THE STEEL INDUSTRY'S CLAIMS

In June 2001, President George W. Bush asked the U.S. International Trade Commission to determine whether steel imports were injuring America's steel producers. Under Section 201 of the Trade Act of 1974,2 the United States can apply tariffs or quotas on a temporary basis--as long as it can be shown that the imports are seriously harming domestic manufacturers. Section 201 cases are not required to prove unfair trade, by which foreign governments subsidize products to give their goods an advantage over U.S. goods. Rather, these cases must only prove that imports are causing serious economic harm to the industry.

The USITC issued a positive ruling on the steel industry's complaint on October 22, 2001, finding that 16 out of 33 steel product categories (which account for about 74 percent of the imports under investigation) had been "injured" by steel imports. Despite the fact that the steel industry is already heavily protected, the USITC recommended that tariffs of up to 40 percent be applied to steel imports.

This policy, however, would increase government intervention in an industry that is already heavily protected. According to the Institute for International Economics, approximately 80 percent of all steel imports are already subject to tariffs under U.S. antidumping laws,3 which allow the government to apply tariffs to products that are subsidized by foreign governments and then "dumped" into the U.S. market.

Despite the protections that the U.S. steel industry has already received, it is struggling. Since the Asian financial crisis, 29 steel firms have declared bankruptcy and have laid off 21,000 employees.4 Over the past two decades, employment in the industry has fallen from 450,000 to 150,000.5

But these problems are not due to foreign competition. Steel imports since the Asian financial crisis have been declining.6 Chart 1 shows that after reaching a high of 4 million tons in August 1998, steel imports have fallen by 36 percent to 2.6 million tons in November 2001. Moreover, not only have imports declined, but the market share of foreign steel has fallen as well. According to the Congressional Research Service, the market share of foreign steel producers has fallen from 28 percent in 1998 to 21 percent in 2001.7

The evidence clearly shows that a "surge" of steel imports is not occurring. Competition from imports is not the problem. Steel manufacturers are suffering because of the worldwide excess capacity in, and overproduction of, steel products. Steel makers around the world are producing more than consumers demand. In 2000 alone, according to one report, steel manufacturers produced approximately 40 million tons more than consumers demanded.8

The overproduction of steel is due to government intervention in the marketplace. Steel producers, left to themselves, have an incentive to produce only what consumers demand. Otherwise, they would be adding needless costs to their operations. When government intervenes and offers subsidies or other protections, normal market incentives are altered. Government subsidies thus may encourage a steel firm to produce more steel even if it exceeds consumer demand.

Subsidies are a common practice in the steel industry, both around the world and in the United States. For example, the American Iron and Steel Institute reports that between 1980 and 1992, foreign steel manufacturers received over $100 billion in subsidies.9 In the United States, the steel industry was the beneficiary of more than $1 billion in federal loan guarantees in 2001.10 When an industry produces more than consumers demand, the surplus puts downward pressure on the price of the product and makes it difficult for firms to earn a profit. As recently as January 10, 2002, even though the price of hot-rolled steel was rising, it was still being sold below cost.11

Homegrown problems are another reason why the U.S. steel industry is suffering. Prior to 1968, the year the steel industry began receiving government protection from foreign competition, average compensation in the industry was roughly equal to the average in the manufacturing sector. Today, the average total compensation for the steel industry is $37.91 per hour--56 percent higher than the average compensation in the manufacturing sector.12 One of the principal reasons for this high average compensation is that the steel industry's very strong unions, without the threat of foreign competition, are able to negotiate high compensation packages for employees.

The industry is also suffering because of increased domestic competition without a corresponding increase in demand. Steel is produced by two types of mills: integrated steel mills and mini-mills. Mini-mills require much less capital to produce steel and are able to produce steel much more efficiently than integrated steel mills can. According to the Institute for International Economics, mini-mills can produce a ton of hot-rolled steel at a cost of $315, compared with a cost of $350 at an integrated steel mill.13 This cost advantage enabled mini-mills to raise their market share from 37 percent in 1990 to nearly 50 percent in 2000.14

At the same time that domestic competition for producing steel has increased, steel productivity has also increased significantly. Output per worker increased from 400 tons in 1990 to 600 tons in 2000. Over this same time period, however, demand remained constant.15 With increased productivity and static demand, steel manufacturers have had to reduce their labor force. Furthermore, worldwide capacity has not fallen fast enough to reflect the stagnant demand.

WHY A SECTION 201 TARIFF IS THE WRONG APPROACH

If President Bush were to approve the USITC recommendation and raise tariffs on steel imports to as high as 40 percent, every American would feel the effects--and the U.S. economy would be set back even further--for the following reasons:

• The price of steel would rise. Steel is a key ingredient in a number of products purchased by most Americans, such as automobiles, appliances, and housing; raising the price of steel raises the cost of these products as well, thereby affecting the overall cost of living.