Testing His Metal – and His Motives: Bush’s Steel Tariffs Spark an Uproar

When President Bush imposed tariffs on steel imports March 5, the White House characterized it as a deft compromise, balancing the needs of the troubled American steel industry with the free-market principles the president has so strongly espoused.

“Free trade is an important engine of economic growth and a cornerstone of my economic agenda,” the President said in announcing the tariffs, adding later that he wanted to assure “that America’s industries and workers compete on a level playing field…”I take this action to give our domestic steel industry an opportunity to adjust to surges in foreign imports, recognizing the harm from 50 years of foreign government intervention in the global steel market, which has resulted in bankruptcies, serious dislocation, and job loss.”

Though often at odds on other issues, the steel producers and the steelworkers union, United Steelworkers of America, joined in lobbying for the tariffs, arguing U.S. producers are the victims of unfair competition and that their strategically vital industry must have protection to survive.

But is the competition unfair? And is the American steel industry really important enough to justify public support in the form of higher prices for cars, refrigerators and other metal products? “Obviously, there is no economic justification whatsoever,” said Wharton management professor Stephen J. Kobrin. “Clearly, it’s just an attempt to pay back people who voted Republican last time and to make sure they do the next time around.”

When it takes effect March 20, the three-year tariff program will impose a 30% charge on major imports such as slabs and flat steel for the next year. That tariff would fall to 24% the second year and 18% in the third. Tariffs on some other products would start at 15% and fall to 12% and 9% over the next two years, while other products would be assessed at 8%, 7% and 6% over the three years.

While the tariffs are expected to cost perhaps 70,000 jobs among American steel-using companies that can’t afford higher prices, tariff advocates argue that perhaps twice that many will be saved in the steel industry. “There’s no free lunch in trade sanctions,” said Richard Shell, professor of legal studies and management at Wharton and author of an article entitled Trade Legalism and the WTO. “You’re hurting your own people as well as helping your own people.”

Several experts on the steel industry and international trade say the case for tariffs may fall far short of the slam dunk the industry and its political backers say it is, especially as it is likely to undermine the administration’s separate efforts to promote free trade. “There’s a long history here of public intervention, trying to save the industry,” according to Paul A. Tiffany, adjunct professor of business and public policy at Wharton and the Haas School of Business at the University of California, Berkeley. “This is Yogi Berra – déjà vu all over again,” said Tiffany, author of the 1988 book The Decline of American Steel: How Management, Labor and Government Went Wrong.

While many foreign governments have indeed intervened in the market to support their steel producers, the U.S. government has frequently done the same, undercutting the fairness issue, he pointed out, adding that the real problem for American producers is they simply cannot make steel as cheaply as can foreign competitors with far lower labor costs.

Currently, 32 American steel companies are in bankruptcy. “Every one of them had a contract with the United Steelworkers of America,” Tiffany said. “Non-union [American] companies are not in bankruptcy.” In addition to paying high wages, the unionized companies face enormous “legacy costs” – billions needed for pensions and health coverage for some 600,000 retirees.

Steel production is a low-tech process using raw materials that are abundant around the world. “The technology is not so sophisticated that only advanced nations can build steel capacity,” he added. “Relatively emerging nations can do it.”

Across the globe, steel producers ramped up capacity in the 1990s to meet demand from booming Asian economies. But the collapse that began in 1997 with the Thai currency crisis caused demand to shrivel, leaving a worldwide steel glut that depressed prices. In addition, steel plants are expensive and fixed costs are high, and steel can be profitable only when produced in large volumes. When a glut causes prices to fall to unprofitable levels, steel companies continue production anyway in order to bring in cash to cover costs that would continue even if plants were shut down, Tiffany said. Hence, a glut is prolonged.

For American producers, the situation has been made worse by the strong dollar. Automobile manufacturers and other American steel users find that steel sold in foreign currencies is cheaper than domestic steel for which they must spend dollars.

Bush emphasized fairness in his public comments, yet in implementing the tariffs the administration did not use fairness provisions of the World Trade Organization rules. The rules permit tariffs in response to dumping – the selling of products at unfairly low prices, such as below production costs. Instead, Bush invoked a rule designed to safeguard an industry facing a surge in imports, said Shell. Taking this approach amounts to acknowledging that the U.S. industry, in fact, is not subject to unfair trade practices such as dumping, he added.

