Commentary

The U.S. Government’s No-Win War on Imported Steel

By Daniel Griswold
This article appeared on Cato.org on February 1, 1999.

The Clinton administration missed a congressionally imposed deadline this week for devising a plan to protect the domestic steel industry from rising imports. The delay can probably be blamed on the no-win politics of the decision: restricting steel imports would appease a small but noisy industry clamoring for special protection, but only by inflicting real damage on a variety of American interests at home and abroad.

An antidumping petition now working its way through the system could result in steep tariffs that would virtually bar steel imports from Russia, Japan and Brazil. The victims of this war against imported steel can be seen everywhere but on the nightly news. The first casualties, as in all trade wars, are consumers. If antidumping duties and quotas are enacted, Americans will pay more for a broad range of products, including household appliances, new construction, machinery, trucks and automobiles. The typical five-passenger sedan, for example, contains $700 worth of steel. If government intervention raises the price of steel by $50 a ton, Americans will pay an extra $6.5 billion for the 130 million tons they consume annually.

Quotas and duties on imported steel will not “protect” U.S. industry. They will profit only one relatively small sector at the expense of others. Some of America’s largest industries — construction, industrial machinery, automobiles and durable goods — swallow huge quantities of steel as an intermediate input to their final products. General Motors, General Electric and Caterpillar each buys more than 600,000 tons of steel a year. Higher steel prices will damage sales and profitability across a broad swath of the American economy, endangering jobs in industries that employ 40 times as many workers as does the domestic steel industry.

The steel industry’s petition demonstrates once again that America’s antidumping law is nothing but a protectionist club for industries feeling the heat of global price competition.”

Steel protection makes a mockery of U.S. foreign economic policy. In Russia a largely privatized steel industry generates a significant share of that country’s foreign exchange earnings. Russia’s largest steel plant, AO Severstal in Cherepovits, 200 miles north of Moscow, is 90 percent privately owned and run by a Western-trained, 30-something management team. The 190 percent duties threatened by U.S. antidumping law would effectively close the U.S. market, costing Severstal and other major Russian producers 20 percent of their sales.

Such a loss would be devastating to those fledgling private firms and the communities that depend on them and cause Russians to become even more cynical about market reform. It will make it all the more difficult for the Russian government to repay the $22 billion it has borrowed from the International Monetary Fund — loans underwritten in part by U.S. taxpayers. Barriers to imported steel will inflict similar damage on the struggling economies of Brazil and South Korea.

In Japan the steel industry, like the rest of the economy, is struggling to stay above water. Overall steel production in Japan has already slumped to a 30-year low. Imposing quotas on Japan’s steel exports to the United States — which account for more than a quarter of Japan’s total steel exports — would only further frustrate efforts to revive that nation’s moribund economy.

Despite their heavy cost, trade barriers won’t even save jobs in the steel industry. U.S. steel mill employment has fallen by 70 percent in the last two decades, despite recurring bouts of protectionism. The reason for the job losses is simple: rising productivity. The integrated steel mills brag, and rightly so, that they have reduced the number of man-hours needed to produce a ton of steel from an industry average of 10.1 in 1982 to 3.9 today. But fewer man-hours mean fewer men and women in the mills.

Foreign competition has spurred this progress, but the most ruthless competition has come from within our borders, from so-called mini-mills. The more efficient of those smaller mills can produce a ton of steel in under two man-hours and are relentlessly expanding the scope of products they can make. With or without protection, the industry will continue to consolidate and shed workers, with production shifting from the larger integrated mills to the smaller, more nimble and efficient (and less unionized) specialty mills.

The steel industry’s petition demonstrates once again that America’s antidumping law is nothing but a protectionist club for industries feeling the heat of global price competition. That law punishes foreign producers for engaging in practices that are perfectly legal, and common, in the domestic American market. U.S. firms, including steel makers, routinely sell the same product at different prices depending on local conditions, or temporarily sell at a loss in order to liquidate inventories and cover fixed costs. If every domestic sale were required to be at a “fair” price according to the antidumping law’s definition, most American companies would be vulnerable to government sanction, and U.S. consumers would find far fewer bargains.

Given the high cost and low return of steel protection, the question is not whether the administration and Congress will stand up for steel but whether they will stand up for America.

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of Mad about Trade: Why Main Street America Should Embrace Globalization (Cato Institute, 2009).