Commentary

Bush Turns Protectionist for Steel Companies

By Daniel Griswold
July 9, 2001
Protecting a few big steel mills from foreign competition may help the Bush administration politically in the short run, but it will impose a heavy, long-term cost on the U.S. economy and the administration’s goal of pursuing free trade abroad. In one stroke, the president has rendered meaningless every free trade speech he and his administration have delivered since he became president.

In June, Bush announced that the United States would initiate a Section 201 investigation against foreign steel producers, an action that will likely result in comprehensive quotas against steel imports. The president tried to justify this protectionist act as an example of “an active, internationalist foreign policy with U.S. interests at its heart,” one aimed at “unfair trade practices” abroad. In fact, it is none of the above.

Imposing quotas on imported steel is not an example of an internationalist policy but of an isolationist policy. It strings barbed wire around the U.S. market, sealing it off from global supplies and price competition. Quotas will by design drive up domestic prices, turning the United States into an isolated island of high steel prices and artificial shortages.

Section 201 quotas will not serve any true national interest, despite the president’s words. They will only serve the narrow self-interest of an economically small but politically influential steel industry. The higher domestic prices caused by the quotas will impose a stealth tax on millions of American families who buy steel- containing products such as cars, light trucks, appliances and new homes. Studies estimate steel quotas will cost American consumers at least $732,000 per steel job “saved.”

Steel quotas will damage a large swath of American industry far more economically important than steel. Higher prices will raise production costs and lower international competitiveness for steel-using producers of transportation equipment, industrial machinery, fabricated metals and buildings. Employment in these industries totals 8 million, which means for every one steel-industry job supposedly protected by quotas, 40 jobs will be made less secure. Like higher energy prices, quotas will raise the price of a key industrial input, pushing the economy closer to recession.

Quotas will further undermine America’s national interest by poisoning global trade negotiations. The administration’s action sends a discouraging message that the United States may talk free trade but it walks protectionism. It will make it much more difficult to persuade our negotiating partners in the Western Hemisphere and the World Trade Organization to open up sensitive sectors such as agriculture and services when we are closing our own market to steel. The administration has just given the European Union, Japan, and Brazil another reason to say no to more open markets.

To justify quotas, the president evoked the usual bogeyman of “unfair trade.” But the term is economically meaningless. Foreign producers who sell in our market at a loss or at a price lower than in their home market (the definition of dumping) are engaging in business practices that are routine and perfectly legal for U.S. producers in our domestic market. Every U.S. company that is losing money or selling products at different prices in different markets would be guilty of dumping if the U.S. law were applied to them, but it is unfairly applied only to foreign producers. And even if foreign producers were technically dumping steel, Section 201 has nothing to do with “unfair trade.” The law is designed merely to blunt import surges that hurt U.S. industry, whatever the underlying cause may be.

It is true that steel industries around the world have been subsidized by governments over the decades, but those subsidies have fallen dramatically in recent years. Meanwhile, the U.S. industry has enjoyed its share of government favors, from 30 years of quotas and other protection to recent “loan guarantees” and more direct state and local subsidies. Our hands are not clean.

Erecting barriers to imports will only postpone needed consolidation of the U.S. steel industry. The industry has not been losing jobs because of unfair imports, but because of relentless technological changes brought by “mini-mills” that produce a ton of steel at a fraction of the man hours required by the larger integrated mills. During the last period when comprehensive quotas were in place, 1984 to 1992, the steel industry continued to lose nearly 10,000 jobs per year. Quotas will only slow the inevitable.

The Bush administration will probably win short-lived applause from the steel unions and CEOs and steel-state members of Congress, but its tactic of appeasement will come at a heavy price. When the cheering fades, the administration will be left with an economy slowed by higher prices and a world even more skeptical of its free- trade rhetoric.

Dan Griswold is associate director of the Cato Institute�s Center for Trade Policy Studies.