The steel tarriff decision

Posted: Mar 28, 2003 12:00 AM

A little over a year ago, on March 5, 2002, President Bush made a serious mistake by imposing tariffs on imported steel. At the time, there were many, including myself, who said that the negative impact of this action on steel consumers would be much greater than any benefit to steel producers. Thus the economy as a whole would suffer. In the time since, this prediction has been borne out by experience.

Last month, the Consuming Industries Trade Action Coalition, a business group, published a study showing that as a result of tariffs, job losses among steel users exceed those in the entire steel industry. It estimates that 200,000 jobs were lost among steel users, while there are only 187,000 total people employed in the steel industry. Sixteen states lost at least 4,500 jobs, including California (19,392), Texas (15,826), Ohio (10,553) and Michigan (9,829).

The reason why steel consuming industries lost jobs is because the tariffs greatly increased their costs -- costs that could not be passed on to consumers due to the absence of inflation. Hence, these higher costs had to be absorbed out of profits. With many manufacturers already suffering losses due to the slow economy, the result was layoffs and bankruptcies.

The steel tariffs ranged from 8 percent to 30 percent on nine different categories of steel. The latest data show that most steel prices are up by about 30 percent on average since the tariffs were imposed. For example, cold rolled coil is up 41 percent since January 2002. Hot rolled coil is up 37 percent, stainless steel is up about 30 percent, and hot rolled plate and wire rod are up 24 percent. The Producer Price Index (PPI) for all steel mill products rose 11.7 percent between February 2002 and February 2003, according to the Bureau of Labor Statistics.

By contrast, steel users have often been forced to reduce their prices. Prices for motor vehicles are down 2.3 percent over this same period. Motor parts are down 1.3 percent, and machine tools are down 1.9 percent. Among steel-using businesses, none has seen price increases close to those for steel producers. Fabricated metal products are up just 1 percent, and the overall PPI is up 3.5 percent.

Many of those hardest hit have been small businesses, which is documented in hearings before the House Small Business Committee on July 23 and September 25 of last year, and by the House Ways and Means Committee on March 26, 2003. This has led to an effort in the House and Senate (H. Con. Res. 23, S. Con. Res. 27) to get President Bush to review the economic consequences of steel tariffs on consumers. On March 18, Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, asked the U.S. International Trade Commission to study the matter, as well.

Not surprisingly, profits are up among steel producers and down among steel users. According to Commerce Department data released on March 27, the primary metals industry -- mainly steel producers -- went from a $1.6 billion loss in 2001 to a $1.2 billion profit in 2002. However, steel consumers mostly saw losses. The motor vehicle industry had a loss of $7.6 billion, and industrial machinery lost $2.5 billion. The fabricated metal products industry saw its profits fall from $9 billion in 2001 to $5.8 billion last year.

In short, in order to give steel producers a tiny profit, many other industries were forced to sacrifice far more than steel producers made. In theory, the tariffs were supposed to give the steel industry "breathing room" and enable it to restructure itself. However, as economists Gary Clyde Hufbauer and Ben Goodrich point out in an Institute for International Economics study, the higher steel prices resulting from import restrictions have encouraged producers to expand even though world steel capacity is far greater than needed, according to the Organization for Economic Cooperation and Development. In short, tariffs have done more to prevent restructuring than to bring it about.

In a time of war, some may say that having spare steel capacity is a good thing. However, according to a Department of Commerce report, the defense industry uses very little of total steel consumption. What steel it needs is highly specialized grades that are not threatened at all by imports. The kind of high-tech weaponry that is being used by our armed forces in Iraq today depends far less on things made with steel than was the case in previous wars, and far more on things like computers and software.

According to press reports, the World Trade Organization has ruled that the U.S. steel tariffs imposed last year violate trading rules that we have agreed to abide by. Although the Bush administration intends to appeal the ruling, its best course would be to just let the tariffs die.