The Steely Truth
or Everything You Always Wanted to Know about Steel Tariffs, but were Afraid to Ask

The Steel World Implodes
In the late 1990's, a financial crisis in Asia led to a sharp reduction in steel demand (Asia accounted for 95% of steel produced there). This coincided with declining economies in Russia and Brasil, both steel-producing nations with nowhere to sell product:

World growth was slowing. Europe had already closed its market to the Commonwealth of Independent States through government restriction and to Japan by private arrangement. Latin America’s growth had slowed as well.

Most countries in the rest of the world, developed and developing, market and nonmarket, had over-invested in steel, often with grotesquely large subsidies – over $100 billion in the last two decades. All would seek to be net exporters. Global overcapacity was enough to supply the entire U.S. market two and one-half times over.

As expected, the Japanese producer cartel shifted almost the entire shortfall from its usual sales to the rest of Asia to the U.S. market. Its shipments of hot-rolled steel, the largest commodity category of flat-rolled steel products, jumped from 218,000 net tons in 1996, the year before the Asian financial crisis, to 2.6 million net tons in 1998. Russia, unable to find demand at home or elsewhere abroad, increased its shipments to the American market from 811,000 to 3.8 million tons. Brazil, increased its exports to the United States from 254,000 to 451,000 tons. The vast increases occurred during the same short period.

Senator Byrd said that the action would amount to $38 million over ten years. The first distribution in January 2001 was nearly $207 million -- mostly to steel producers. By the following year the number reached $270 million.

World Reaction
Reaction from the global community was swift as nine members of the World Trade Organization (WTO) filed a complaint -- the largest coalition of aggrieved parties in the history of the WTO (and later joined by Canada and Mexico):

The EU and other complainants -- Australia, Brazil, Chile, India, Indonesia, Japan, Korea and Thailand -- claim that the law punishes exporters to the US twice because first they are fined and then those fines are handed back to their competitors. Japan also underscored that the law works as an incentive to domestic producers to file complaints.

Now consider the state of American steel, which also had excess capacity, too many companies, inefficient organization and procedures, and were in financial straits due to a $2 billion pension problem. From 1997 until the time of the tariff enactment, 31 American steel companies had gone into bankruptcy -- 17 of them having shut down completely.

The President Takes Action
President Bush asked the USITC for a recommendation, and in December 2001 it reconfirmed that foreign steel producers were dumping product on the American market and recommend tarrifs between 20 and 40%. In spite of the union vote going overwhelmingly to Gore, President Bush kept a campaign promise and enacted steel tariffs of 8 to 30% in March of 2002 under the Escape Clause (Section 201, Article XIX or the Trade Act of 1974). Still, no one was happy. Free trade proponents were outraged, as were industry insiders:

The domestic industry had demanded tariffs of 40 percent on all foreign steel. Bush exempted NAFTA members and about 80 developing countries. Steel makers also wanted the federal government to pay for billions of dollars in health care bills for 600,000 steel retirees, which did not happen.

In addition, reorganizations have made American steel more efficient. The industry’s largest union, the United Steel Workers of America, agreed to more flexible work practices, profit-sharing and even some redundancies in order to give its remaining members a fighting chance of saving their jobs. For example, one ISG mill eliminated 200 managers, reducing the management layers from seven to three. And on the shop floor the number of job descriptions were reduced from 165 to a mere five -- meaning that some employees are now doing the work that used to be performed by two or even three workers.

Finally, prices have risen and imports dropped. Billions of dollars in pension and healthcare obligations have been shifted (to the Pension Benefit Guarantee Corp., a government agency) or eliminated.

Pay the Piper
There was a cost associated with protecting the steel industry. Some 200,000 jobs were lost in manufacturing industries that use steel -- more than all the jobs in the entire American steel industry -- representing $4 billion in last wages. The remaining 13 million workers in steel-related industries were solidly against the tariffs.

Consumers were hit, too. Higher raw materials price meant that the American public paid higher prices for everything from toasters to automobiles. Product choices declined as well. The hardest hit by higher steel prices were small to medium-sized businesses, some of which were forced to close their doors. Other companies shifted manufacturing off-shore where they had access to lower cost steel (and lower cost workers) in order to compete.

Most importantly, I think, is that many of the steel-related industries in America lost customers to overseas competition who were able to undercut American manufacturer's prices by margins greater than the tariffs imposed.

WTO Raps Uncle Sam's Knuckles
Enter the international community, still outraged over the tariffs. In early November 2003 the WTO's highest court ruled that the US tariffs were illegal, clearing the way for other countries to impose sanctions of their own on US imports. The EU threatened $2.2 billion in sanctions, with up to $4 billion the following year. The sanctions were clearly aimed directly at the president, as the laundry list of products was carefully chosen to affect the 2004 presidential election. It included Florida oranges, textiles from the Carolinas, Wisconsin-built Harley-Davidson motorcycles, agricultural equipment from Iowa, even Californian farm products (although California can hardly be considered a "swing state").

