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In what is perhaps one of the most important economic decisions of his administration, President Bush is moving forward with a plan to impose a 30 percent tariff on imported steel. While this protectionist measure will be welcomed by the steel industry, consumers should be wary. Higher steel prices translate into higher prices for a wide array of consumer products, from automobiles to appliances to housing. Worse, it is not evident that higher tariffs will help the steel industry; taxpayers may be the next target as steelmakers seek greater subsidies and benefits from the federal government.
The weak economy and increased number of bankruptcies sent the steel industry to Washington with a million-dollar lobbying campaign in search of relief. In October 2001, the International Trade Commission completed a study stating that international competition was hurting the domestic steel industry. The report included a variety of recommendations that were forwarded to the president to provide a basis for his decision. President Bush’s solution was a 30 percent tariff on imported steel. Exemptions were included for Canada and Mexico under the NAFTA as well as many developing countries, such as Argentina and Thailand, whose output is less than 3 percent of the total market.
Despite efforts by the steel industry to wrap the issue in American jobs at risk due to unfair foreign competition, the simple facts of the matter suggest the industries' woes are of their own making. Increased productivity and the rise of more efficient American “mini-mills” have threatened the older steel plants at a time when market demand has slackened. The mini-mills, which are highly competitive, have grown from a small niche market in the 1970s to a significant component of America’s domestic steel industry. These mills tend to be smaller and produce products from recycled scrap metal. They are efficient and require far less labor than the older and larger “integrated steel mills.” While U.S. steel output has remained relatively constant at 100 finished tons a year for the last thirty years, mini-mills have gone from producing 10 percent of that output to producing half of America’s steel output.
Claims about protecting American jobs ring hollow as well. In the first place, productivity gains reduced the demand for labor. Where 10 man-hours were required to produce a ton of steel in 1980, less than four are required today (“Steel Quotas Will Harm U.S., Brink Lindsey and Daniel T. Griswold). But more importantly, there are far more jobs created by those who use steel than those who produce steel. Pushing steel prices higher through tariffs and protectionism threatens a broader swathe of our economy. Industries that use steel employ 57 workers for every one worker in the steel industry and steel users account for more than 13 percent of America’s GDP while steel producers generate only 0.5 percent of the GDP (Dan Ikesnson, “Steel Trap: How Subsidies and Protectionism Weaken the Steel Industry,” Cato Institute, March 1, 2002).
With respect to claims of unfair competition from abroad, it is important to realize that the federal government has coddled the American steel industry for years. Tariffs and quotas have been used to keep out competitors, as have the anti-dumping laws and countervailing duties. For example, the Cato Institute found that since 1997, over ¾ of all antidumping and countervailing duty measures have been on steel products. And according to Dan Ikenson, “If selling below cost really does constitute unfair trade, U.S. producers have a lot of explaining to do. Under the current definition of dumping under U.S. law, every U.S. steel company that is losing money is guilty of dumping here in the home market.” (“Steel Trap” Cato Institute, March 1, 2002, p. 4).
If anything, tariffs and other protectionist measures simply prolong the transition that must ultimately occur in the United States steel industry. There is over capacity in the industry along with inefficient business practices that raise the costs of many steel producers. A more competitive market drives out inefficiencies and lowers prices for consumers. The more efficient American steel producers are set to compete in a global market; artificially restricting that market to protect a subset of America’s steel industry rewards the more inefficient American steel companies at the expense of our more efficient producers.
Finally, the protectionists suggest that there are national security reasons to prop up ailing steel firms. Relying on international sources of steel during times of war is unwise, they claim. In reality, the U.S. military’s demand for steel is only a small fraction of our national output of steel and our domestic suppliers can easily meet that demand.
From virtually every perspective, tariffs on steel will do little more than raise prices for consumers to subsidize an industry that is not viable in its current configuration. Nonetheless, the steel industry continues its search for federal assistance. Steve Miller, the new CEO of the now bankrupt Bethlehem Steel, is no stranger to Washington. A key executive at Chrysler when it received its bailout in 1979, Mr. Miller is banking on Washington one more time to bail out his new industry. And if he has his way, tariffs are just the beginning of Washington’s payoffs to the industry. Many in steel industry have their eyes on a taxpayer bailout of their “legacy” costs.
Legacy costs are the costs of paying for the health care and pensions of steelworkers and retirees. In earlier years, many steel companies agreed to very lucrative retirement and health care packages for their workers. With a slow market and increased competition, some of these firms are predicting difficulties in covering these costs. Many of the old integrated steel companies are now turning to Washington to cover these liabilities, which can range up to $10 billion.
Legacy costs are indeed a problem that makes restructuring the existing industry more difficult. Mergers or acquisitions are unlikely, as few would be willing to take on the legacy costs of the integrated firms. Yet that does not warrant a federal bailout. The dot-com crash and Enron’s nosedive wreaked just as much havoc on pensions without any talk of a federal bailout. Even within the steel industry, the more efficient firms question the push for federal funds. Dan DiMicco, CEO of Nucor stated, “I want to make it clear that we are very opposed to having the American taxpayer and the federal government bail out the industry on these premium benefit packages that are not available to the average American taxpayer who would be asked to foot the bill.” (http://www.ita.doc.gov/media/InTheNews/nytsteel_grant012002.htm)
Free trade is an integral component of a market society and a important part of American history. As Benjamin Franklin noted, no nation was ever ruined by free trade. Protectionism, on the other hand, is a guise of industrial planning, with the federal government choosing winners and losers through price controls. Inevitably, this props up weak industries and delays necessary changes to enhance innovation and competition. Consumers suffer through higher prices and restricted choices in the marketplace. The steel industry is no exception. New tariffs will do little more than raise prices and shield the industry from necessary change.