Secretary Pritzker Forgets About Steel Users

Commerce Secretary Penny Pritzker authored an Aug. 12, 2016, opinion piece in the on-line version of the Cleveland Plain Dealer that emphasizes her desire to protect the steel industry from import competition. She states, “We take seriously our ongoing responsibility to combat unfair trade that threatens the viability of this industry and the good people in our steel-making communities.” Pritzker notes that at the Department of Commerce, “Currently, we are enforcing 161 anti-dumping (AD) and countervailing duty (CVD) cases on steel products to combat the countries, like China, that are trying to dump steel on our market.”

There is no doubt that steel producers are being affected by global steel overcapacity, as I have noted here, here, and here. Much of the overcapacity is due to China’s use of various policy measures to stimulate steel industry expansion. In 1995, China produced 95 million metric tons (MMT) of steel, equal to the amount produced in the United States. Twenty years later in 2015, Chinese production had risen more than eight-fold to 803 MMT. U.S. production decreased 17 percent over that same period, amounting to 79 MMT in 2015. Global production more than doubled, rising from 753 MMT in 1995 to over 1600 MMT today. The boost in China’s output exceeded 700 MMT and accounted for more than 80 percent of the increase for the entire world. It is reasonable to conclude that China’s actions have been the most important factor in glutting the global steel market.

A world marketplace so strongly influenced by government policies can hardly be described as fair. The effects of the steel surplus are felt around the globe, including in the United States. U.S. steel producers have been dealing with relatively low-priced imports from a number of countries. They have responded by filing many AD/CVD petitions, which helps to explain Sec. Pritzker’s statement about her role in “enforcing 161 AD/CVD cases.” Those measures restrict the importation of a variety of steel products from numerous countries. They have succeeded in making the United States a somewhat high-priced island in a world awash with low-priced steel. The AD/CVD restrictions apparently haven’t been sufficient, though, to ensure the profitability of American steel producers. United States Steel Corporation reported a loss of $1.5 billion in 2015.

However, what Sec. Pritzker ignores is that efforts to restrict imports to the benefit of steel producers come at the expense of steel users. U.S. manufacturing firms that use steel as an input have to pay prices that are higher than those paid by competitors located in other countries. This makes steel-consuming manufacturers vulnerable to losing sales to lower-priced imported goods that compete with them in the U.S. marketplace. Economists long have understood that imposing trade restrictions lowers the economic welfare of the country that puts them in place. Since the steel-consuming sector is so much larger than the steel-producing sector, the welfare losses for the overall U.S. economy are magnified.

The Bureau of Economic Analysis (BEA) is part of Sec. Pritzker’s Department of Commerce. BEA data indicate that value added by “primary metal manufacturing” amounted to $59.7 billion in 2014. (Note: Primary metal manufacturing [NAICS 331] includes nonferrous metals, such as copper, aluminum, magnesium, lead, tin, silver, and gold, so is much broader than the steel industry.)  Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger than primary metal industries. The disparity in employment also is more than 16 times greater. Primary metal manufacturing employed 400,000 people in 2014. Downstream manufacturers employed 6.5 million. Employment by U.S. steel producers is somewhere in the range of 100,000 – 150,000.

The point is not that the U.S. steel industry is small and insignificant, because clearly it is not. Rather, the point is that the problems of the steel industry need to be kept in perspective. The bottom line is that it would be a poor policy choice to attempt to protect steel producers in ways that do much greater harm to steel users. Those who wish to provide policy support for the steel industry should look for approaches that do not involve restricting trade.