Eliminating Steel Tariffs Is a No-Brainer
by Dan Ikenson
October 1, 2003
Dan Ikenson is a trade policy analyst with the Cato Institute.
The U.S. International Trade Commission has issued its mid-term report on the impact of the steel safeguard tariffs the president imposed in March 2002. Thanks to a biased crafting of the report's executive summary, 150,000 steel workers are claiming vindication, saying the tariffs have helped them more than they have hurt American steel consumers and the economy. Fortunately, for the remaining 275 million of us, President George W. Bush can still revoke the tariffs.
Clearly, the trade commission has an institutional predisposition to support the tariffs. It recommended the tariffs, so it would be indicting itself to conclude that the program has failed at considerable cost to the economy.
The report is loaded with data that suggest steel-consuming industries have suffered substantially because of the tariffs. A quarter of steel users reported losing customers to overseas competitors, who had access to steel at lower world market prices. Almost a third reported that long-term contracts had been broken or modified by steel suppliers, who could suddenly obtain higher prices because of the tariffs. And about 40 percent indicated that employment would increase if the tariffs were terminated. These are indications of substantial harm.
The trade commission downplays by citing the inverse of the numbers cited above. For instance, the executive summary says, "Most (steel-consuming firms) ... reported that their customers did not shift to sourcing from foreign plants or facilities."
While that is true, what justifies the implication that the 25 percent who lost customers is insignificant? After all, workers in steel-consuming industries outnumber workers in steel production 57-1, and those industries contribute $10 to gross domestic product or total economic output for every $1 contributed by steel producers.
Accordingly, harm to a small but significant fraction of steel users can easily outweigh any benefits accruing to the entire steel industry.
On that score, the report is silent as to whether steel industry efficiencies -- measured in this case by industry consolidation and cost-cutting -- would have occurred without the trade restraints.
The president now has three choices: to continue, change or revoke the tariffs.
Changing the tariffs might mean reducing tariffs or converting to import quotas that are high enough to allow American customers access to sufficient volumes of high-quality steel while protecting domestic producers from import surges. But domestic producers would regard improving market access for imports as akin to eliminating the tariffs.
Besides, modifying the tariffs would not address a World Trade Organization dispute panel's finding in July that the "safeguard injury analysis" -- the supposed justification for the tariffs -- was flawed. According to the WTO decision, there is no justification for the tariffs.
To continue the tariff program, the president must explain to steel consumers that their concerns are less urgent than those of steel producers. He must do this going into an election year when economic sluggishness -- in particular, the loss of U.S. manufacturing jobs -- is a leading issue. He will have to explain to trading partners that despite the breakdown of multilateral talks in Cancun, Mexico, and the failure of U.S. policymakers to implement yet another WTO ruling (refusing to revoke the steel tariffs), America remains committed to the multilateral trading system. Good luck.
Then there's the WTO appellate panel report -- due by Nov. 10 -- concerning the steel tariffs. The report will affirm the dispute panel's report that the tariffs were unjustified and give the green light to Europe and others to retaliate against U.S. exports. So the president then will have to explain to exporters of citrus in Florida, textiles in North Carolina, and steel users in Michigan and everywhere that the $2.2 billion in tariff retaliation against their goods was a necessary sacrifice for the steel industry. That would make for a testy campaign season.
From the start, the steel tariff enterprise has been about politics. So senior presidential adviser Karl Rove might ask whether it makes sense to continue to protect a steel industry that has been a ward of the federal government for more than three decades, is mostly concentrated in a few states and largely comprises workers whose union just endorsed Democrat Richard Gephardt for president.
Then Rove might ask whether the tariffs should be terminated and the decision packaged as a tax break for U.S. manufacturing. That approach would prevent a trade war that could sink economic recovery, reinforce a U.S. commitment to a fledgling international trade dispute process and reinvigorate the stalled worldwide trade talks, which could provide enormous export opportunities to American businesses. The downside would be alienating steel producers, whose allegiances are elsewhere anyway.
Mr. President, eliminating the steel tariffs is a no-brainer.
This article originally appeared in The Detroit News on October 1, 2003.