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Prepared Testimony of
Under Secretary of Commerce for International Trade
Grant D. Aldonas
Before the House Committee on Small Business

September 25, 2002

Thank you, Chairman Manzullo, Congresswoman Velazquez, and Members of the Committee for inviting me to testify before the Small Business Committee. Mr. Chairman, I want to thank you for holding this hearing. Under your leadership, the Committee has proved a consistent advocate for American small businesses, particularly the many firms that represent the heart of American manufacturing.

One of the many points on which I know we agree is the need to expand export markets and level the playing field for our small and medium-sized manufacturers. Critics of international trade often claim that trade agreements are for the large multinationals. We know that trade agreements, in fact, offer substantial benefits to American small businesses. The reason is plain. While larger companies have the option of investing behind (and often taking advantage of) foreign trade barriers, smaller American companies generally have only one option - exporting.

Mr. Chairman, as you have often indicated to me, an effective trade policy will also help those many American small businesses that provide the majority of American jobs and sustain our economy through constant innovation and investment. You have been particularly innovative in developing market-opening initiatives on behalf of the small businesses that make up 97 percent of all American exporters.

At the same time, in the course of the recent congressional debate over Trade Promotion Authority (TPA), you and many of the Committee members emphasized the need to rebuild cooperation between Congress and the Executive Branch over our trade policy, and between the government and the people who our trade policy is designed to serve.

In fact, perhaps the single most important step the President has taken in terms of trade policy is not the passage of TPA or the launch of a new round of multilateral trade negotiations in the World Trade Organization. The single most important step the President has taken is his effort, along with that of Secretary Evans and Ambassador Zoellick, to restore the trust that must prevail over trade policy if we are to secure the benefits of the world trading system for American workers, manufacturers, and farmers.

The blunt truth is that we can only expect the American people to support an aggressive, forward-looking trade agenda if we can assure them - and you as their elected representatives - that we will look out for their interests at the negotiating table. We must be willing to confront and challenge the trade barriers and other challenges facing our workers and firms in the international marketplace and we must ensure that the rules of the game are clear and that the players follow the rules.

STEEL IMPORTS HAVE INJURED DOMESTIC STEEL FIRMS AND WORKERS

The steel industry worldwide is one of the most distorted in the global marketplace. Today, the industry confronts the legacy of 50 years of government intervention. A single statistic tells the story. Prior to the last decade of privatizations, governments owned 75 percent of the steel industry worldwide. Despite the intervening progress, governments still retain ownership of 25 percent of the industry.

Since the President initiated action under section 201 of the Trade Act of 1974, I have heard critics of the action claim that the U.S. steel industry is the source of its own problems. The front pages and editorials - which often seem to be one and the same when it comes to criticizing the President's action on steel - seem to suggest that the U.S. steel industry is a monolithic entity made up of nothing but old, uncompetitive integrated mills that must plead for protection in order to stay in business.

What that ignores, of course, is the strong record of adjustment and innovation that has characterized some firms in the U.S. industry over the last 20 years. Half of U.S. steel is produced in new "minimills" with the latest electric arc furnace technology, which exhibits some of the highest efficiency of any steel manufacturers in the world. In the other half of the steel companies, particularly on the West Coast, we have seen firms adjust their production to take advantage of synergies found in combining their finishing operations with foreign firms who export slab to the U.S. market. And, within the existing integrated sector, we have seen firms steadily drive up the value chain to find more profitable niche markets that require quality products that only those integrated firms can produce with current steel-making technology.

That is not a record of wholescale failure or mismanagement, as steel's critics often suggest. It is a record of substantial adjustment and reformation in response to the pressures of the market and competition from the foreign firms that benefit from the assistance and intervention of their government in the marketplace. In fact, foreign government intervention in the steel industry has contributed to a 200 million ton glut of excess capacity in the industry globally. The net effect of that glut has been a death spiral in prices, sharp declines in capacity utilization, declining employment, and a negative return on capital that now inhibits integrated steel firms from adjusting further.

