Commentary

Import Curbs Would Delay Reforms, Hurting Consumers and Steel Users

The U.S. integrated steel industry is ailing. But massive import curbs are bad medicine, which would only prolong necessary structural reforms within the industry and adversely impact steel users, consumers and exporters.

The steel industry’s woes will persist unless and until significant domestic capacity reduction is realized. Aggressive import competition is merely a symptom of what plagues the industry, not the cause. Unhealthy domestic competition caused by large, unnatural barriers to exit is the real problem. These barriers are the product of intransigent unions, unscrupulous steel management, and enabling government policies.

Steel production carries high fixed costs and exhibits decreasing average costs as production rises. The greater a firm’s output, the greater its profitability at a set price. The collective incentive is, thus, to produce more than the market demands at that price, causing price and profit to decline. Demand can only support a finite number of profitable firms in an industry with this cost structure, and that magic number is much smaller than the firms currently operating in this artificial environment.

The solution is consolidation. The obstacle is that most of the would-be targets have unattractive balance sheets, dogged by huge liabilities, known as legacy costs. Specifically, legacy costs are the billions of dollars of benefits promised to retired union steelworkers. They are the legacy of greed: demands made by the United Steelworkers Union that were economically irrational, but agreed upon because management assumed it could pawn off its obligations on taxpayers. Unfortunately, that assumption may ultimately prove correct.

Recently, price increases were announced in anticipation of huge tariffs. Consequently, firms that should be laid to rest can now rationalize that exiting the market may be premature. Nobody wants to fold operations. Politicians don’t want their constituents out of work. So they resolve to agree that consolidation is key, but not in my backyard. And so the problem persists.

This vicious circle is perpetuated by the demagogic rhetoric and finger pointing of people like Senator John D. Rockefeller IV (D-West Virginia), who recently wrote, “our steelmakers simply can’t compete with subsidized foreign competitors operating in protected sanctuary markets.” What he doesn’t acknowledge is that his own steel industry is already heavily subsidized and protected from imports. What he fails to admit is that the 1997 Asian crisis, the catalyst for the import surge that followed, had nothing to do with sanctuary markets or unfair trade. Nor does the current Section 201 proceeding have anything to do with those urban legends about “unfair trade.” The steel industry and its handlers intentionally ignore these facts because stigmatizing imports as unfair is a useful smokescreen for protectionism as usual.

Complicit are Michigan’s U.S. senators, Carl Levin (D) and Debbie Stabenow (D). Both support a steel-centric trade policy that ultimately undermines their state’s interests. Last May, they were signatories of a letter to the president threatening to withhold support for any trade agreements that might “weaken” the antidumping law, a trade-restricting tool used primarily by the steel industry.

The problem is that foreign governments have adopted copycat antidumping laws and have turned their sites on U.S. exporters. Michigan companies like Whirlpool, Dow Chemical and Gerber Products have all been hit by foreign antidumping measures recently. Since 1997, exports from Michigan have increased by 91 percent to over $3.7 billion in 2000, a trend jeopardized by steel’s agenda with at least the tacit support of Levin and Stabenow.

Import curbs won’t cure the steel industry, so why make matters worse for the economy by restricting trade? The steel industry’s perennial pursuit of protectionism threatens the well-being of some major economic interests. Chief among them are the steel-using industries, like automobile, machinery, and appliance manufacturers that are forced to endure higher input prices. These industries employ 50 times the merely 200,000 employed in steel production, and are vital to Michigan’s economy.

New import restraints will impede legitimate steel industry reforms, raise the costs to consuming industries and consumers, and further threaten prospects for exporters.

Daniel J. Ikenson is the associate director of the Center for Trade Policy Studies at the Cato Institute.