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The recent imposition of tariffs and quotas on imported steel by the president of US triggered the beginning of trade war between the US and the steel exporting countries. The article finds out the reasons behind the imposition of tariffs and quotas, the effects of tariffs and quotas, and the future of this trade war.
The President of USA, George W Bush (Bush), once commented, "Free trade is an important engine of economic growth and a cornerstone of my economic agenda." However, recently, Bush had imposed tariffs1 ranging from 8% to 30% and quotas2 on steel imported into the US for the next three years. The imposition of tariffs will affect mainly the European Union and others, which include Japan, Brazil, Russia, and South Korea. In retaliation, these countries have complained to WTO and have also asked for compensation from the US.
To understand the issues involved in the imposition of tariffs on imported steel, we have to study the characteristics of the American steel industry, excess production in foreign countries and the international price of steel.
The American steel industry can be divided into two categories, the big integrated steel plants such as Bethlehem Steel, National Steel, etc. and the mini-steel plants such as Nucor. The integrated steel plants still continue to make steel the traditional way, where iron ore is converted into steel in a blast furnace. The integrated steel plants have high fixed costs and long planning cycles, as a result the cost of converting iron ore into steel is very high. They are also labor intensive. In contrast, the mini-steel plants are less capital intensive (Refer Fig 1) as they use electric-arc furnaces to recycle steel scrap into fresh steel and employ less number of workers (compared to integrated plants, the mini plants require less than one-third of the labor to manufacture one ton of steel).
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