Opinion Editorial | |
| Wednesday, March 24, 1999 | |
Trade Isn't The Culprit In Steel Industry's Problems |
Last week, the House of Representatives voted overwhelmingly in favor of legislation to restrict steel imports. H.R. 975 directs the President to reduce steel imports and empowers him to use quotas, tariffs or other measures to ensure this result. While the steel industry has definitely had some recent problems, they are less trade-related than it thinks. The true source of steel's woes lies with the Federal Reserve and the International Monetary Fund.
While steel is the squeaky wheel getting the grease, the fact is that prices for virtually all industrial commodities have fallen over the past year.
Such a decline in commodity prices indicates a general deflationary trend. Deflation results when the Federal Reserve restricts growth of the money supply to less than the growth of output. In short, it is the opposite of inflation, which results from too much money chasing too few goods. The Fed has been following a deflationary policy for several years in an effort to wring inflationary expectations out of the economy. This has led to lower long-term interest rates, which have benefitted consumers and businesses alike. But it has also put downward pressure on commodity prices.
The problems of steel have been exacerbated by the policies of the IMF, which often forces countries with financial problems to devalue their currencies. When a foreign currency falls against the dollar it makes goods priced in that currency cheaper in terms of dollars. Thus a foreign steel producer would be able to lower his price in terms of dollars without changing the price in terms of his own currency.
Last year, many countries in Asia and elsewhere ran into financial problems and the IMF was very busy dispensing advice. One piece of advice is always for a country to run a trade surplus in order to raise hard currency to service its debts. Currency devaluations aid this effort by increasing exports while reducing imports. (Just as exports get cheaper in terms of dollars, imports become more expensive in terms of domestic currency.)
Thus the Fed's deflationary strategy has been reinforced by the IMF's policies, which have driven down prices for imports. While this is painful for impacted industries, we should not forget that consumers are the ultimate beneficiaries. Last year, consumer prices rose just 1.6 percent, the best performance in 13 years. In terms of inflation, 1997 and 1998 were the best back-to-back years since the early 1960s.
If low prices and increased imports are the result of Federal Reserve and IMF policies, then it is clear that actions aimed directly at imports are totally inappropriate. They are attacking symptoms, not causes. Consequently, import restraints not only will not help the steel industry more than temporarily, they have negative consequences for other industries that will more than offset steel's gains.
For starters, higher steel prices will raise costs for steel-using industries, such as autos, construction equipment and industrial machinery. Unilateral import restraints probably violate international treaties and will invite retaliation by steel-exporting countries. It will also encourage other industries to seek special deals for themselves, which could erupt in a full-scale trade war. At a minimum, consumers will end up paying more for many products than they do now.
Protection is almost never good policy. But today in the case of steel it is especially bad because it aims so far afield from the source of its problems.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 24, 1999.
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