Counting the Cost of Steel Protection

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First, let me thank Chairman Crane for the leadership he hasshown on trade issues, and let me also thank the other members ofthe committee for allowing the Cato Institute to testify at thisafternoon's hearing.

The difficulties facing the steel industry today are not unique.Increased competition and lower prices are the bane of everyindustry's bottom line. Layoffs, falling profits, and industryrestructuring can be seen today in the oil industry, where importprices have fallen 40 percent in the last year. Yet just abouteveryone understands that lower oil prices are good for our economyand that duties on imported oil would drag down living standardsand damage our national interest. The same is true for steelprotection.

The primary cause of rising steel imports and falling pricesduring 1998 was the Asian economic crisis, which resulted in (1) acollapse in demand for steel in that region and (2) a realignmentof currency values that makes foreign steel much moreprice-competitive in the United States. In light of thosecircumstances, it is only natural that that prices fell and thatthe still vibrant U.S. market pulled in extra imports.

Many other U.S. industries have been hit by the effects of theAsian crisis: Exporters have seen sales slump whileimport-competing industries have faced stiffer competition at home.There is no reason why the steel industry should receive specialtreatment at the expense of its customers and American consumers,just because it is experiencing temporarily unfavorableconditions.

The viability of the U.S. domestic steel industry is notthreatened by the recent increase in imports. According to CommerceDepartment figures, imports of steel mill products peaked in thefall of 1998 and have been declining since then. Normal marketplacereactions, compounded by the threat of retroactive antidumpingduties, caused December steel imports to fall by one-third comparedto November, including a 47 percent plunge in imports from Japanand a 79 percent fall in imports from Russia.

For all of 1998, imports of steel mill products were up 33percent from 1997, but most of the net increase in imports went tomeet strong domestic demand. In terms of tons of steel shipped, theU.S. domestic steel industry had one of its best years ever in1998. Domestic steel shipments reached 102 million tons last year,down 3 percent from 1997, but still the second highest level ofproduction in the last two decades. Domestic steel production in1998 was still 20 percent above production in 1989, at the peak ofthe last expansion. With world steel production falling, U.S.domestic producers actually increased their share of world steeloutput last year, from 12.3 percent in 1997 to 12.6 percent.

Prospects for the U.S. steel industry remain positive despitecurrent problems. Domestic demand is expected to remain strong,especially in the automotive sector, and exports could pick up in1999 as demand in East Asia begins to recover. After bottoming outin the fourth quarter of 1998, steel prices are expected to rise in1999; indeed numerous U.S. mills have announced price hikes in thepast few weeks. Despite the recent increase in imports, domesticsteel producers continue to supply more than two-thirds of thesteel consumed in the United States.

The Futility of Protection

The big steel companies and their unions point to the 10,000jobs that have been lost in the industry in the last year, but thatnumber needs to be put in perspective. First, total job losses inthe steel industry are relatively small when compared to the 2.5million net new jobs created in the whole U.S. economy in 1998.U.S. economic policy should not be driven by an industry whose joblosses in the last year are being overwhelmed by an expandingeconomy that, during the same period, created nearly that many netnew jobs on an average business day.

Second, falling employment in the steel industry is nothing new.Since 1980, the domestic steel industry has shed two-thirds of itsproduction workers. Most of the layoffs in the steel industry havenot been caused by imports, but by rising productivity within theindustry. In 1980, a ton of domestically produced steel required10.1 man-hours to produce; today the industry average is 3.9man-hours. With productivity rising faster than domestic demand,the industry has required fewer workers. The resulting decline inemployment has been relentless, with the number of employedsteelworkers falling in 15 of the last 18 years. Employment hasmoved steadily downward whether imports have been rising or fallingas a share of domestic supply. For example, imports as a percent ofnew supply (shipments plus imports) fell from a peak of 26.2percent in 1984 to a low of 16.7 percent in 1991. Yet during thatsame period, employment in the steel industry fell by more than70,000. (See the attached graph.)

Foreign competition has helped to spur this progress inproductivity, but the most ferocious competition has come fromwithin our borders, from so-called mini-mills. The more efficientof these smaller mills can produce a ton of steel in under two manhours, and are relentlessly expanding the scope of products theycan make. In 1981, mini-mills accounted for 15 percent of U.S.steel production; today they account for nearly half of thesteel-making capacity in the United States. With or withoutprotection, the industry will continue to consolidate and shedworkers, with production shifting from the larger integrated millsto the smaller, more flexible and efficient mini-mills.

