No later than March 6, President Bush must make a difficult decision on whether to grant trade protection to the steel industry. While he knows that the economics are totally against protection, Bush is being strongly pressured to grant it on political grounds. However, it is a false trade-off. Whatever he gains in the short-run, he will lose in the long-run.
The history of the U.S. steel industry over the last several decades has been pretty much a continuous effort to get restrictions on imports, which it blames for falling sales. In reality, unions deserve most of the blame for saddling the industry with labor costs far out of line with productivity. But management is also culpable for buying them off with future pension and health benefits that would not have to be paid until they were long retired themselves.
The legacy of this live-for-today attitude has now come home to roost. The few remaining steel companies must now pay massive sums each year to retired workers. Retiree health benefits alone consume more than $1 billion per year of steel-industry profits.
In the years since the promises were made to provide these benefits, the steel industry has shrunk to a fraction of its former size. The economy simply does not need as much steel as it once did. With less output and fewer workers to bear the cost of paying benefits to retirees, the price of producing steel domestically is just too high to be competitive, resulting in higher imports.
The steel companies and unions believe that if tariffs were imposed on foreign steel, then prices would rise by enough to make domestically produced steel competitive again. The problem is that in making steel producers more competitive, higher prices will make industries that use steel less competitive. Since there are many more businesses that use steel than produce it, the economy as a whole suffers. Estimates are that eight times as many jobs will be lost in steel-consuming businesses than would be saved among steel producers.
The best study that has been done is by economists Joseph Francois and Laura Baughman for the Consuming Industries Trade Action Coalition, a group of steel consumers. Although this study has been criticized by the American Iron and Steel Institute, which represents producers, its critique is little more than an ad hominem attack. The results of the Francois/Baughman study are well within the range of estimates one would expect from standard international trade models, such as those used by the U.S. International Trade Commission.
According to Francois and Baughman, a low tariff would impose about $2 billion in additional costs on U.S. consumers. This might save 4,375 jobs that would otherwise be lost to imports. However, the higher costs on steel consumers would likely result in a loss of 36,164 other jobs, for a net loss of 31,789 jobs. They calculate that each job saved in the steel industry will cost the economy $439,485.
Francois and Baughman also calculate the effects of a high tariff, costing consumers $4 billion, which might save 8,902 steel industry jobs. But it would destroy 74,502 jobs elsewhere in the economy. The cost per job saved under this option is $451,509.
In short, the costs of steel protection are far greater than the benefits. There would be no real decision for Bush to make if there weren't political considerations. The one that is weighing on him most heavily is fear that he will not get Trade Promotion Authority from Congress without the votes of a few members who desperately want steel protection. TPA would allow Bush to negotiate a new international agreement that would open up trade around the world, something almost all economists support.
This is a tough call. The optimists among Bush's advisers, such as U.S. Trade Representative Bob Zoellick and National Economic Council Director Larry Lindsey, believe that TPA will gain more for the economy in the long run than steel protection will cost. Other advisers argue that it will be very hard to negotiate a worthwhile trade agreement if the president squanders his moral authority as an advocate of free trade by caving in to the steel companies and unions now. Moreover, congressional authorization for TPA is not assured even if Bush imposes steel tariffs.
What clearly tips the balance against protection, in my view, is the fact that there are many other industries that would also like protection. If Bush grants it to steel, he will be hard-pressed to reject protection for autos, semiconductors and others less deserving than steel.
One of the reasons for Bush's high standing in the polls is that Americans respect his willingness to make tough decisions about the war against terrorism. He may be squandering that, too, if he bails out the steel industry.