need during a war and recession is a protectionist policy employed against countries we are trying to forge into a coalition,” testified William Lane, director of governmental affairs for Caterpillar Inc., one of the largest steel consumers and an opponent of import restrictions. That most of the U.S. steel industry has been struggling is one of the few undisputed facts in the gargantuan proceedings, which involve lawyers from more than 65 law firms, including giants like Skadden, Arps, Slate, Meagher & Flom; Shearman & Sterling; Hogan & Hartson; O’Melveny & Myers; and Kirkland & Ellis. Since 1996, 24 steel makers have filed for bankruptcy, and 31,000 workers have lost their jobs. In general, steel prices are at a 20-year low, and U.S. companies have been hard-pressed to stay competitive. For example, American producers managed to cut the cost of producing a ton of flat-rolled steel by $30, but the market price has fallen $93 per ton. At the end of 2000, steel mills in the United States were operating at less than 65 percent of capacity. During this same time period, imports of all steel products have increased 31 percent. The basic question before the ITC is: Are imports a “substantial cause of serious injury” to the domestic steel industry? In a June 22 letter, U.S. Trade Representative Robert Zoellick formally instructed ITC Chairman Stephen Koplan to institute a so-called global safeguard investigation. The action is brought under Section 201 of the Trade Act of 1974, a seldom-used provision that allows the United States to throw up trade barriers such as quotas or tariffs to give a domestic industry temporary relief from all import competition. The last time an administration made such a request of the ITC was in 1985. “The U.S. steel industry is suffering financially, with marked declines in profits, returns on investment, and market share,” wrote Zoellick, acting on instructions from Bush. American steel makers, he continued, have “been affected by a 50-year legacy of foreign government intervention in the market and direct financial support of their steel industries. The result has been significant excess capacity, inefficient production, and a glut of steel on world markets.” But unlike anti-dumping cases, a Section 201 investigation needn’t prove steel imports are being traded unfairly — it’s enough just to show that the increase in imports is seriously hurting domestic producers. “There’s never been a case like this, in terms of its breadth, its scope, and the president’s involvement,” says David “Skip” Hartquist, a Washington, D.C.-based partner at Collier Shannon Scott who represents U.S. steel companies that make specialty stainless products. He notes that the ITC case is just one prong of the administration’s efforts on steel, which also include negotiating with trading partners to get rid of unnecessary global overproduction, and eliminating market-distorting practices like subsidies. Given the intense political interest in the outcome of the case, lawyers for foreign steel companies say they have been impressed with how the six ITC commissioners — three Republicans and three Democrats, serving staggered nine-year terms — have handled the hearings, which have run from 9 a.m. to 9 p.m. on some days. “They are treating it as a serious issue, not a given,” says one respondent’s lawyer, who asked not to be identified. “Just because the steel industry says, ‘I want it,’ they aren’t automatically giving it to them. They are doing a very professional job.” A decision is due by Oct. 22, and if at least three commissioners vote that injury has occurred, the commission has 60 days to complete the remedy phase. The ITC’s recommendations are then forwarded to the president, who has total discretion to decide what type of relief, if any, to grant. Perhaps the most difficult question facing the commissioners is how to break down the industry for analysis. Unlike previous Section 201 investigations, which focused on specific products like apple juice, Harley-Davidson motorcycles, or lamb meat, steel as an industry encompasses hundreds of different products. Under the statute, the ITC needs to show that imports are injuring domestic products that are “like or directly competitive with the imported article.” The question is: Can steel H beams, for example, be lumped together with steel pipes, or railroad tracks, or flanges? The position of the United Steelworkers of America and some members of Congress is that the entire steel industry should be treated as one entity. “Our industry needs relief, not just selective subsets,” union President Leo Gerard told the ITC. Rep. Phil English, R-Pa., agrees, and he expanded on this point in his testimony. “To grant relief for certain products will simply encourage a reallocation of productive resources from the affected product to another,” he said. When the USTR ordered the Section 201 investigation, it broke steel down into four categories: flat-rolled, which accounts for about 65 percent to 70 percent of the industry; long products, which range from rebar to rails to staples; pipe and tube; and specialty. “There’s not a lot of precedent on what ‘like or directly competitive’ products should mean,” says Robert Lighthizer, a D.C.