Steadily declining employment has come despite three decades ofgovernment import protection. Beginning with import quotas in 1969,protection has been the rule rather than the exception for thesteel industry. Quotas were followed in the late 1970s by theCarter administration's "trigger price" mechanism and then in the1980s by the Reagan administration's "voluntary" import quotas.U.S. "fair trade" laws seem to have been written primarily for thesteel industry. About a third of the antidumping orders in the lasttwo decades have been directed at imported steel. The latest roundof protection - with preliminary antidumping rates ranging from 25to 71 percent, and a suspension agreement with Russia - threatens asevere disruption in U.S. industry access to needed steelsupplies.

The Steel Manufacturers Association, the trade grouprepresenting the mini-mill sector, recognizes the futility ofprotection. According to an official statement, its members "notethe deterioration of artificially protected industries and markets.They have seen artificially nurtured industries sink into excessivecomplacency and stagnation. They believe that competition hasfostered a revolution in the U.S. steel industry." These words areas true today as ever.

Costs to U.S. Economy

Raising barriers against steel imports will impose a real coston the American economy. Millions of American workers and tens ofmillions of American consumers will be made worse off so that thedomestic steel industry can enjoy temporary benefits. Consumerswill pay more than they would otherwise for products made fromsteel, such as household appliances, trucks, and cars. (The averagefive-passenger sedan contains $700 worth of steel.) Artificiallypropping up the domestic cost of steel will only raise the cost offinal products to U.S. consumers. If protectionist measures succeedin raising the average price of steel mill products by $50 a ton,Americans will pay the equivalent of a $6 billion tax on the morethan 120 million tons of steel they consume each year.

Steel protection will impose a heavy cost on the huge segment ofAmerican industry that consumes steel as a major input to itsproduction process. The major steel-using manufacturing sectors -transportation equipment, fabricated metal products, and industrialmachinery and equipment - employ a total of 3.5 million productionworkers. Production workers in manufacturing industries that usesteel as a major input outnumber steelworkers by 20 to 1.

A prime example is General Motors Corp., which buys 4.7 milliontons of steel directly each year and another 2.5 million tonsindirectly through independent suppliers. GM buys most of its steelthrough long-term contracts, and is thus insulated from short-termprice fluctuations, but any price increase caused by protectionwill eventually filter through when contracts are renegotiated. Ina brief filed with the International Trade Commission in October1998, GM warned that antidumping duties against steel imports couldnegatively affect its ability to compete in global markets. GM'sdomestic operations "become less competitive in the internationalmarketplace to the extent those operations are subjected to costsnot incurred by offshore competition, and to the extent that U.S.import barriers impede access to new products and materials beingdeveloped offshore, or remove the competitive incentives to developnew products in the United States."

Another company hurt by steel protection is Caterpillar ofPeoria, Ill., which buys 600,000 tons of steel annually to makeearth-moving equipment. While three-quarters of Caterpillar'sproduction facilities are located within the United States, onehalf of its sales are abroad. Higher steel prices in the domesticmarket will eventually cause its products to become less pricecompetitive compared to products made in other countries. Sales,profits, and employment will suffer.

One of the largest direct consumers of steel is the constructionindustry, which accounts for about 35 percent of domestic steelconsumption. Duties and tariffs against imported steel will filterthrough to higher prices for homes and commercial office space. Thejobs of thousands of construction workers could be put in jeopardy.When construction and other non-manufacturing industries areincluded, the total number of employees in steel-using industriesdwarfs the number of steelworkers by 40 to 1.

Especially vulnerable to rising import prices are workers insmaller companies that manufacture metal products. These firmstypically buy on the spot market rather than on long-termcontracts, and are the first to feel the pinch of higher steelprices. Many of them also act as suppliers to larger corporations,and are thus less able to pass along a hike in steel costs in theform of higher prices for their final products. The result ofhigher domestic steel prices to these companies will be lowersales, declining profits, and fewer jobs created.

If the steel industry succeeds is gaining protection fromimported steel, an even larger gap will open between domestic andinternational prices for steel mill products. This will give anadvantage to foreign firms competing against American steel-usingindustries. Faced with artificially high steel prices at home,Americans will simply buy their steel indirectly by importing morefinished products made abroad from steel available at cheaperglobal prices. If the federal government blocks the import of steelmill products through the front door, steel will come in the backdoor in the form of automobiles, industrial equipment, machinetools, and other steel-based products.

