Trade Follies

Bruce Bartlett

4/18/2002 12:00:00 AM - Bruce Bartlett
One of the main arguments against George W. Bush's decision to impose tariffs on foreign steel is that it would undermine U.S. efforts to get other countries to adopt free trade policies. Bush dismissed this argument and imposed trade protection anyway. However, the chickens are already coming home to roost. On a recent visit to Beijing, U.S. Trade Representative Robert Zoellick found the Chinese resistant to opening their market to our goods. Quite rightly, they asked Zoellick why they should let in more American goods when the United States has slapped large tariffs on their steel. Zoellick didn't have a satisfactory answer; not surprising since the United States is clearly hypocritical -- demanding free trade from others, while practicing protectionism itself. The Wall Street Journal put it more diplomatically in a report about the Beijing meeting: "The steel dispute has cast the U.S. in the awkward role of defending protectionist practices even as it preaches free trade to those criticized for their closed markets." Bush also underestimated retaliation. The Europeans have been particularly vociferous in their criticism of his action. They immediately drew up a list of $2.1 billion worth of U.S. goods that may be subject to tariffs in response to tariffs on European steel. One obvious target is the $500 million in U.S. steel exports that go to Europe annually. Furthermore, Europe likely will use the ongoing dispute over Foreign Sales Corporations to get even with the United States over steel tariffs. These are entities created by U.S. law to lower taxes on U.S. exporters. The World Trade Organization has already ruled that this constitutes a trade subsidy and is illegal under world trade law. In a few weeks, the WTO is expected to authorize the European Union to impose tariffs in response. The Europeans have let it be known that the steel decision will be a factor in their decision to impose new tariffs on U.S. goods over the FSC problem. Thus it appears that the steel tariffs are a failure any way one looks at them. Nevertheless, there has not been a great deal of domestic criticism of Bush's action. One reason is that many people view them as necessary to maintain an adequate American steel industry for defense purposes. However, the amount of steel needed for defense is a trivial amount of raw steel production -- on the order of 1 percent, according to defense expert Loren Thompson of the Lexington Institute. Thompson points out that relatively little of what the U.S. military uses today has much steel in it. Aircraft, for example, have virtually no steel in them -- being built mostly from titanium and other high-tech materials today. Nor are we building many of the weapons that do use steel, such as ships and tanks. In any case, the Department of Defense could easily stockpile as much steel as it will ever need in an emergency at far less economic cost than the tariffs impose. It can also rely on steel produced by our allies, such as Canada, or use close substitutes, such as aluminum, if the need arose. In short, the national security case for steel tariffs is very weak indeed. Others support steel tariffs because they believe that the erosion of U.S. manufacturing is a cause of economic decline. They think the United States produces too many services and not enough "things." The result, they believe, is that we will eventually become a nation of hamburger flippers. But in reality, the production of goods as a share of total economic output has never been higher. In 2000, goods production accounted for 40.3 percent of gross domestic product, up from about a third in the 1950s and 1960s. One response I heard to these data when I reported them earlier is that they simply measure the final sale of goods imported from abroad. But this cannot be the case because imports are subtracted from investment and consumption in order to calculate GDP. Thus, imports do not add to GDP -- only domestic production does. Lastly, I often heard that the United States now has the "export profile of a 19th century Third World colony," in the words of columnist Paul Craig Roberts. He says that the United States' principal exports now are agricultural commodities and other low-tech goods. But official Commerce Department data show that Roberts is wrong. Capital goods are the largest category of U.S. exports. Last year they accounted for 44.7 percent. Agricultural commodities, by contrast, accounted for only 6.2 percent. The case for steel tariffs has still not been made, while the costs continue to rise. Bush should rethink his decision.