Trade Act of 1974 on Euro Exchange Term Paper

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Trade Act of 1974 on Euro exchange rates?

Free Trade has been a key agenda for the past three presidents. In an expanding global market, tariffs and trade policies are more important today than they have been in the past. More and more countries are forming alliances such as the North American Free Trade Agreement (NAFTA), the Asian Alliance, and the European Union (EU). These trade agreements are meant to level the playing for all countries, both industrialized and emerging countries.

President Bush's trade policy is aimed at helping to generate American jobs, open markets to American products, and provide economic growth. Sometimes massive increases in imports can have a devastating effect on U.S. industries. [This has been the case for the U.S. steel Industry and is the issue addressed in Section 203 (B) (1) of the Trade Act of 1974. Foreign steel makers have had the luxury of government support which allowed them to have large capacity for expansion and as a result they have flooded the U.S. market with cheap imports. Since 1998, thirty percent of all U.S. steel producers have filed for bankruptcy as a result of falling steel prices in the U.S. The World Trade Organization allows countries who have been severely effected by changes in trade policy to take temporary actions to provide ailing relief to suffering industries. This is the premise behind the Presidential Proclamation issued by President Bush (Congressional Report, 1974).]

This measure will impose taxes on European steel products being imported into the United States from other countries. It effectively excludes NAFTA countries from this, however does effect Africa, the European Union, and the Asian Alliance. Tariffs on certain products, such as rolled steel bar can be as much as 30%. Other products such as Carbon alloy fitting sand flanges will carry a tariff of 13%. Eleven products will be effected by the import tariffs. The measure is temporary and will only last for three years. This time frame is supposed to ease foreign competition pressures from U.S. steel producers and allow them to undergo a re-structuring of the industry. After the time of the Trade Act is ended, these measures should allow for a more even global playing field in the steel industry (Office of the Press Secretary, 2002).

This amendment to trade policy caused an immediate outcry from European and Asian steel makers. They claim that these measures will severely hurt the industry in their own countries. Members of the EU claim that this measure will send the already ailing Euro plunging even deeper. Some threaten to retaliate with counter measures to protect their own interests.

In the year 2000, the Euro was averaging .88 to .90 U.S. Dollars. In 2001, the Euro rose to 1.19 U.S. Dollars. This began to drop in the fourth quarter of 2001 and has been on a steady decline since that time. In March of 2002 exchange rates took a sudden plunge down to 1.13 UD Dollars, however this is still will above the exchange rate of 2000 (Xrates.com, 2002). Members of the European Union, particularly Great Britain as outraged and blame the drop in price of the Euro on Bush's tariffs. However the Euro was in decline for a full four months before these acts were even announced and the Euro is still at a rate well above the U.S. Dollar as of 2000. The steel industry only accounts for a small portion of exports to the U.S. And it is doubtful whether one industry sector would have an effect on the total economy. It may have a short-term effect, but we must remember that the steel industry is only one small part of the total European economy and is not strong enough to make or break the economy, as some would lead you to believe. This report will demonstrate that the Euro will be affected little, if at all by the Tariffs imposed by the U.S. On foreign steel.

Size of the U.S.-European import-export trade.

In 1999, EU countries traded 8.7 million metric tonnes among themselves. They exported 13.6 million metric tonnes to NAFTA countries. Their biggest destination was Central and South America at 62.5 million metric tonnes. Total exports of the EU in 1999 were 128.1 million metric tonnes.

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NAFTA countries only exported 0.4 million metric tonnes to the EU. Most of its steel was used domestically at 13.6 million metric For the EU exports-imports = -113.9. This same ratio for NAFTA countries is + 8.1(World Steel, 1999).

The following chart sums up this information:

Scrap: consumption, trade and apparent domestic supply, 1999

PRIVATE

Consumption

- Imports

+ Exports

Apparent

=Domestic

Supply

Austria

1.8

0.6

0.6

1.7

Belgium-Luxembourg

6.3

3.5

1.8

4.6

Finland

1.2

0.3

0.2

1.1

France

9.8

2.9

3.8

10.6

FR Germany

17.6

2.9

8.5

23.2

Italy

16.7

4.3

0.1

12.5

Netherlands

1.3

1.4

2.5

2.4

Spain

12.2

5.6

0.0

6.6

Sweden

2.5

0.4

0.4

2.5

United Kingdom

5.9

0.2

3.6

9.3

Other EU

3.0

0.9

0.6

2.6

European Union (15)

78.2

23.0

22.0

77.2

Canada

8.5

1.6

1.9

8.8

Mexico

7.3

1.4

0.1

6.0

United States

55.4

3.7

5.5

57.2

NAFTA

71.1

6.7

7.5

72.0

(Source: Scrap: consumption, trade and apparent domestic supply, 1999.Trends & Indicators: Miscellaneous Data. http://www.worldsteel.org/trends_misc/misc16)

These numbers support the argument that the steel exports to the U.S. will not cause the Euro to "Crash." The EU exports 5 times more steel to South America than it does to the United States. In addition, the EU imports more steel than it exports. The media, particularly the BBC is making claims that the tariffs spell disaster for steel exports and the Euro as well as the British pound, but these numbers simply do not reflect that it. The amount of steel exported to the U.S. is small compared to that shipped else where and only accounts for approximately 10% of the total EU exports. It is unlikely that the decline of 10% of the market will have as drastic effect as the European steel workers and the new media would have you believe. Let us now take a look at their arguments.

Mass Media Reactions to the Tariffs

According to Crowley, 2002. A world-renowned steel economist called the tariffs "Damaging" to the U.S. economy and sets a dangerous precedent that could cost tens of thousands of layoffs in steel using industries. In this same article economist Robert W. Crandall called the tariffs "draconian" and claims that they are not the compromise, as President Bush calls them. They called it a "damaging economic blow that could delay the U.S. economy's recovery by increasing the cost of steel-made products like automobiles, cutting the demand for them" (Crowley, 2002).

Most recently, U.S. steel imports have dropped from 34.4 million tons in 2000 to about 27 million tons in 2001, according the U.S. Department of Commerce (Crowley, 2002).In this same article by Crowley, Robert Crandall the problems with the U.S. steel industry are not foreign imports, but rather excess U.S. capacity, huge retiree health care and pension costs for integrated mills, competition from more efficient U.S. mini-mills, and weakness in worldwide steel demand (Crowley, 2002). An estimated 50% of U.S. steel imports already are protected by tariffs. Despite these tariffs and a long history of voluntary export restraints by our trading partners, integrated steel mills are still not competitive. Crandall added that the U.S. market prices will recover when demand worldwide recovers, and the industry reduces production capacity (Crowley, 2002). He also points out that the new tariffs will destroy the agreement made on February 8, to cut global steel production by more than 100 tons. Crandall calls these tariffs a contradiction in policy by the Bush administration. He fears that this could start a trade war with Europe and Asia. (Crowley, 2002). Many economists on both sides of the ocean share his sentiments, particularly those in which the ailing steel industry has made its own bed, and now must lay in it.

As a reaction to the tariffs, the BBC notes that Japan and the European Union were quick to file complaints with the World Trade Organization. The EU fears that it could be hit by a wave of cheap far eastern steel displaced from the U.S. market. But the U.S. argues that the tariffs, aimed at shielding ailing steel makers from cheap imports long enough to allow them to restructure, are permitted under WTO rules (BBC News, 2002). As far as fears of a flood of cheap steel to the European market, let us.....

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