Besides being economically self-defeating, steel protectionwould be at odds with America's foreign policy interests. The bestthing America can do to encourage growth and stability in the worldeconomy is to keep our markets open. It makes no sense to hectorJapan to stimulate its domestic economy or to underwrite IMF loansto Brazil and Russia while denying producers there the opportunityto earn valuable foreign exchange by selling steel to willingAmerican buyers.

One recent study suggested that restrictions on steel importswill enhance overall U.S. economic welfare. Specifically, theEconomic Strategy Institute published a study earlier this monthwhich purports to show that steel dumping, however that term mightbe defined, reduces U.S. economic well-being, and that antidumpingduties are needed to prevent this harm. ESI's findings restultimately on the fact that wages in the steel industry are higherthan average and that displaced steel workers frequently are forcedto accept lower paying jobs. Thus, according to the ESI study, netU.S. welfare is reduced by dumping that causes job losses in thesteel sector; antidumping is good for us because it prevents thosejob losses.

First, this argument gets causation backwards: it assumes thathigh-paying jobs are the cause of economic welfare, rather than theconsequence of it. If applied across the board, the ESI analysiswould mean that public policy generally should protect our highstandard of living by discouraging or even outlawing layoffs fromhigh-paying jobs. This is basically the European approach, and itseffects are all too visible in low growth and chronic double-digitunemployment.

Second, and more narrowly, the ESI analysis assumes that joblosses in the steel sector wouldn't occur in the absence oflow-priced import competition - an assumption refuted by theindustry's steadily declining employment over the past 20years.

Third, the study fails to adequately account for the offsettingproduction and employment gains that the lower prices wouldstimulate in the far larger steel-using sectors. Even if oneaccepts the study's methodology, the hypothetical gains fromimposing antidumping duties against foreign steel are tiny - lessthan .005 percent of annual GDP - and not worth the far more realdanger that the law will be used for protection.

America's Unfair "Unfair Trade" Laws

Despite complaints from the big steel mills that Congress andthe administration are not doing enough, the system is alreadystacked in favor of domestic steel producers. U.S. antidumping lawhas become nothing more than a protectionist weapon for industriesfeeling the heat of global price competition.

These laws punish foreign producers for engaging in practicesthat are perfectly legal, and common, in the domestic Americanmarket. U.S. firms, including steel makers, routinely sell the sameproduct at different prices in different markets depending on localconditions, or temporarily sell at a loss in order to liquidateinventories and cover fixed costs. Any steel company that lostmoney in the third or fourth quarters last year was selling itsgoods at below total average cost and was consequently "dumping"its products on the domestic market according to the definitioncontained in U.S. law. If every domestic sale was required to be ata "fair" price according to the antidumping law's definition, mostAmerican companies would be vulnerable to government sanction, andU.S. consumers would find far fewer bargains.

It is a misnomer to say that steel is being "dumped" on the U.S.market. Virtually every ton of steel that enters the United Stateshas been ordered by a willing American buyer, often months inadvance of its actual delivery. Antidumping duties not only stopforeign producers from selling in the U.S. market; they stopAmerican citizens from buying the type and amount of steel theyneed at prices that benefit them most as shareholders, workers andconsumers.

Proposed Legislation Would Compound theDamage

On top of antidumping protection already in place, an array ofnew protectionist proposals in Congress threatens U.S. producers'access to imported steel. None of the offered legislation wouldincrease general economic welfare and much of it would be inviolation of U.S. international commitments.

1) H.R. 506/S. 395, Stop Illegal Steel Trade Act, sponsored byRep. Visclosky and Sen. Rockefeller. This bill would limit steelimports from all nations to 1997 levels on a monthly basis for aperiod of three years. Although SISTA says that the import limitscould be accomplished by "quotas, tariff surcharges, or negotiatedenforceable voluntary export restraint agreements, or otherwise,"it is in essence a quota bill that would set strict limits on thevolume of foreign steel U.S. companies would be allowed topurchase. SISTA is a clear violation of our institutionalobligations under the GATT.