-based partner at Skadden Arps who represents U.S. flat-rolled producers, including Bethlehem Steel and U.S. Steel. Lighthizer argues that the ITC should treat various forms of flat-rolled steel, which is used in things like refrigerators, car bodies, and ships, as a single category. “The purpose of the statute is to preserve productive resources in the U.S.,” he says. “You have to do so in a comprehensive way, because if you don’t, you’ll lose the part of the product cycle you don’t grant relief to.” But Willkie Farr & Gallagher partner William Barringer, one of the lead counsel for foreign steel producers, argues that the categories should be much narrower. When the ITC sent out questionnaires to gather market data on steel, it broke the industry down into 33 categories. To Barringer, that number is more appropriate. “The only reason [opposing counsel] is pushing so hard for four ‘like product’ categories instead of 33,” he says, “is because as a political matter, if you only have one vote for the entire flat-rolled industry, it’s harder to vote no.” U.S. companies that rely on steel to make their products have also been a major presence at the hearings, many pleading that specific imported steel products be exempted from tariffs or quotas. For example, Ross Rivard of the NSK Corp., which makes ball bearings, testified that the kind of steel his company needs isn’t even made in the United States. Other steel consumers stressed that imposing tariffs or quotas on imported steel will raise the price of products made with steel, a move that will ripple through the economy. A study by the Consuming Industries Trade Action Coalition found that quotas resulting from a Section 201 investigation could cost consumers as much as $2.34 billion a year. Also pushing for an exemption from the proceedings is Canada — a move backed by the steel unions, the U.S. Congressional Steel Caucus, and many U.S. companies. The rationale is that the steel trade between the two countries is balanced, with U.S. exports to Canada growing more rapidly than Canadian exports to the United States. “Canada is not injuring the domestic industry,” says Hartquist of Collier Shannon, who also represents Canadian steel makers. “Their prices are higher, and they are not causing a disruption.” Under Article 802 of the North American Free Trade Agreement, imports from a member country are to be excluded from global safeguard measures unless the imports are a “substantial share” of the total, and “contribute importantly” to the injury. With considerably less support, Mexico is also arguing it should be exempted. “The standard applicable to imports from Mexico is the same as the standard applicable to imports from Canada,” testified Javier Mancera, minister of trade affairs with the Mexican Embassy in Washington. “Mexico is not the cause of any problems that the U.S. domestic industry might be facing.” But some domestic producers, such as stainless flange maker Gerlin Inc., claim Mexican imports are being sold at steep discounts in the United States. Once the ITC determines the various categories of steel products, the task will be to decide whether imports are largely to blame for each sector’s problems. But lawyers from foreign steel companies say other factors are far more significant. “The problem with the industry is that a number of mills do not have the physical facilities to produce steel competitively,” says Barringer of Willkie Farr. “The sad thing is that with the inflexibility of this industry, constantly blaming everything on imports, it didn’t restructure.” Other issues cited by respondents’ lawyers include poor investment decisions on the part of U.S. steel companies, the exchange rate, the business cycle, and a rise in the cost of raw materials. Furthermore, not all areas of the steel industry are in trouble — in some product segments, the industry is doing well, and enjoying steady growth. Also complicating the analysis is the fact that most steel imports have fallen across the board this year. Commissioner Jennifer Hillman grappled with the issue during the Sept. 28 hearing. “How much weight do we place on declining imports in the first half of 2001, when we’re also looking at a decline in consumption?” she mused. “We have all these WTO panels telling us there should be a sudden, sharp surge in imports” to support a finding of injury. In theory, a Section 201 action does not violate U.S. obligations to the World Trade Organization. In reality, virtually every time any country has attempted an equivalent maneuver, the action has been challenged before the WTO dispute settlement body. Indeed, lawyers from both sides of the proceedings say a WTO fight is all but certain should the ITC make a finding of injury, with the distinct possibility that steel will join beef and bananas and corporate tax breaks as a source of global trade friction. Lighthizer of Skadden Arps predicts there is a “serious possibility” that the steel proceedings will deteriorate into a trade war, especially since the WTO tends to side with complainants. Barringer agrees the case is ultimately WTO-bound, but predicts that the ITC commissioners “first and foremost will administer U.S. law, and will not do something to please the WTO.”

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