Switching on steel?

Posted: Sep 08, 2003 12:00 AM

WASHINGTON -- George W. Bush must soon decide whether to reverse the biggest economic blunder of his presidency by ending his three-year imposition of steel tariffs halfway through that period. The issue that bitterly divided the administration when President Bush wandered down the protectionist path 18 months ago now has his entire economic team united in advocating a change. But high-level sources insist no discussions have been held, and the president has not signaled his intentions.

Even Commerce Secretary Donald Evans, a leader in imposing tariffs, is reported by colleagues to support change. Seldom has a president's initiative backfired so completely as his adding of tariffs, from 8 percent to 30 percent, on steel products, effective March 20, 2002. Failing to save steel industry employment as claimed, the tariffs are killing U.S. auto parts production jobs and threatening to drive more manufacturers out of the country.

Loyal administration officials, proud of their president for courageous tax reduction, were heartsick that he was talked into tariffs to build support in steel-producing states. The idea that it would yield labor union backing was a fantasy, and sanctions by the disapproving World Trade Organization were assured. Once again, protectionism has been exposed as an economic and political loser. The bigger lesson is that any administration that betrays its own principles does so at its own peril.

First-year Sen. Lamar Alexander of Tennessee, experienced in national Republican politics, put the situation precisely in a July 16 Senate speech (cited favorably in private by Bush officials). "It is a story of an honest effort by our president to save jobs that has backfired," he began. Alexander pointed to a study finding that 200,000 Americans in the steel industry have lost their jobs since tariffs were imposed. He warned that auto parts suppliers, facing cost pressures on steel, will move to Mexico, South Korea, Japan and Germany -- any country where steel can be purchased at global market prices.

Internal government documents make clear that the tariffs did not achieve their economic goals. Steel imports were not reduced as purchases were transferred to countries excluded from the tariffs. Instead of declining as intended, steel sector consolidation has increased (with Bethlehem Steel and National Steel taken over by competitors). The share of steel production by "minimills," which require fewer workers than traditional firms, has doubled.

Over the last year, the Commerce Department has been battered by as many complaints against tariffs by steel-purchasing companies as support from steel-producing firms. Nevertheless, the steel makers have not given up. On the airport tarmac in Cleveland on Labor Day, Bush was lobbied by a steel executive who thanked him for the tariffs and told him of how they facilitated restructuring of the industry.

Just how much the tariffs have helped the president's re-election prospects in Pennsylvania, West Virginia and other steel-producing states is debatable. Not debatable is the failure of this protectionist venture to further Bush's efforts for a foothold in blue-collar labor unions. At the high-water mark on March 5, 2002, when Bush announced the tariffs, United Steelworkers President Leo Gerard was grudging in his praise: "I'm not sure it will do all that needs to be done to save the industry, but at least we have a ray of hope."

The White House had hoped the tariffs would impel the Steelworkers to join the Teamsters and other unions in supporting drilling in the Arctic National Wildlife Refuge (ANWR), with oil proceeds to help fund "legacy" payments for retired union members. Instead, Gerard opposed ANWR, and embarked on a fruitless effort to pay for legacy benefits out of the U.S. Treasury. When Gerard on Aug. 5 announced his union's support for Rep. Richard Gephardt for president, he bashed Bush for "reactionary policies."

The long-term political cost of the steel tariffs is clearer than their benefit. Free market economist Stephen Moore told me the Bush administration had "lost its virginity" on the issue. He meant that the president is now vulnerable to protectionist lobbying on an endless succession of commodities. It is hard for a president even tacitly to admit a mistake, but that is what Bush's economic team wants him to do.