The steel industry brought the country to the brink of protectionism with its vigorous campaign for tough new restrictions on steel imports. But the Senate, showing an unusual combination of economic sense and political courage, refused to jump off the policy cliff.
There are few issues that more unite economists than support for free trade. Purchasing the best goods at the lowest prices, irrespective of where they are produced, is a key ingredient to economic success.
Of course, that doesn’t mean no one loses. Participants in declining industries are hurt by all sorts of economic changes. Earlier this century workers who made buggies lost their jobs to automobiles. Decades later workers who made automobiles lost their jobs to foreign imports.
Attempting to freeze the economy to protect employment in such cases would lock resources in obsolescent and inefficient industries, stifling technological progress and economic development. Some jobs would be preserved, but many more would ultimately be lost.
Unfortunately, however, the jobs saved are visible while those destroyed are invisible. And the political process is driven by the visible. Steel workers know their jobs are threatened; they therefore organize and lobby for protection. Those who would suffer from trade restrictions — such as auto workers who would suffer as rising steel prices raised the cost of and thus lowered the demand for cars — are typically oblivious to the threat.
Which is precisely what has happened with steel. The Asian economic crisis triggered greater imports from that region. American consumers have been unambiguous beneficiaries. So, too, have U.S. industries which use steel.
But domestic steelmakers have lost some sales and a number of workers have lost their jobs. That spurred a campaign to roll back steel imports. In March the House overwhelmingly approved quotas on steel. To its credit, the Clinton administration opposed the bill.
The arguments against the legislation were unassailable. In 1998, American firms shipped 102 million tons of steel, the second-highest amount over the last two decades. Production was one-fifth higher than in 1989, the previous cyclical peak.
Domestic producers accounted for two-thirds of U.S. consumption. Indeed, America’s share of international production actually rose from 12.3 percent to 12.6 percent.
U.S. steel companies, busy squealing for protection, earned a collective profit of $1.5 billion last year. Eleven of the largest 13 steel mills were profitable.
Moreover, these companies are among the biggest purchasers of foreign steel (typically basic slab vs. finished products). As much as one-fourth of total imports goes to U.S. steel companies. Low-cost steel is obviously fine so long as it enhances already ample industry profits.
In any case, new trade restrictions would only slow, not halt, the decline in jobs in the steel industry. Over the last three decades, Washington has utilized a variety of trade restrictions, ranging from quotas to the so-called trigger price mechanism to dumping penalties to “voluntary” restraints. Yet steel employment has dropped more than 60 percent since 1980 because companies have grown more productive. This trend will continue.
Nevertheless, quotas would cost $800,000 per job saved, according to the Institute for International Economics. It would be cheaper to hand every displaced worker a life-time annuity and toss in a vacation to Bermuda.
Moreover, the higher costs from such restrictions would ripple through the economy. Not only would prices rise, but jobs would disappear. Indeed, employees in industries that use lots of steel — construction, fabricated metal products, industrial machinery, and transportation goods — outnumber those in the steel industry by 40-to-1.
Finally, protectionism would encourage retaliation against U.S. exports. America is the world’s greatest trading nation. It therefore has the most at stake in maintaining an open international economic system. Should the United States impose steel quotas, thereby violating World Trade Organization rules, other nations would be entitled to restrict American exports in response. Washington would risk sales in products where it leads the world, such as agriculture, aircraft, high-tech, and pharmaceuticals. Far more workers could find themselves without jobs.
There is one aspect in which steel imports are unfair, however. U.S. taxpayers routinely subsidize foreign producers of steel and other goods.
The Export-Import Bank lends money to the international competitors of American firms to buy U.S. products. The World Bank underwrites foreign government enterprises, including steel operations. The International Monetary Fund pushes borrowers to devalue their currency, which lowers the prices of their exports, including of steel. All these organizations should be defunded and dismantled.
Economic change can be painful; one should sympathize with the very real plight of those harmed by foreign imports. But steel workers, executives and shareholders have no right to loot the rest of the population. Preserving open markets is the only way to protect the public interest.