So Bush was wedged firmly between a rock and a hard place. On the one hand, he could bow to pressure from the EU and lift the tariffs. On the other hand, he could appease voters in steel-producing states like Ohio (Bush by 3%), Pennsylvania (Gore by 4%), and West Virginia (Bush by 5%). The former makes him look like a wussy. But the latter includes billions of dollars in retaliatory sanctions in states throughout the nation.

Bush Blinks
So Bush did what he did in the first place -- he followed the USITC's advice. The ITC said that the tariffs had a "slightly negative" impact on the economy, to the tune of $30.4 million annually in lost economic growth.

This allowed the president to declare victory and go home. In essence he said that the industry had consolidated, retooled and retrenched -- all true. What was not mentioned is that the industry moves probably would have happened anyway. Also not mentioned were the unintended consequences of the tariffs in terms of steel-related jobs and higher consumer prices.

Bottom Line: Politics
Truth is, the tariffs may have saved a few steel worker jobs -- but they were few indeed. It was the union's willingness to negotiate that saved the jobs. It was the series of bankruptcies and mergers that saved the industry. These were painful to go through but that is the price of a free market.

The tariffs did more harm than good in other parts of the economy -- a lot more harm. This was a feel-good policy that was politically motivated, not one that was grounded in economic theory.

Clearly, all measures possible should be taken to stop foriegn governments from dumping products and harming American businesses, especially (some would argue) those that are essential to maintaining our national infrastructure. However, no business exists in isolation. Tariffs should be the absolute last resort after all other avenues are explored, such as negotiations at the WTO level.

In addition to the need to fulfill a campaign promise, some say that Bush initiated the tariffs in order to influence mid-term elections in the steel-producing swing-states of Ohio, Michigan, Pennsylvania and West Virginia. If so, it was a miserable failure. The net result was a one-seat pickup in the House for Michigan.

The steel unions, of course, are now saying that this issue will cause them to vote against the president next year. Leo Gerard, head of the United Steelworkers of America, said, "Caving in to the blackmail of the European economic community is not going to float well in Ohio, Pennsylvania, West Virginia, Illinois and the other industrial states. The last time I saw, there were no votes for the president in Europe."

Who among us cannot recognize standard union rhetoric? Union endorsements always go to Democrats, and this election cycle is no exception. Months before President Bush announced he was rescinding the tariffs, United Steel Workers joined the Teamsters by announcing their endorsement of Dick Gephardt.

So now the president is chasing votes in the "rust belt" and other states that are home to steel-consuming industries:

Steel consumers hail from the so-called rust belt of Michigan and Illinois — states with concentrated auto industries — as well as Wisconsin and Minnesota, home to smaller manufacturers hit by higher steel prices. Collectively, they have lost nearly $680 million in capital and labor returns since the tariffs were put into place, according to International Trade Commission numbers. These four states share a total of 47 electoral votes in the 2004 election and have hosted Bush no less than 36 times since his inauguration. In 2000, Bush lost all four states to Al Gore by varying measures — Michigan by 5 percent, Illinois by 12 percent, Minnesota by 2 percent and Wisconsin by only about 5,700 votes.

Now that's outrageous.

Blog post #1912 in category Economics and the Economy

Truly superior bloggers that reference The Steely Truth
or Everything You Always Wanted to Know about Steel Tariffs, but were Afraid to Ask:

» Submitted for Your Approval from Watcher of Weasels:

First off...  any spambots reading this should immediately go here, here, here, and here.  Die spambots, die!  And now...  here are all the links submitted by members of the Watcher's Council for this week's vote. Council links:Roommate... [Read More]

Tracked on December 9, 2003 9:39 PM

» The Council Has Spoken! from Watcher of Weasels:

First off...  any spambots reading this should immediately go here, here, here, and here.  Die spambots, die!  And now...  the winning entries in the Watcher's Council vote for this week are The Gore Hex by The SmarterCop, and The Socia... [Read More]

Tracked on December 11, 2003 8:59 PM

» Weasel Winners from Spicedsass:

A belated post linking to the November 6th results will be accepted if it also links to all entries... [Read More]

Tracked on March 9, 2004 8:18 AM

» Weasel Winners from Spicedsass:

A belated post linking to the November 6th results will be accepted if it also links to all entries... [Read More]

Tracked on March 9, 2004 8:21 AM

» Weasel Winners from Spicedsass:

A belated post linking to the November 6th results will be accepted if it also links to all entries... [Read More]

Tracked on March 9, 2004 8:28 AM

» Weasel Winners from Spicedsass:

A belated post linking to the November 6th results will be accepted if it also links to all entries... [Read More]

Tracked on March 9, 2004 8:31 AM

» Weasel Winners from Spicedsass:

A belated post linking to the November 6th results will be accepted if it also links to all entries... [Read More]

Tracked on March 9, 2004 8:36 AM