Commentary

Honorable End to Steel Protectionism

This article originally appeared in The Washington Times on September 6, 2002.

The Bush administration’s foray into steel protectionism has proven costly. The decision by the administration to exempt an additional 178 products from its steel safeguard represents the latest effort to remove itself from the quagmire. But in the coming weeks, the administration may have the political cover it wants to revoke the safeguard entirely and achieve “peace with honor.”

The dubious scheme to protect the steel industry from imports — hatched in March — has since required a succession of mitigating measures to mollify irate trade partners, domestic steel users and concerned exporters. The latest exemption list, the seventh since March, brings the total number of exclusions to 727, about 25 percent of imports subjected to the original remedy. While these are said to be the last exemptions until at least March 2003, a steel industry progress report requested by the U.S. Trade Representative is due next week. And it is likely to extinguish any embers of remaining enthusiasm the administration has for protecting this industry. Here’s why.

The political calculus was a bit passe: Impose import restrictions to optimize chances for both congressional passage of trade promotion authority (TPA) and preservation of Republican control of the House after November. Well, TPA passed. But it passed without support of a majority of representatives from steel-producing states like Pennsylvania, Ohio and West Virginia. In fact, none of West Virginia’s representatives voted for the bill. Perhaps the import restrictions compelled a few Republicans from steel country not to abandon their president, which may have spelled the difference in the three-vote margin. But arguably, more principled and less drastic measures could have achieved the same result.

The conventional wisdom that protecting steel is a relatively painless prerequisite for advancing an agenda of broader trade liberalization is no longer conventional or wise. The fallout from the safeguard announcement was immediate and widespread.

Several key trade partners launched World Trade Organization challenges. Meanwhile, Europe and Japan have been threatening retaliation against a variety of U.S. exports from key electoral states. On the domestic front, angry steel users have provided evidence of scant supply, rapidly increasing prices, dwindling profits, layoffs and contracts broken by domestic producers seemingly eager to gouge their customers.

The administration’s justification for the protection was that the industry needed time to catch its breath, retire unproductive assets, restructure, cut costs and then return to the ring in fighting shape. (Historical Note: That is the same justification provided by the Johnson, Nixon, Carter and Reagan administrations, too). This time, as is required by statute in safeguard cases, the industry submitted a plan describing how it would improve its condition, if and when relief was granted. That plan called for cost-cutting, consolidation and capacity reduction, but with the caveat that the government should provide further assistance to cover enormous retiree benefits known as “legacy costs,” which are viewed as an impediment to any potential mergers or acquisitions. For some inexplicable reason (oh yeah, presumed political gain), the administration didn’t slam the door on that scurrilous logic: Subsidize us so that we can justify your subsidies to us.

While the administration granted the import protection, it left the legacy cost issue to the Congress, from which no legislation has emerged. And none will because the industrywide coalition that mobilized for import protection breaks apart on the legacy-cost issue. Further, Congress is not about to treat steelworker retirees’ plights as unique when there are hundreds of thousands of displaced ex-Enron, ex-WorldCom, ex-Kmart employees in more dire straits.

So, with almost nothing to show for the political capital and personal credibility expended, the administration has been backing away from its fateful March decision. The steel industry progress reports due to the U.S. Trade Representative may prompt a full-scale retreat. There has been virtually no capacity reduction. Companies that were in bankruptcy in March are choosing to go back into production rather than liquidate. Start-up and production costs at outdated facilities are increasing, not cutting, costs. Plans for big mergers, rumored to have merit before the March decision, are no longer considered serious. Nothing positive has transpired in six months, and this should infuriate the administration.

Citing supply shortages, significant price increases, contract reneging, intolerable harm to downstream industries, concern for exporters targeted for retaliation, compromised prospects for opening markets to U.S. products and services abroad, the need to honor WTO commitments, and the failure of the industry to effectively use the import relief, the administration’s case for revoking the steel tariffs altogether is strong. Peace with honor is within grasp.

Dan Ikenson is a trade policy analyst at the Cato Institute.