NCPA - National Center for Policy Analysis

Trade Isn't The Culprit In Steel Industry's Woes

March 24, 1999

Last week, the House of Representatives voted overwhelmingly to restrict steel imports. H.R. 975 directs the President to reduce steel imports using quotas, tariffs or other measures. But the industry's problems are less trade-related than it thinks. The true source of steel's woes lies with the Federal Reserve and the International Monetary Fund.

Prices for virtually all industrial commodities have fallen over the past year.

  • Prices for aluminum and corn are down 19 percent; copper is off 23 percent; and hog prices have fallen 32 percent.
  • Coffee has dropped 35 percent; wool has plunged 39 percent; and steel is down 43 percent.
  • Overall, commodity prices are down 17 percent.

The 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 -- the opposite of inflation, which results from too much money chasing too few goods.

The problems of steel have been exacerbated by the IMF, which often forces countries with financial problems to devalue their currencies, making their goods cheaper in terms of dollars.

Last year, many countries ran into financial problems, and the IMF advised them to run trade surpluses to raise hard currency for debt service. Currency devaluations aid this effort by increasing exports while reducing imports.

Thus actions aimed directly at imports are totally inappropriate, and the negative consequences for other industries 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. Other industries may 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.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 24, 1999.


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