But the industry-safeguard provision is intended to justify an across-the-board tariff applied equally to all foreign producers, since it is not designed to punish individual transgressors. The Bush administration has ignited international controversy by applying the tariffs selectively, in violation of this rule, critics say. For a variety of economic and political reasons, Bush spared Argentina, Canada, Mexico, South Africa, Thailand and Turkey, while imposing tough restrictions on China, the European Union, Japan, South Korea and Taiwan. “You’re not supposed to discriminate,” Shell said. “There’s a lack of compliance with the general notion of a safeguard.” In fact, he added, there has not been a surge in steel imports, as envisioned in the safeguard provision. Imports have fallen 25% since 1998.

“There are two reasons for everything a person does: a ‘good’ reason and the real reason,” Shell said, paraphrasing J.P. Morgan. In the case of steel tariffs, he and many others argue, the real reason is domestic politics. Prior to the November congressional elections, Bush needs to bolster support for Republicans in critical steel-producing states such as West Virginia, Pennsylvania and Ohio. “I think Bush realized this is something he can do for labor,” Shell said.

At the same time, the tariffs fall well short of the remedies the steel industry and union had wanted. Also, the tariffs expire in three years and can be lifted sooner if the industry fails to satisfy Bush’s demand that it use the three years to get its house in order by consolidating and modernizing. That, according to Shell, should keep conservatives from being too upset.

But the tariffs are sure to anger other countries. Producers that rely on American markets will lose money. And cheap developing-nation steel that is effectively blocked from the U.S. may instead flood European markets, hurting producers in those countries.

Two days after Bush imposed the tariffs, the European Union filed a complaint with the World Trade Organization, saying the U.S. broke trade rules by blaming imports for the industry’s problems. Japan and New Zealand also have lodged complaints. Many experts expect the U.S. to lose the case, as it recently has in three similar cases – involving wheat gluten from the EU, lamb from Australia and steel pipe from South Korea. The WTO found that imports were not the chief cause of problems in those industries. But Bush’s steel tariffs would be in place during the two years or longer that it could take to resolve the WTO case, buying the industry time and getting Republicans through some key elections.

The picture is further complicated by another factor, according to Shell. “The EU recently won an unrelated case against the U.S. that entitles the EU to impose tariffs on any U.S. products it wants. The EU could elect to put tariffs on U.S. steel by May or June. There also is provision for countries hurt by the U.S. steel tariffs to demand compensation for their losses.

“You can see this whole thing gets very complicated very quickly,” Shell said. “It’s sort of a regulated tit-for-tat legal system… Rather than having trade wars that get out of hand, it’s a form of regulated trade sniping.”

The steel issue aside, Bush has been pressing for more free trade, not less. Looking like a protectionist, or a hypocrite, will not help those efforts, Kobrin said. “I think it’s a big deal. It’s hard to know with certainty what will happen. It appears that the Europeans are much more concerned than the administration thought they would be.”

Is all this worth it?

In the 1950s, one could have argued that the steel industry deserved government support because of its strategic importance, Tiffany said. But the recently downsized and modernized military is less reliant on steel for ships and armor, and there now are more abundant sources. There is no OPEC-style cartel in the steel industry. “The national security arguments are gone,” he noted. “There is so much steel in the world now that if the U.S. industry shut down today at 5 o’clock we would get all the steel we would want.”

Like the making of clothing, steel manufacturing is best suited to countries with low labor costs, Tiffany said. Despite its image as a core American industry, steel actually has only minor impact on our $10 trillion economy, involving about $40 billion in revenues. Moreover, protecting American steel producers means shoring up companies that are operated inefficiently, Tiffany added. “Why should I pay because the management gave in and the union asked for and received absurd wage rates?” Tariffs shift the burden of these costs to American steel users and consumers. “One way or another we are going to pay.”

Maybe there is a rationale for having “the federal government step in [to take on] some of the legacy costs to promote consolidation of the industry,” he said. That is what many in the steel industry, especially those in the union, are seeking. In a statement following Bush’s tariff announcement, USWA President Leo W. Gerard said the tariffs “set the stage” for government support of health benefits for the 600,000 retired steel workers.

“These are the working citizens who built this country into the great and powerful nation that it is today,” Gerard said, “and we will be coming to Congress very soon with legislation that prevents their health and retirement security from being sacrificed on the altar of unfair trade.”

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