Lamy, Steel and the World

Fifty years ago, there was a country that, when it came to international trade issues, put the general welfare of the world economy ahead of its own.

That country was the leading economic power of its day — and its ideas about economics and finance determined the direction global policy would take. Of course, that country was the United States.

The United States is still the world’s leading economic power. But what happens when the erstwhile hegemon becomes too absorbed in internal matters, like West Virginia’s five electoral votes in the 2004 election?

Clearly, such horse trading opens the door for someone with different ideas on how the global economy should be organized. Count on Pascal Lamy, perhaps Europe’s most strategic-minded politician, to seize that opportunity.

The Europeans, interestingly enough, are taking great care to play by the rules in the steel dispute. The EU, in essence, is keen to make sure that even stiff European retaliation is fully justifiable. It hopes that the U.S. action, by contrast, looks more and more like a temper tantrum.

Not that the European approach is just one of suggesting a carrot. The EU is clever enough to be ready to use a stick. In this case, that means a carefully chosen set of countervailing tariffs designed with the U.S. electoral map in mind.

If, as many people believe, President Bush adopted the steel tariff to make sure that he will receive the electoral votes of steel producing states in 2004, the Europeans are ready to try to prove that doing so will entail the loss of other electoral votes where people are hurt by the European response.

Clearly Mr. Lamy is hoping that, one way or another, the administration will be forced to realize that the steel tariffs are all pain and no gain. When it does so, he will be ready with his European-style proposal to solve the problem.

All this is because Mr. Lamy’s real goal goes far beyond jobs for metal workers. He knows all too well that discussions of trade issues like steel can rapidly get bogged down in technical details.

What about those “hot rolled coils?” How many tons of steel can the United States actually produce? And so on. Such discussions rapidly become the province of industrial experts — and leave little room for sweeping strategic moves.

That explains Mr. Lamy’s unusual approach to his U.S. counterpart. In a recent letter to Bob Zoellick, Mr. Lamy avoided getting bogged down in details of the steel industry.

Instead, he made a simple and sweeping proposal that represents an attempt to defuse the entire steel issue once and for all. And, in defusing the crisis Mr. Lamy’s proposal would, in essence, establish a European-style approach to industrial policymaking — in the United States.

Mr. Lamy proposes a 2% tax on all steel sold in the United States, with the proceeds to go to solving the “legacy cost” problems of U.S. steel companies.

According to Mr. Lamy, removal of those costs would permit the U.S. steel industry to become competitive, thus removing the need for the punishing tariff on foreign steel.

But, details aside, it is important to consider this approach in a wider context. Essentially, he says that the EU is willing to globalize those legacy costs (by taxing all steel sold in the U.S., not just steel produced by U.S. companies.) That is a remarkably generous offer.

Savor the symbolism: Employing tax policy as a global tool to restore a fair competitive environment. For the proposal would use the tax code to effectively create a competitive playing field for steelworkers from Western Europe and Ukraine as well as U.S. steel consumers. Think of it as a global social contract — French style.

U.S. acceptance of the offer would amount to putting the country in the position of admitting that European social policy is superior for solving certain types of problems. That alone would be a tremendous victory for Europe. But Mr. Lamy has an even more ambitious goal in mind.

Most experts agree that the U.S. action probably violated WTO rules. Once the EU obtains an official ruling, the United States will face not just one, but two high profile international economic disputes — the other being the dispute over corporate tax breaks for exporters.

In all likelihood, the United States will be forced to back down in both areas. That will surely prove embarrassing for a country that has placed the Doha negotiations at the center of its international economic policy. More to the point, it betrays past U.S. policy.

In the formative years of the GATT — the precursor to the WTO — the United States was the rule maker that promoted free trade. It was even willing to make significant sacrifices towards that goal.

But those sacrifices were also part of a system that left the United States as the rulemaker. After all, it was the United States that created and nurtured the world trading system, so no wonder that the United States set the framework. The Europeans, on the other hand, were the source of the major violations and tensions in the system.

Now, the tables are turned. Of course, Europe is far from being the poster boy of international trade, as witnessed by the spats over bananas and beef a couple of years ago. But what is truly different in these formative years of the WTO is that the United States is more and more often the violator — and that Europe is intent on seizing the opportunity to become the rule maker.

How? Europe, by the way it frames its complaints to the WTO, will get to structure the nature of the case. That, in turn, will play a huge role in determining the nature of the implementing rules. In an area like world trade rules, where much of the “case law” remains to be determined, this amounts to a considerable amount of power.

In the weeks to come, then, it is imperative to remember that the bottom line for Mr. Lamy and the EU is not steel.

It is nothing less than wrestling the leadership of world economic regulation from the United States. U.S. violations of WTO rules are the exact route by which Europeans can assert their interpretation of those rules. By playing the good global citizen, Europe aims to become the world’s pace-setter. That is a goal that each of the fractious 15 EU countries would want to reach.