Bush Faces Tough Choices on Steel Imports
Under Lobbying Pressure, President Must Decide by Wednesday Whether to Act to Aid U.S. Industry

By Steven Pearlstein and Mike Allen
Washington Post Staff Writers
Thursday, February 28, 2002; Page A04

If the president does too little, he could trigger another round of steel company bankruptcies and layoffs, jeopardize passage of his cherished free-trade legislation, sacrifice control of the House of Representatives -- and perhaps endanger prospects for own reelection in 2004.

On the other hand, if he does too much, it could cause a trade war with Europe, create budget-busting new entitlements for American workers, jeopardize jobs in steel-using companies and invite other industries to demand similar trade barriers and government bailouts.

And if, as aides now indicate, President Bush goes with a Solomonic compromise, he may not please anybody while failing to achieve his original goal of securing a sustainable future for the perennially beleaguered American steel industry.

Next Wednesday is the deadline for the White House to decide what steps, if any, the federal government will take to stem the flow of foreign steel into the United States. The decision is now the focus of intense lobbying, including a planned rally today by thousands of steelworkers on the Ellipse, across from the White House.

Cabinet members, including Vice President Cheney, have already met eight times on the issue, including a session as recently as Tuesday. Dozens of sub-Cabinet meetings also have been held under the direction of Gary R. Edson, Bush's top aide on international economic issues. Two of the president's top political advisers, Karl Rove and Ken Mehlman, have run a steady stream of meetings with business and union leaders and key members of Congress. The topic is so politically sensitive that no official has been willing to discuss it publicly.

As of yesterday, administration sources said, no final decision had been made.

The administration's effort to save the U.S. steel industry was launched last June when Bush formally asked the International Trade Commission to determine whether a surge in imports had seriously damaged the U.S. industry.

At the same time, he ordered trade officials to launch negotiations with foreign governments aimed at eliminating trade barriers and government subsidies that have generated endemic oversupply in the global steel market.

Industry officials hoped that the ITC process would lead to substantial tariffs on steel imports that would raise domestic steel prices from their lowest levels in 20 years while giving the industry the financial breathing room it needed to consolidate into fewer, larger and more modern producers. In the last three years, 31 steel companies have filed for bankruptcy protection -- mostly the older, integrated steelmakers such as Bethlehem Steel Corp. and LTV Corp. that use huge, coal-fired blast furnaces to turn ore into metal. More recently, more modern minimills, which turn scrap metal into new steel, reported that they could no longer make enough to raise new capital.

For their part, the steelworkers union looked to the White House initiative as the only hope to forestall another round of the layoffs, plant closures and bankruptcies that have cut their ranks by 20,000 since 1997 and threatened retirement benefits for more than a half-million retirees.

At the White House, the president and his political advisers saw in the steel initiative a chance to increase Republican strength among union households while realigning the politics of steel-sensitive swing states of the industrial Midwest.

Political strategists calculate that as many as six House seats in this year's elections -- exactly the number it would take for Republicans to keep control of the chamber -- hinge on the fallout from the steel decision.

"These seats could put Dick Gephardt in the speaker's chair," said Howard Wolfson, executive director of the Democratic Congressional Campaign Committee.

And for the president, the steel belt provides a crucial battleground for his own reelection. The White House strategy calls for the president to make inroads in Pennsylvania, where his loss by 5 percentage points to Vice President Al Gore was one of his bitterest disappointments of the tight 2000 race, while holding on to Ohio, which he won by a similar margin. But perhaps no state better demonstrates the importance of the steel issue than West Virginia, where high-profile promises to protect the industry allowed Bush and Cheney to score a crucial upset in 2000, making him the first non-incumbent Republican to carry the state since 1928.

As recently as December, it looked like all the pieces for a successful steel initiative were falling into place.

The ITC, having found that the U.S. industry had sustained serious injury from imports, recommended that the president impose some combination of import quotas and tariffs ranging from 15 percent to 40 percent, depending on the type of steel.

In negotiations in Paris, major steel-producing countries identified more than 100 million tons of annual steel production that was scheduled to be retired by 2005, or about half of the global overcapacity problem.

And at home, U.S. Steel Corp., the largest and most profitable of the surviving integrated steelmakers, boldly proposed to buy Bethlehem Steel and as many as three other rivals, if the federal government agreed to assume some of the health-care and pension obligations to the companies' retirees. The company proposal had the blessing of the steelworkers union, which agreed to help finance the deal by accepting more flexible work rules and reductions in benefits.

More recently, however, this plan to save the American steel industry began to unravel.

