The Indisputable Case for Keeping Steel Tariffs

TradeAlert.org ^ | Wednesday, October 08, 2003 | Alan Tonelson

[Willie Green]

For education and discussion only. Not for commercial use.

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).

[Willie Green]

Excerpted and condensed from:

Adam Smith: The Wealth of Nations, Book 4, Chapter 2

Of Restraints upon the Importation from Foreign Countries
of such Goods as can be produced at Home

"There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry...

• The first is, when some particular sort of industry is necessary for the defence of the country....

• The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry is, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former....

As there are two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry, so there are two others in which it may sometimes be a matter of deliberation; in the one, how far it is proper to continue the free importation of certain foreign goods; and in the other, how far, or in what manner, it may be proper to restore that free importation after it has been for some time interrupted....

• The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours....

• The case in which it may sometimes be a matter of deliberation, how far, or in what manner, it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable....

The steel industry qualifies for tariff protection under BOTH of the situations cited by Adam Smith:

• It is an industry that is vital to our national security and defense.
• It is an industry deserving of compensation for the economic disadvantages imposed upon it by stringent federal environmental, health, safety and employment regulations.

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[inquest]

I don't have a problem with the tariffs, but I would like to know where the President gets the authority to impose them by fiat.

[Recourse]

President Bush's imposition of steel tariffs in 2002 is the single worst decision of his Presidency. According to a report from the International Trade Commission, in their first year, U.S. steel tariffs inflicted a staggering $680 million hit on an already struggling U.S. economy.

Even as simple political calculus, the losers outweigh the winners from the tariff decision. While American steel makers have benefited from the tariffs, those paying the price were steel users -- everyone from auto and tool makers to appliance manufacturers. Not to mention the American consumer.

It's the classic protectionist result, with the benefits enjoyed by a concentrated and politically powerful few while the costs are diffused. According to the ITC, a quarter of the U.S. companies surveyed reported losing business to foreign competitors since the tariffs were imposed. That's a pretty significant burden for an economy struggling to come out of recession and already losing manufacturing jobs. And it's not the only cost the tariffs have imposed.

[DManA]

Since tariffs have been imposed, one Minnesota taconite plant has closed and another is threatened. At this rate the "domestic" steel makers will soon be buying all their iron ore from foreign sources. They cry for protection out of one side of their mouths and for free markets out of the other.

[Willie Green]

I agree that Bush's abysmal imposition of steel tariffs was political pandering at it's worst. While they did benefit some steelmakers, the tariff's were also riddled with hundreds of loopholes and exemptions (demanded by special interests) that hurt others.

Such micromanagement of targetted tariffs is counterproductive. The better solution would be to levy a relatively low (10~15%) flat-rate "revenue tariff on ALL imported goods. The proceeds from such a tariff could then be used to provide a reduction in the corporate income tax, benefitting ALL domestic businesses without sacrificing revenue for our Treasury.

[DWPittelli]

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation

He makes it sound as if steel is somehow different from other products, but his group's website (tradealert.org) is much broader in its opposition to free trade. For example, they oppose Fast Track authority for the President, and they say we should "Learn the difference between fair trade, which protects American companies and jobs, and free trade, which destroys them."

His economic arguments seem nonpersuasive to me. Especially the notion that steel prices, after a brief blip up, are now no higher than they would be under free trade. If that's true, then I don't see how domestic producers could be benefitting from the tariffs. At any rate, I'd expect more detail supporting his strong claim that the vast majority of economists are wrong on this issue.

[DWPittelli]

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.

Quite an admission, considering the group's claim to be looking for the interests of America as a whole, not just one industry. We as a whole are better off taking the path that does not have "depressed returns on capital and labor for the U.S. economy as a whole," even if it's "by utterly trivial levels."

[Willie Green]

They cry for protection out of one side of their mouths and for free markets out of the other.

You shouldn't confuse true domestic businesses with the larger, transnational corporations. The transnationals are the ones sqawking the "free" trade mantra. They couldn't care less about America and American businesses as they pursue their game of global Monopoly. As long as they can increase their bottom line, they'll corruptly manipulate our nation's policies and regulations just to help them put our true domestic industries out of business. They don't want the competition, so they rig the game in their favor.

[EagleMamaMT]

Read later.

[Willie Green]

For example, they oppose Fast Track authority for the President

I got news for you: our Founding Fathers would've severely frowned on that abomination as well.

"We are infinitely better off without treaties of commerce with any nation."

--Thomas Jefferson to James Madison, 1815.

[DManA]

My point is that steel companies shouldn't be mistaken for true domestic businesses, since they buy more and more of their inputs from foreign sources. So why do they deserve protection?

[DWPittelli]

The Jefferson quote "We are infinitely better off without
treaties of commerce with any nation" is not a great argument against "Fast Track" authority. First, Jefferson was opposed to all sorts of treaties. He also wrote "Our system is to have no treaties with any nation, as far as can be avoided." A Jeffersonian system of Tariffs would be to set a given Tariff level and apply it to all nations, without favoring one over another based on treaties. Given that Jefferson was a Southern planter, I'm pretty sure he'd want Tariffs to be as low as possible, but otherwise I don't see how his opinion is especially relevant: Jefferson is not particularly known for financial acumen (he went broke), and would oppose many important facets of our economy -- most of what makes it not an agrarian aristocracy, in fact. Finally, even the initial writer who favors the steel tariff would not want a Jeffersonian system: he wants a system where we trade freely only with "fair" nations, and that requires discriminatory tariffs and treaties.

[Willie Green]

Because both they and their domestic suppliers (the coal and ore mining companies) are placed at economic disadvantage by the federal governments imposition of strict environmental standards. That's why you can't just place a targetted tariff on one type of steel and not on other types or raw materials or steel products. The only thing that truly works is a much lower flat-rate "revenue tariff" on ALL imports. Then the proceeds can be used to finance a reduction of the corporate imcome tax to further benefit ALL domestic business.

[DManA]

Well that's not what Bush did is it. He gave finished steel only special treatment. The only thing that truly works is a much lower flat-rate "revenue tariff" on ALL imports.

[Willie Green]

A Jeffersonian system of Tariffs would be to set a given Tariff level and apply it to all nations, without favoring one over another based on treaties.

Absolutely! Our Founders had just been through a Revolution against a tyrannous monarchy, and one of the major issues was "taxation without representation". They considered the placement of tariffs on imports to be the mode of taxation that was LEAST oppressive of our own populace. They hated taxation, but they recognized that there was a valid need for federal revenue. But the establishment of different tariffs for different goods/nations depending on political favoritism smelled too much like corruption to them. And granting the President "Fast Track" would have been considered a ghastly abdication of Congressional rights and responsibilities to We the People.

I shudder to think what the Founders might think of Robert Zoellick if they were still alive today.
My guess is they'd be ready to try that SOB for Treason ahead of Benedict Arnold. At the very least, they'd tar and feather him for sure!

[Willie Green]

Well that's not what Bush did is it. He gave finished steel only special treatment.

Heck, he didn't even do that.
Only certain types of finished steel received tariffs so that he could make a political claim that he did something.
At the same time, he pandered to other special interests and granted hundreds of loopholes and exemptions on other types of finished steel.

He was trying to be on both sides of the fence at the same time: pure pander politics. Extremely BAD economics. It's no wonder the economy is floundering with such inept "leadership".