Commentary

Steel and its Protection Boss

Recently, Senator John D. Rockefeller IV (D-W.Va.) presented his perspective on why the president should grant import protection to the steel industry. His diagnosis that the steel industry is ailing has merit, but his prescription of more trade barriers is no cure at all.

The steel industry’s woes will persist, even with massive import curbs, unless and until significant domestic capacity reduction is realized. Demagogic rhetoric and finger pointing only delays that day of reckoning.

Senator Rockefeller perpetuates the myth that “our steelmakers simply can’t compete with subsidized foreign competitors operating in protected sanctuary markets.” What he doesn’t acknowledge is that one would be hard pressed to find a U.S. industry already more subsidized and protected from foreign competition than the steel industry. What he fails to admit is that the 1997 Asian crisis, the catalyst for the steel 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 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.

The truth is that Section 201 cases are explicitly about injury caused by fair trade (i.e., healthy competition). Under such circumstances, the onus is on the protection-seeking industry to bow its head humbly and express contrition for its state of affairs - hence the requirement under the law that the relief-seeking industry submit a detailed plan of how it intends to right its ways under the protection, if granted. Unfortunately, import restraints will render any recovery plan less tenable.

In reality, aggressive import competition is a symptom of what truly plagues the industry. Unhealthy domestic competition caused by large, unnatural barriers to exit is the real culprit. 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. But since most firms face this same cost structure, the collective incentive is 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 artificially created environment.

The solution is consolidation. The obstacle is that most 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. People don’t want to lose jobs. 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.

Since import restrictions won’t solve the problem, why make matters worse for the economy by restricting trade? In its relentless pursuit of protectionism and subsidies, the steel industry’s trade agenda threatens the well-being of many major economic interests. Chief among them are 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.

U.S. exporters are also major victims of a steel-centric trade policy. Foreign governments have begun mimicking the U.S. antidumping law, a protectionist weapon honed to perfection by years of steel-industry lobbying.

New import restraints will delay necessary steel industry reforms, raise the costs to consuming industries and consumers, and further threaten prospects for exporters. Senator Rockefeller’s constituents would be better served if he devoted half the energy to resolving the legacy cost issue that he does to vilifying trade.

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