Steel Tariffs' Unhappy Anniversary

Commentary by Pete du Pont

The Bush administration has sought successfully to free and expand trade. Last year, Congress passed Trade Promotion Authority and Chile was added to the list of U.S. free trade partners. The president has proposed a Free Trade Area of the Americas and is pursuing the Doha round of World Trade Organization negotiations in order to eliminate tariffs, quotas and subsidies worldwide.

However, on the path to free trade, in March 2002 the president took a detour down the Smoot-Hawley highway of protectionism by imposing tariffs ranging from 8 percent to 30 percent on many varieties of imported steel. The tariffs were imposed after intensive lobbying by U.S. steel makers, and are supposed to run three years.

Section 201 of the Trade Act of the 1974 allows the president to impose tariffs and quotas when imports of a product threaten to injure the competing U.S. industry. Unlike antidumping or countervailing duties, these "safeguard" - duties aren't imposed because foreign producers are pricing their steel below cost or because overseas markets are unfairly closed. It is simply that some American steel producers can't compete in supplying the domestic market at going prices. By raising import prices, the big integrated steel companies hope to better compete.

However, the U.S. steel industry is dwarfed by businesses that purchase or consume steel - including farmers, retailers, builders, manufacturers and energy suppliers. These steel users say they lost more jobs last year due to rising steel prices than the total employment in the steel industry. The reason is that trade restrictions are causing supply shortages of raw materials, higher prices and delays. In many cases, the end result is an increase in imports of finished, or value-added, products from overseas.

"More Americans lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself," concludes a recent study by economists Joseph Francois and Laura Baughman for the Consuming Industries Trade Action Coalition (CITAC). CITAC represents steel consuming industries that employ an estimated 12 million Americans.

According to revised U.S. Labor Department data, employment in steel-consuming industries declined from December 2001 to December 2002 by 370,600 jobs. Francois and Baughman say as many as 200,000 of those jobs were lost to higher steel prices. By comparison, American steel companies employ 190,000.

Francois and Baughman estimate that higher steel prices have cost at least 4,500 job losses in no fewer than 16 states, and lost wages amount to $4 billion. About half the rise in steel prices is due to the effects of the tariffs imposed by President Bush, according to Ben Goodrich, a trade analyst at the Institute for International Economics.

The U.S. Small Business Administration estimates that 98 percent of all the 193,000 U.S. firms in steel-consuming sectors employ less than 500 workers. These businesses are too small to pass price increases from their steel suppliers on to their customers. Manufacturers have had to contract their businesses. And some of their customers are buying products from overseas, as U.S. products containing steel rose in price, and production and delivery problems arose due to steel supply problems.

The Section 201 remedy was established for three years. World Trade Organization rules and domestic law require that the International Trade Commission, a federal agency, conduct a mid-point review of the three-year tariffs in September 2003. Currently, only U.S. importers, foreign and domestic producers, and labor unions may be full parties in ITC trade remedy cases. Import purchasing and consuming industries should be full parties in all such trade cases.

After initially plummeting, steel imports rose in 2002. The American Iron and Steel Institute says this is largely the result of the 727 exclusions to the tariffs that the administration has granted over the last year. In fact, seven major U.S. steel producers recently requested that the Bush Administration expand Section 201 tariffs to include 30 developing countries plus Mexico.

But the American Institute for International Steel, which opposed the tariffs, says imports of finished steel products were unchanged, and that the increased imports were due to domestic steel companies, such as U.S. Steel and Bethlehem Steel Corp., buying unfinished products, like steel slabs, from foreign markets to process here. It is cheaper for them to do so than to make it or buy it from a domestic competitor.

In fact, half of the tonnage of steel imported under the exclusions was imported by steelmakers for further processing. Meanwhile, the Wall Street Journal reported on March 4, 2003, "domestic steelmakers, emboldened by lower foreign shipments to the U.S., are attempting to push through price increases of as much as 10 percent, the latest in a series of price rises since President Bush imposed tariffs on imported steel a year ago."

The 2002 steel tariffs were a bad idea. We can only hope that in next September's mid-point review, the administration will draw the same conclusion and move to do something about it.