Facing the prospect of tariffs that could raise domestic steel prices by as much as 10 percent, steel-consuming industries -- makers of tractors, washing machine, airplane fasteners and auto parts -- have launched a lobbying counteroffensive, arguing that they would lose sales if they are forced to pay more than foreign competitors for a key raw material. And just yesterday, port directors and shipping companies from around the country descended on the Capitol, arguing that thousands of jobs in their sector are at stake if steel imports dry up.

As is often the case, a bidding war has broken out among economic consultants to show how many jobs will be "saved" and "lost" if one side or the other prevails.But there is no debate that a 40 percent tariffs on steel would create a sizable pool of winners and losers, shifting jobs and incomes among companies, industries, regions and countries.

These economic crosscurrents have now muddied the political waters. Eight members of the Senate, including Louisiana's John Breaux, a key moderate Democrat, and Trent Lott of Mississippi, the Republican leader, wrote the president this week urging him to avoid "prohibitive" tariffs or quotas. Reflecting the views of Republican House leaders, Speaker Dennis J. Hastert of Illinois told his local newspaper that he's against any tariffs or quotas at all.

Weighing in on the opposite side, however, are several Republican congressmen from steel-producing districts who cast difficult -- and ultimately deciding votes -- last December to give the president authority to submit new trade treaties to an up-or-down vote in Congress, referred to by the administration as trade promotion authority. They have warned the White House that they might have to abandon the president on the next vote if he fails to provide sufficient help to steel communities to make the transition to a free-trade environment.

"I'd hate to speculate on the likely effect on the administration's trade promotion authority if they walked away from [this steel decision]," said Rep. Phil English (R-Pa.), whose district includes a large steel plant that is now foreign-owned.

Rep. Robert W. Ney (R-Ohio) also said this week that if Bush doesn't find a way to make free trade into fair trade for the 9,000 steelworkers in his district, "it will make me look very differently at future trade bills."

According to industry lobbyists, administration officials have now begun to gauge reaction to a tariffs compromise somewhere between the 20 percent cited by the ITC majority and the 40 percent being demanded by union leaders and industry executives. The reaction has been hardly encouraging.

"Twenty percent will be just as devastating as 40," declared Calman Cohen, president of the Emergency Committee for American Trade, a business group that opposes steel tariffs.

"Anything less than 40 percent will be meaningless and unacceptable," said Rep. Peter J. Visclosky (D-Ind.), vice chairman of the Congressional Steel Caucus.

Meanwhile, after encouraging U.S. Steel to push ahead with its industry consolidation plan, the administration has reportedly rejected the idea of the government picking up some of the "legacy costs" of the industry's retirees, which for some companies now run as high as $100 per ton of steel.

U.S. Steel Chairman Thomas J. Usher had told administration officials that these costs would soon drive all but the strongest of the integrated steelmakers into a messy and brutal bankruptcy process in which old plants would be shuttered, efficient ones sold off and much of the obligation for retiree pension and health benefits shifted to federal and state governments.

By assuming some of those costs up-front, Usher argued, the government could speed the process, help keep the industry out of the hands of foreigners, buffer the blow to steel communities and save the government money in the long run.

In the end, however, administration officials concluded that a bailout for the steel industry would set a dangerous precedent, inviting similar demands from other industries such as textiles and wood products that have also been hard hit by imports. There was also a profound reluctance to "reward" the old-line unionized companies that had got into trouble in the first place by providing overly generous health and retirement plans.

"Legacy costs are off the table," said one official familiar with the administration's deliberation.

Instead, sources said Bush will argue for a more "market-based" proposal to modestly expand existing trade adjustment assistance to workers and communities hurt by import competition. The president will also emphasize his proposal to provide tax credits to help any laid off or low-income worker purchase private health insurance.

If domestic considerations weren't enough to complicate the White House's steel deliberations, there are also strong international pressures on the issue.

Brazil has warned that any move by the United States to impose tariffs or quotas on steel would scuttle talks aimed at creating a free-trade zone in the western hemisphere. And Russian officials have said it won't make it any easier to help with the war on terrorism if the United States deals a blow to one of Russia's major export industries.

The clearest warnings, however, have come from European officials who have threatened to pull out of the talks aimed at cutting global steel capacity if barriers to steel imports are erected by the United States. And European Trade Minister Pascal Lamy has warned his American counterpart, Robert B. Zoellick, that if U.S. tariffs cause excess steel to be dumped in the European market, the European Union would have no choice but to impose its own protective tariffs, setting the stage for a wider trade war.

Staff writer Glenn Kessler contributed to this report.