Industry at Front of Corporate Welfare Line

Andrew Sharkey and Leo Gerard try to pass themselves off as injured parties. The U.S. steel industry, they contend, has done everything right and is the innocent victim of foreign predation.

It is difficult to muster up sympathy for an industry that queues up perennially at the front of the corporate welfare line. For the better part of the past 32 years, some form of restriction against foreign steel has existed, making it more difficult for U.S. steel consumers to compete, and providing ample opportunity for the domestic industry to right itself once and for all.

From 1969 to 1974, there were ‘voluntary’ import restraints — restraints observed under the threat of statutory quota legislation. From 1978 to 1982, there were minimum import price arrangements — a scheme perpetrated while 19 anti-dumping petitions were pending. From 1982 to 1992, there were new quotas affecting a range of steel products from many different countries.

Since then, there have been literally hundreds of anti-dumping and countervailing duty cases brought against every relevant foreign producer from every region of the world. And on top of everything else, the industry is now pursuing an enormous campaign for global steel quotas under Section 201 of the U.S. trade laws.

Mr. Gerard decries foreign government subsidization as the cause of his industry’s woes, but conveniently fails to mention the dozens of programs from which the domestic steel industry has ‘benefited’ — programs that are arguably a greater cause of the industry’s bloated state. The past three decades are littered with U.S. and state government pension bailouts, tax refunds and loopholes, environment exemptions, research and development subsidies, loan guarantees and competitive bidding exemptions. These interferences prolonged and prevented the natural process of retiring unproductive assets.

Consider the facts. The steel industry employs fewer than 200,000 workers out of a total American work force of about 135 million. It accounts for US$30-billion of value-added in a US$10-trillion economy. In contrast, steel-using industries, which suffer from restrictions on imported steel, employ about 12.8 million. In other words, protectionism hurts more than 60 steel-using jobs for every one steel-producing job it supposedly helps.

As of May, 2001, half of the 265 outstanding anti-dumping and countervailing duty orders in place were against imported steel products. While the steel industry contends that this reflects unfair pricing behaviour of foreign producers, the fact is that the regulations governing anti-dumping administration were commandeered and effectively rewritten by domestic steel proponents in recent decades to accommodate the economic realities of steel production. Specifically, under current definitions of dumping, any industry with high fixed costs will be found to be dumping during periods of slack demand. It is profit-maximizing behaviour — and acceptable if you are a domestic company — to sell products above variable cost, but below full cost of production when the market will not bear a higher price. Domestic firms pursuing this practice are rational; foreign firms are dumpers.

Mr. Sharkey contends that there is consensus among U.S. producers — mini-mill and integrated alike — that domestic competition is not the reason for the steel ‘crisis.’ That is extremely suspect. In an article written in July, Thomas Danjczek, president of the Steel Manufacturers Association (the trade association for mini-mills), contends that ‘mini-mills as a group are highly competitive in the North American market and will continue to take a larger share of that market. U.S. shipments of steel rose about 20 million tons from the level obtained in the early 1990s, and the mini-mills now account for close to one-half of total steel shipments. In 2000, mini-mills’ share of U.S. shipments was nearly 100% of the long products and a third of flat products. In three or four years they will account for a preponderant share of U.S. steel production.’

Considering that the average mini-mill produces a ton of steel with one-fourth the amount of labour and at lower total cost than the average integrated mill, it’s no mystery why there have been declines in employment and profit. Coupled with higher energy costs of the past year and a half — costs that comprise between 15% and 20% of the total costs of steel production — these factors play significant roles in the current state of the integrated industry.

The contention that the steel industry’s problems represent a national security threat is bogus. The problem, as Mr. Sharkey and Mr. Gerard are so intent on proving, is that there is an overabundance of steel on the world and U.S. markets. How can they make both arguments? Will we be less secure if the bridges and roads — ‘transportation security infrastructure,’ as termed by Mr. Sharkey — and the petroleum refineries and storage tanks — ‘energy security infrastructure’ — are made with steel from Canada or France or Brazil? The answer is that we are more secure when foreign steel is available because competition creates better products and lower prices for the people and companies that turn this commodity into value-added products. We will always be dependent upon foreign sources of oil but we rarely hear of oil executives arguing that blocking imports is in the U.S.’s national security interest.

Steel industry alarmism is not new. The rhetoric has been around for a long time. So, too, will the U.S. steel industry. Despite current problems, there are plenty of profitable companies. Nucor, by some measures the largest U.S. steel producer now, experienced record profits in 2000. As the economy picks up again, steel will experience a rebound as it always does. No doubt there should and will be consolidation and obsolescence in the process because there remains a lot of unproductive capacity here and abroad.

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