PRESIDENT BUSH'S AGENDA ON STEEL

President Bush confronted this situation upon taking office. To address the fundamental problems affecting the industry, the President proposed a three-point plan. This includes WTO consistent temporary safeguard measures - to provide breathing room for our industry while it adjusts to import competition - as well as international talks to eliminate excess inefficient global capacity and market-distorting practices, such as subsidies, that have led to current conditions. While our trading partners often prefer to label American trade policy on steel as unilateralist, no one should suggest that the President's approach to the steel crisis was anything other than an attempt to develop a multilateral approach.

Indeed, the first action the President took was to invite all of the steel-producing nations to the negotiating table to develop a common solution. He sought one that would address the immediate problem of excess capacity in the marketplace and then create new disciplines on government intervention in the market to ensure that we would not repeat the cycle that has dogged the industry for many years - that of foreign intervention in the market on behalf of their industry which, in turn, invited a U.S. response under its trade laws.

I had the privilege of representing the President and our country in those negotiations. I am pleased to report that the countries participating in these discussions have forecasted to the elimination of 128 million tons of excess capacity over the next three years. On the discipline subsidies and market distortions, the President has put forward what can be described safely as the most forward-leaning proposal ever to eliminate government intervention in the steel industry, one that could well set a model for the trading system generally.

Our efforts to find a multilateral solution to the industry's problems are consistent with the direction we have received from both the President and Secretary Evans. Our goal is to cut to the root of trade problems, rather than simply conducting investigations under U.S. trade laws. What the President's approach emphasized was the need to find a lasting solution - one that restores market conditions - to the global steel trade.

At the time he launched his multilateral initiative, the President also laid down a marker for our trading partners. He initiated an investigation under section 201 to determine whether the U.S. industry had been seriously injured by reasons of imports stemming from the global glut of excess capacity. Simultaneously, the President has launched an effort to solve one of the underlying problems in the industry - global overcapacity in steel, much of which was financed by government intervention over the last 40 years.


THE SAFEGUARD REMEDY WAS DESIGNED TO ADDRESS INJURIES LIKE THOSE TO THE U.S. STEEL INDUSTRY

In evaluating the action taken under section 201, it is important to remember that the relief provided by the U.S. safeguard law and the WTO safeguard agreement was designed to respond to those very conditions that the U.S. industry now faces. The International Trade Commission (ITC) conducted a thorough investigation into whether the U.S. steel industry has been injured by imports flooding the U.S. market. They found that imports had surged, U.S. producers had sustained injuries, and effects were still being felt throughout the industry. And they recommended that temporary tariffs be imposed on imported steel.

After much deliberation, the President decided that while the Administration worked to address the underlying problems of global overcapacity and market distortions, he would accept the recommendation of the ITC and provide temporary relief to American steel companies and workers in the form of short-term tariff increases on some steel imports. In fact, one of the reasons that the President took this step was his belief that a viable U.S. steel industry is beneficial to the long-term success of U.S. steel users and the U.S. economy.

Perhaps most importantly, I want to assure you, Mr. Chairman, and the members of the Committee, the President's action was not taken without consideration of the downstream effects of imposing the tariffs. We understood that there would be repercussions from the imposition of the tariffs. And, while we could not know the precise effects, it was also clear that the imposition of the tariffs was likely to have the greatest impact on those downstream manufacturers that lacked the market power either to exact lower prices from their steel suppliers or the ability to pass on any price increases to their customers. Thus, while some small firms may have been harmed by the steel price increases, this problem is in part a result of the global steel problem.

Prices have risen for a number of reasons. One reason is industry restructuring that has begun to occur, such as the closing of LTV steel. Industry restructuring was an intended and expected reaction to the 201 tariffs. This is critical for the long-term health and survival of the overall U.S. steel industry, which is equally critical to the long-term health and viability of U.S. steel users. In addition, the U.S. market has exhibited strong consumer demand for cars, appliances, and other goods that use steel. This increased consumer demand, coupled with an increase in consumer spending due to the President's tax cut and a general improvement in the economy, had an impact on prices.

