Steel saga: tallying real costs of protectionist moves

President Bush's decision this month to come to the rescue of the nation's steel industry got a blast of catcalls.

"World united to condemn US decision," read one Financial Times headline. "Caving in to 'Big Steel' Tarnished Bush's Image," charged a Wall Street Journal columnist.

Republicans generally are loud in their support of free trade. Yet Republican administrations have taken at least as many protectionist actions for American industry and its workers as have Democrats.

Both parties, after all, do face elections every two years. Keeping key constituents happy is a basic rule of politics.

The Bush administration earlier protected the American lumber and textile industries.

Bush's new tariff wall, as high as 30 percent on imported steel, may help Republicans politically in such states as Pennsylvania, Virginia, and Indiana.

In battling to win over the White House, the steel industry and its customers disagreed on the impact of protection on the economy, jobs, and consumers.

A group of steel-using companies and their industry groups had a Washington consulting firm, Trade Partnership Worldwide, study the issue. The firm's report held that steel-using firms – faced with higher-cost steel at home and more competition from steel goods made abroad – would lose between 36,200 and 74,500 jobs.

"Not credible," says Robert Blecker, an American University economist in Washington. Their job loss will be "negligible." He was hired by the other side, the Stand Up for Steel Coalition.

The steel industry has excess capacity in the US, notes Mr. Blecker. It can replace much of the imported steel without greatly pushing up prices.

Without protection, 325,000 jobs are "at risk," concludes Mr. Blecker. These jobs are in the steel industry itself, among firms supplying the industry, or in communities where steel workers spend their money.

How to evaluate such studies is hard. "They are all paid for," notes Robert Z. Lawrence, who was a member of President Clinton's Council of Economic Advisers when the steel industry was first making its case.

Mr. Lawrence, now teaching at Harvard University in Cambridge, Mass., suspects the job issue is "a wash" – the tariffs will enable the US steel industry to add about as many new jobs as those lost to companies using steel or competing with steel products from abroad.

This conclusion hangs considerably on what happens to steel prices. The president's decision exempts steel from Canada and Mexico, both within the North American Free Trade Agreement. They supply about one-quarter of imports.

Even with the tariffs, price pressure from the worldwide surplus of steel production will continue in the US. A study for the Consuming Industries Trade Action Coalition (CITAC) figured the tariffs would soon raise domestic steel prices 0.2 to 0.4 percent. That's hardly a lot, especially since the prices of many important steel products have fallen to 20-year lows. For some steel products, prices have been halved in real terms since the huge surge in imports began in 1998 after the Asian financial crisis, the slump in Japan, and slow growth in Europe.

Using the price increase predicted by CITAC, Blecker estimates that the tariffs would add about $2 to the cost of an auto. Maybe it would add $35 to a $50,000 car, estimates a US Steel Corp. official. Since carmakers usually raise prices each year by $200 or $300 per car, that $35 would be hardly visible. A large appliance's price would rise maybe $2 or $3.

To Lawrence, the debate over jobs is "slightly strange." That's because the Bush protection measures are temporary, limited to three years. They are intended to give the steel industry time to reduce its overcapacity.

"Some steel firms have to be eliminated," Lawrence says.

During the late 1980s and part of the 1990s, American steel firms were modernizing. Now, US steel firms are among the most efficient in the world. That includes mini-mills that use scrap as their input and integrated mills that employ blast furnaces to make steel from iron-ore pellets. They can no longer be charged with lagging behind Japanese or European steel companies technologically.

But in this upgrading process, US steel firms added to capacity, and that, combined with the surge in imports, depressed prices. Since the late 1990s, 31 firms have declared bankruptcy.

In part, that happened because the domestic steel industry invested too much in productivity and now can't make profits on that investment, Lawrence says.

In arguing for protection, the steel industry and its union produced a study maintaining that a domestic steel industry was critical to national defense.

To Lawrence, that argument is "a joke – a fraud." The defense industry uses less than 1 percent of domestic steel output, he says.

President Bush's tariff decision doesn't take steel off the table. The steel industry is still pressing Washington to cover at least $10 billion in "legacy costs" – the pensions and health benefits of thousands of retired steelworkers.