Automotive parts producers are attacking controversial U.S. duties on imported steel for their adverse impact on domestic manufacturing. Meanwhile, international pressure is building against Washington as the World Trade Organization (WTO) has agreed to rule on the legality of the tariffs.

Members of the Motor & Equipment Manufacturers Association (MEMA) and the Original Equipment Suppliers Association (OESA) say the administration's steel safeguard program has created severe economic hardships for U.S. manufacturers of automotive parts and components. In a letter delivered to President Bush, the trade groups contend:

*Domestic steel-consuming industries are facing steep and sudden increases in raw materials costs, which cannot be passed to vehicle manufacturers in the current market.

*The allocation and rationing of domestic steel has the potential to severely disrupt production in the automotive industry.

*The components industry is witnessing a rapid shift of customers' purchases from domestic to foreign sources of automotive parts and assembled component systems.

The automotive industry is one of the nation's largest users of steel, consuming more than 20 million tons of the metal annually. "Any disruption in the supply of steel raw materials has severe implications not only for automotive parts and components manufacturers that directly purchase steel, but also for every company in the entire chain of production culminating in the final assembly of a finished motor vehicle," according to the letter from MEMA and OESA .

The chief executives of 19 top North American supplier companies led by Delphi Corp., the world's largest automotive supplier, also signed the letter. Other companies whose executives signed the letter include Dana Corp., TRW Inc., ArvinMeritor Inc. and American Axle & Manufacturing Holdings. In addition to a jump of up to 50% in raw material prices for suppliers since the hefty steel tariffs were imposed in March, they say there already is a supply squeeze under way because of the allocation and rationing of domestic steel could severely disrupt the continued production of auto parts and vehicles within the U.S.

Market prices for steel rose steeply again in June, due to reduced domestic supply caused by mill shutdowns and lower imports from new steel tariffs. Also, early bookings for monthly sheet steel deliveries through September are priced higher. And, recent complaints about domestic mills' steel supply allocations causing sporadic market shortages are far flung—coming from buyers in virtually every state of the union.

The MEMA and OESA letter also explains to the president that U.S. automotive suppliers face strict cost reduction mandates, so recent steel raw materials price increases of up to 50% "will result in the loss of current business and will disqualify many suppliers from winning future business with the automakers." Also as a result of the steel tariffs, auto companies are shifting to foreign supply sources for intermediate and finished steel products. "This has resulted in a loss of business for U.S. suppliers and will impact the economic recovery," according to the trade groups.

By mid-June, the Bush administration had issued a batch of 224 exemptions, but the exemptions represent only 10-15% of the 14 million tons of steel imports originally targeted. Commerce says these exempted steel products are not made in sufficient quantities in the U.S. to satisfy domestic demand. The types of steel excluded come from a broad range of steel plate, hot-rolled sheet, cold-rolled sheet, tin mill products, welded pipe and tube, stainless steel bar, stainless steel wire rod, and stainless steel bar.

While representatives of steel-using groups applaud the exemptions, they say the administration will have to go much further in exempting foreign steel products. "It's clear the 30% duty is such an enormous hit on a lot of steel customers in the U.S. that the administration is now reconsidering the economic and job consequences of its action,'' says David Phelps, president of the American Institute of International Steel, which represents steel importers.

Interestingly, the European Union (EU) reacted positively to the announcement. "Reading the tea leaves of the European Union's reaction, we believe they may be looking for some sort of compromise or settlement to the steel trade dispute," says analyst Ed Canaday at Goldman Sachs in New York. This is especially true since Europe and Japan have postponed retaliatory tariffs on U.S. goods sold in their countries.

Meanwhile, Japan, South Korea and the European Union (EU) still want the WTO to overrule the March decision by President Bush to raise steel tariffs by up to 30%. In effect, the White House must now prove the three-year tariffs on steel imports don't violate global trade rules. The U.S. says it needs the levies to help the embattled U.S. steel industry recover from decades of cheap imports taking market share from domestic mills. However, numerous countries are lining up to challenge the U.S. by demanding compensation for damage they claim the tariffs is causing to their domestic industries. The 15 EU governments alone have approved separate proposals for retaliatory tariffs on U.S. exports worth up to $888 million if Washington does not compensate them.

Under WTO rules, countries can impose temporary increases in tariffs, known as safeguards, to give their domestic industries time to restructure and improve competitiveness. However, the EU, Japan, South Korea, China, Switzerland, Norway and others claim the U.S. move breaks WTO rules since there was no overall recent increase in steel imports, a precondition for enacting tariff safeguards. Latest Commerce trade data shows that imports of finished steel mill products during the January-April 2002 period were down 3% compared to the same period last year, while imports of semi-finished steel used by U.S. steel companies to produce finished products were up 41%.