While there have been some short-term adjustments in steel-prices, the steel market seems to be stabilizing and spot prices appear to be leveling for the fall and winter season. Long-term contract prices are currently being negotiated. With this I believe the impact on small businesses, which are most susceptible to changes in spot markets, will stabilize as the market levels.

OUR APPROACH HAS THE LEAST MARKET-DISTORTING EFFECT, WHILE STILL PROVIDING THE NECESSARY RELIEF INTENDED BY OUR TRADE LAWS.

In order to meet the President's objective of providing relief where needed without overburdening steel consumers, the President directed the Department of Commerce and the Office of the United States Trade Representative to establish an ongoing process to exclude products that are not sufficiently available from domestic sources. In addition, as part of his decision to enact the steel safeguard, the President excluded imports from our free trade partners, including Canada, Mexico, Israel, and Jordan, and most developing countries.

Since March 5th, the Administration reviewed over 2,500 requests for exclusions. We carefully considered all information submitted by interested parties and met with all parties that wanted to discuss concerns. This was a difficult and technical process, requiring the analysis of an enormous amount of information regarding U.S. consumers' product needs and U.S. steel producers' production capabilities. Commerce and USTR only granted exclusions to those products that are not sufficiently available from U.S. producers at the quality required and would not undermine the effectiveness of the safeguard on steel products.

In total, Commerce and the USTR excluded 727 products from the steel safeguard measures. The 2001 import volume of the excluded products was approximately 3.2 million metric tons, or approximately 25% of the total 2001 import volume of products subject to the 201 relief (13.1 million metric tons).

MANY OF THE EXCLUSION REQUESTS BENEFITTED SMALL BUSINESSES

Many of the 727 exclusions granted were requested by, or on behalf of, small businesses. For example, Industrial Nut Corporation, a small family-run company in Sandusky, Ohio, was granted an exclusion for large hexagon bars used as input in precision machined nuts. Grasche, USA, a small company that employs 38 people in Hickory, North Carolina received an exclusion for cold-rolled sheet for saw bodies. Hedstrom Corporation, with over 500 employees in Bedford, Pennsylvania, manufactures swing sets, trampolines and spring horses. The company was granted an exclusion on the galvanized sheet it uses in its finished products. Stamco Industries of Euclid, Ohio is a small business that supplies the automotive industry. It received an exclusion on the hot-rolled steel used to make its automotive parts.

Although we have concluded our review of this year's requests, U.S. steel consumers, importers, and foreign producers will have another opportunity to a submit requests in November 2002 for consideration by March 2003. We will announce in March of each year in which the safeguard is in effect any additional products to be excluded from the safeguard.

We are mindful of the effect that the safeguard action has on steel consumers, and over the last ten months, I have met with numerous representatives of steel consuming companies to discuss their concerns regarding the safeguard remedy and the exclusion process. In fact, the Secretary and I will be meeting with a number of small manufacturers today, including companies from Ohio [A.J. Rose Manufacturing], Indiana [Batesville Tool & Die], Pennsylvania [New Standard Corporation and Oberg Industries], and Illinois [Parkview Metal Products].

THE ADMINISTRATION HAS AND WILL CONTINUE TO MONITOR ECONOMIC CONDITIONS AND RESTRUCTURING EFFORTS BY THE U.S. STEEL INDUSTRY

The purpose of the safeguard law is to give the U.S. industry the breathing room it needs to adjust to import competition. The President has made it clear that there is no "free ride" for the steel industry, and has retained the right to modify or terminate the safeguard measure, as appropriate, after conducting a mid-term review of the measures next year. The Administration is also closely monitoring economic conditions and the steps taken by the U.S. steel industry to restructure and increase competitiveness. We have already seen some changes in the steel industry - inefficient capacity is coming off-line through bankruptcies, consolidations, and mergers.

