The Steel Protection Racket

COMMENTARY Global Politics

The Steel Protection Racket

Mar 4th, 2002 2 min read

Former Policy Analyst

Aaron Schavey is a former Policy Analyst

Just give it four years, says Sen. John Rockefeller, D-W.Va.

Just four years of huge tariffs on imported steel, along with other protectionist measures, and all will be well. The U.S. steel industry will recover. Chronic overcapacity will be reduced. Steel-makers will begin to invest in new technologies and become more efficient. Four years from now, they'll be ready to take on the world -- even if the world continues to dump steel here and slap high tariffs on our exports.

It's not the same as agriculture, the protectionists say. We grow enough corn and wheat and soybeans to survive even if we were shut off from the rest of the world for centuries by war or other tragedies. If we don't protect steel, we may not have enough to build weaponry and meet domestic needs. This isn't a four-year corporate welfare program, they say, it's a security issue.

We're hearing more of this argument, from Sen. Rockefeller and others, now that President Bush is about to decide whether to raise tariffs and take other steps to protect the domestic steel industry. Approve the tariffs and other measures, Rockefeller says, and "the future of our nation's steel industry, its national security contributions and a critical portion of our manufacturing economy will be secured." Otherwise, he says, "we may well lose this essential domestic industry forever -- with grave consequences."

This would be an utterly convincing argument but for one tiny problem -- it isn't true. Failure to cater to the steel lobby won't render us vulnerable on the defense front and it won't kill the industry. And anyone who believes that Sen. Rockefeller and his allies won't be back in four years asking for more knows little of the history of government giveaways.

A recent Commerce Department report found that U.S. steel-makers are capable of producing three times the amount of steel we'd need for national security purposes during war. And that's counting not only military uses -- which make up just 0.1 percent of domestic steel production capacity -- but also the steel needed to keep the economy purring.

In fact, steel's problems have almost nothing to do with protectionism or the world economic order and almost everything to do with over-capacity. According to The Wall Street Journal, the global steel industry produced 847 million tons of steel in 2000. Very impressive. Too bad demand totaled only about 807 million tons.

This oversupply forces down the price of steel and causes economic hardships for many U.S. steel manufacturers. Unfortunately, more protection for the steel industry, even in the name of national security, won't change that.

Why? Because the oversupply of steel worldwide isn't the only problem. So-called "integrated" steel mills (which have a strong union presence), have been losing market share to "mini-mills" for some time now. These smaller facilities, which operate more efficiently and can produce steel more cheaply, now control 50 percent of the market. That's up from 10 percent in the late 1970s. Over the same period, imports have increased by only 10 percent. More protection won't do anything to help the integrated steel mills.

Besides, many of our trading partners complain about the way we protect the steel industry today, and they retaliate when they can.

If the nations of the world want to help the steel industry, they should eliminate protection and subsidies -- which merely upset the balance of supply and demand -- and let the industry go through the changes it needs to make.

That's what Big Steel needs: Someone who'll refuse the industry's latest shake-down attempt -- a protectionist plea masquerading as a patriotic defense issue. Unfortunately, that's not what it has asked for and, unless President Bush can stand up to the powerful interests led by Sen. Rockefeller, that's not what it's going to get. 

Aaron Schavey is a policy analyst in the Center for International Trade and Economics at The Heritage Foundation.

Distributed nationally on the Knight-Ridder Tribune wire