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Current Trade Deficit:    
The Indisputable Case for Keeping Steel Tariffs
Alan Tonelson
Wednesday, October 08, 2003
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Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
President Bush’s upcoming decision on maintaining steel tariffs is usually described as a classic case of good economics clashing with good politics. Eliminate or gut the tariffs, and the president pleases Wall St., the media, steel-using industries, and economists nearly everywhere. But keeping the tariffs can help keep Bush in the White House by catering to voters in key 2004 battleground states like Pennsylvania and Ohio.

In fact, preserving the tariffs is a no-brainer for Bush economically as well as politically. For the recent debate on this issue makes clear that the tariff opponents don’t have a leg to stand on.

Foreign steel producers are among the loudest critics of the steel tariffs, but the case for their removal centers on their alleged costs to the American economy. In particular, steel-consuming U.S. industries – which have a major short-term interest in getting steel as cheaply as possible – have complained that by restricting imports, the tariffs have jacked up steel prices and harmed their competitiveness vis-a-vis foreign firms.

Economists and editorialists, meanwhile, have charged that the harm done to steel users and American consumers has greatly outweighed the tariffs’ benefits to the nation’s steel industry and its relatively small workforce – not only lost sales and profits, but lost jobs for the steel users’ employees.

These arguments sound powerful in principle, but the facts overwhelmingly refute them. According to an authoritative September report from the independent U.S. International Trade Commission, steel prices in America did increase after the tariffs’ onset in March, 2002, and remained relatively high for several months. By last May, however, the ITC reported that “prices in the U.S. market may be higher, lower, or about the same as those in foreign markets depending on the markets being compared.”

The reason for the price drop? Simple economics. Thanks to the tariffs, the restructuring domestic steel industry started to re-attract investment. This trend in turn enabled shuttered plants to re-open and start making steel again. As more U.S. supply came on to the market, prices predictably fell.

Even when steel prices were rising, however, steel-consuming industries and their workers generally enjoyed better times than before the tariffs were imposed. The ITC found, for example, that “Overall sales and profits increased, while capital investment fell, for most steel-consuming industries in ... (the year following the imposition of the safeguard measures), compared with ... (the year preceding the safeguard measures).” Employment levels in these steel-using industries “generally fell or remained flat” after the tariffs as opposed to before, but “productivity and wages increased over the three-year period.”

The tariffs so far seem to have depressed returns on capital and labor for the U.S. economy as a whole, but by utterly trivial levels. Steel-consuming industries’ earnings, for example, fell by a grand total of 0.01 percent.

Most revealing, according to the International Trade Commission, “A majority of steel-consuming firms indicated that neither continuation nor termination of the safeguard measures would change employment, international competitiveness, or capital investment. Purchaser responses were split over whether profitability would increase or decrease if the safeguards continued....” Translation: Whatever ails U.S. steel-consuming industries – and plenty are ailing –  it ain’t the steel tariffs. These sectors should look instead to the NAFTA-style trade expansion of the last decade and its cumulative effects.

Nor is the ITC alone in these conclusions. Pricing data from the consultants CRU International show that, as of June, 2003, prices of hot-rolled, cold-rolled, and galvanized steel were all lower in the United States than in other major steel-producing regions. Indeed, according to CRU, prices of flat-rolled steel in the United States today are actually lower today relative to Asian and European prices than they were before the tariffs were imposed.

In addition to these short-term issues, however, the steel-using industries and other steel tariff opponents need to think about long-term issues. As noted previously in this column (“It’s Not Just Steel,” March 19, 2002), steel is hardly the only product in the global economy today whose production is heavily subsidized and then dumped into the U.S. market. Rescinding or lowering the steel tariffs under consuming-industry pressure would broadcast loud and clear to foreign governments and other dumpers that it’s open season on U.S. domestic manufacturing. All our trade partners would need to do is continue dividing and conquering American industry.

But the domestic disputes opened by the steel tariffs should not be ignored by Washington. In particular, when dealing with goods like steel, which are industrial inputs, not final products, U.S. responses to predatory foreign trade practices should indeed reflect the needs of consuming industries as well. But if tariffs do increase consuming industries’ prices, the way to help these sectors is to grant them tariffs as well, especially if they can show they are using mainly domestically made parts, components, and materials.  

Of course, this kind of comprehensive approach to preserving and strengthening American industry will require a wholly new mindset in the White House and the rest of the U.S. government. Washington will have to begin thinking strategically about trade and manufacturing, not reactively. The jury is out on whether President Bush is capable of such growth. Maintaining the steel tariffs would be a great place to start.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).