We have asked for regular reports from the U.S. steel industry on their progress with restructuring in response to the section 201 remedies imposed by the President. We will evaluate these reports, along with other economic indicators, to monitor their overall efforts at restructuring. We will also meet with individual companies to discuss their own efforts, as well as broader restructuring plans for the industry as a whole. Furthermore, I have met personally with many manufacturers and steel consuming industries to monitor the downstream impact of the safeguard measures. For example, I recently attended the AMT (Association for Manufacturing Technology) Trade Fair in Chicago, where I met with numerous manufacturers of machine tools. I also met with several steel users in Minnesota. I will continue to conduct such meetings.

As this process continues, we will update Congress on developments and issues related to the steel safeguard measures. I am pleased to participate in this consultative relationship today, and I look forward to working with you and members of the Committee as we continue to consider the issues involved.

THE PRESIDENT'S STEEL POLICY HAS FORCED STEEL-PRODUCING COUNTRIES TO SIT DOWN AT THE NEGOTIATING TABLE TO ADDRESS OVERCAPACITY

The second element of President Bush's three-part initiative is to work with other steel-producing countries to facilitate the market-based reduction of inefficient excess capacity in the global steel industry. In a landmark agreement last September, thirty-nine countries agreed that overcapacity was a global problem in the steel trade, and each participating government pledged to evaluate its own industry to identify and address excess capacity. As a result of these self-assessments, in April, countries reported projected capacity closures of up to 128 million metric tons by the end of 2005.

While we have made substantial progress in addressing overcapacity, there is still much work to be done. We are encouraging participating countries to take a closer and more realistic look at their steel industries and how they will respond to future market forces. We have established a framework for countries to semi-annually submit updated capacity forecasts and reports on their respective steel industries. These forecasts and reports will then be subject to a vigorous peer-review process, ensuring the accuracy of the information. As countries submit more complete reports, we will update the snap shot of the steel industry worldwide and each country's steelmaking capacity forecast. This information is crucial and will allow us to better understand and address the problem of excess capacity.

WE HAVE AN AMBITIOUS AND COMPREHENSIVE PROPOSAL TO ADDRESS OTHER MARKET-DISTORTING PRACTICES

The third element of the President's steel initiative focuses on the market-distorting practices that have led to current conditions in the industry. Our work at the OECD has generated broad support for enhancing disciplines on subsidies and other market-distorting practices. Participating countries agreed that government intervention in steel has hampered the efficient functioning of the market and that the problem of overcapacity will likely recur without effective market disciplines.

Earlier this month, Assistant Secretary of Commerce for Import Administration Faryar Shirzad chaired the most recent meeting of the Disciplines Study Group. He made significant progress in building international consensus on the nature of the problems and the most effective solutions. The United States tabled an ambitious and comprehensive proposal to address the market-distorting practices that plague the international steel market and contribute to the perpetuation of uneconomic steel production capacity.

Our proposal also addresses anti-competitive conduct, tariffs, non-tariff barriers to trade in steel, and other measures that distort markets and impede the elimination of excess, inefficient steelmaking capacity worldwide - or which lead inappropriately to the creation or expansion of such capacity. Our suggestions received significant interest and support, although much more ground needs to be covered before we arrive at a clear international consensus on the identity and priority of the issues to be tackled. We will be making full use of the coming months to reach out to our trading partners to shape that consensus in time for the next High Level meeting in the OECD process in the latter half of December.

THE ADMINISTRATION HAS MADE EVERY EFFORT TO FACE THIS CHALLENGE WITH A BALANCED APPROACH

I want to underscore the President's commitment to restoring market forces to the global steel trade. In the long run, a more stable steel market will benefit both producers and users alike. To reach this goal, we must eliminate the underlying conditions that led to the problems in the first place. This Administration will use the trade laws as a catalyst to pursue solutions to address those underlying conditions.

Again, Mr. Chairman, I want to thank you for holding this hearing. I appreciate frequent consultation with Congress as this dialogue ensures that all voices are heard and considered as we undertake future action in this matter.

I look forward to your questions.

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