Quotas are one of the most damaging forms of trade restrictions.They redistribute wealth from consumers to domestic producers andto those foreign producers lucky enough to get quota rights, whilethe U.S. government does not receive tariff revenues. In otherwords, SISTA would tax U.S. steel users to benefit major steelcompanies, both here and abroad. Moreover, SISTA would endanger theability of U.S. steel-using industries to obtain the materials theyneed. According to calculations by the Precision MetalformingAssociation, for example, SISTA quota levels would leave U.S.manufacturers nearly 4 million tons short based on 1998 levels ofdemand.

2) H.R. 502, Fair Steel Trade Act (FASTA), sponsored by Rep.Traficant.

FASTA would impose a 3-month ban on imports of steel and steelproducts from Japan, Russia, South Korea, and Brazil, in disregardfor the needs of American consumers and steel-using industries. Atrade ban - even a limited one - would seriously damage privatebusiness relationships and undermine the global competitiveness ofdynamic U.S. companies. This bill would deprive the U.S. economy ofall the gains from steel trade and offer only temporary benefits todomestic steel companies. It would, in short, be a disaster.

3) H.R. 412/S. 261, Trade Fairness Act of 1999, sponsored byRep. Regula and Sen. Specter. This legislation would create apermit and monitoring program that would require all steelimporters to register with the Commerce Department and reportinformation on the cost, quantity, source, and ultimate destinationof all steel shipments. The bill authorizes Commerce to collect"reasonable fees and charges" to defray the costs of issuingpermits.

More significantly, the bill would amend the Trade Act of 1974to make an injury finding easier under Section 201. First, it woulddrop the requirement that imports be a "substantial cause" ofserious injury (i.e., "not less than any other cause") and insteadrequire that imports be only a cause of injury, howeverinsignificant. Second, the bill would detail the factors to beconsidered by the ITC to determine whether U.S. industry hassuffered serious injury.

The Trade Fairness Act is the most subtle of all the currentproposals, and thus the most dangerous. Its import-reportingregime, in addition to being an unfair burden that falls only onsteel importers, has the potential to choke off beneficial steeltrade through paperwork. The Section 201 amendments, however, areits most ominous provision. By making 201 cases much easier forpetitioners to win, this bill threatens to open the floodgates ofprotectionism in the future. It is clearly a step in the wrongdirection.

4) Voluntary Export Restraints. The administration is attemptingto jawbone foreign governments - especially Japan - into reducingsteel exports "voluntarily." Of course, a VER is in reality aninformal quota that is hardly voluntary. Like all quotas, VERsdistort the economy and reduce national welfare. The Institute forInternational Economics has estimated that steel quotas in the1980s imposed a net loss on the U.S. economy of $6.8 billion ayear.

Conclusion

Unfortunately, changes in steel prices are invisible to ordinaryAmericans. Those changes show up, eventually, in the price of anautomobile, or a plane ticket, or rental space in an officebuilding - but the causal connections are complex and subtle. Theeffect of a tax on foreign steel just doesn't show up in theaverage family's budget in any direct or immediate way. As aresult, steel producers are free to equate their interest with thenational interest without generating much in the way of grass-rootsopposition.

The campaign for steel protectionism thus highlights a classicproblem of political economy known as concentrated benefits anddispersed costs. The benefits of restrictions on foreign steel areconcentrated in the relatively small steel-producing sector, whilethe costs are dispersed throughout the entire economy. Steelproducers therefore have a very clear and powerful incentive tolobby for protectionism, while most of the rest of us who stand tolose don't have a big enough or clear enough stake to oppose themwith any vigor.

Worldwide economic developments have combined to produceconditions that at present are unfavorable for U.S. steel producersand favorable for American steel users. In such a circumstance, itis not the business of the U.S. government to intervene in themarketplace and favor one U.S. industry at the expense of otherU.S. industries. In particular, it makes no sense to penalize theindustries that in terms of employment and value-added are of muchgreater significance to the overall national economy. So if youthink an import tax to help out the oil companies sounds like a badidea, you ought to come to the same conclusion about steelprotectionism. Just because the costs are better hidden doesn'tmean they're not there.

The federal government should not use its power to favor oneindustry over another, or to confer special benefits on a small butvocal segment of producers at the expense of the nation's generalwelfare. Congress should reject calls for steel protection andreform the antidumping law to prevent future abuse.

Daniel Griswold

Subcommittee on Trade
Committee on Ways and Means
United States House of Representatives