The U.S. integrated steel industry is ailing. But massive importcurbs are bad medicine, which would only prolong necessarystructural reforms within the industry and adversely impact steelusers, consumers and exporters.
The steel industry's woes will persist unless and untilsignificant domestic capacity reduction is realized. Aggressiveimport competition is merely a symptom of what plagues theindustry, not the cause. Unhealthy domestic competition caused bylarge, unnatural barriers to exit is the real problem. Thesebarriers are the product of intransigent unions, unscrupulous steelmanagement, and enabling government policies.
Steel production carries high fixed costs and exhibitsdecreasing average costs as production rises. The greater a firm'soutput, the greater its profitability at a set price. Thecollective incentive is, thus, to produce more than the marketdemands at that price, causing price and profit to decline. Demandcan only support a finite number of profitable firms in an industrywith this cost structure, and that magic number is much smallerthan the firms currently operating in this artificialenvironment.
The solution is consolidation. The obstacle is that most of thewould-be targets have unattractive balance sheets, dogged by hugeliabilities, known as legacy costs. Specifically, legacy costs arethe billions of dollars of benefits promised to retired unionsteelworkers. They are the legacy of greed: demands made by theUnited Steelworkers Union that were economically irrational, butagreed upon because management assumed it could pawn off itsobligations on taxpayers. Unfortunately, that assumption mayultimately prove correct.
Recently, price increases were announced in anticipation of hugetariffs. Consequently, firms that should be laid to rest can nowrationalize that exiting the market may be premature. Nobody wantsto fold operations. Politicians don't want their constituents outof work. So they resolve to agree that consolidation is key, butnot in my backyard. And so the problem persists.
This vicious circle is perpetuated by the demagogic rhetoric andfinger pointing of people like Senator John D. Rockefeller IV(D-West Virginia), who recently wrote, "our steelmakers simplycan't compete with subsidized foreign competitors operating inprotected sanctuary markets." What he doesn't acknowledge is thathis own steel industry is already heavily subsidized and protectedfrom imports. What he fails to admit is that the 1997 Asian crisis,the catalyst for the import surge that followed, had nothing to dowith sanctuary markets or unfair trade. Nor does the currentSection 201 proceeding have anything to do with those urban legendsabout "unfair trade." The steel industry and its handlersintentionally ignore these facts because stigmatizing imports asunfair is a useful smokescreen for protectionism as usual.
Complicit are Michigan's U.S. senators, Carl Levin (D) andDebbie Stabenow (D). Both support a steel-centric trade policy thatultimately undermines their state's interests. Last May, they weresignatories of a letter to the president threatening to withholdsupport for any trade agreements that might "weaken" theantidumping law, a trade-restricting tool used primarily by thesteel industry.
The problem is that foreign governments have adopted copycatantidumping laws and have turned their sites on U.S. exporters.Michigan companies like Whirlpool, Dow Chemical and Gerber Productshave all been hit by foreign antidumping measures recently. Since1997, exports from Michigan have increased by 91 percent to over$3.7 billion in 2000, a trend jeopardized by steel's agenda with atleast the tacit support of Levin and Stabenow.
Import curbs won't cure the steel industry, so why make mattersworse for the economy by restricting trade? The steel industry'sperennial pursuit of protectionism threatens the well-being of somemajor economic interests. Chief among them are the steel-usingindustries, like automobile, machinery, and appliance manufacturersthat are forced to endure higher input prices. These industriesemploy 50 times the merely 200,000 employed in steel production,and are vital to Michigan's economy.
New import restraints will impede legitimate steel industryreforms, raise the costs to consuming industries and consumers, andfurther threaten prospects for exporters.