December 27, 2001 | Commentary on Foreign Aid and Development
Yet the wisdom of treating the cause of suffering rather than
merely masking the pain, appears to escape those who set government
policies for the global steel industry. Instead of forthrightly
treating the disease-chronic over-capacity-they continue to treat
the symptoms through an expensive course of government subsidies,
tariffs and quotas.
Steel is not healthy these days, mostly because it produces more
than consumers need. This pushes prices downward and makes it
difficult for firms to survive. In the United States alone, 29
steel-making firms have filed for bankruptcy in just the last four
years. To address the issue of global over-capacity,
representatives from the governments of more than 30 nations,
including the United States, met in Paris on Dec. 17-18 to come up
with a solution.
The representatives tentatively agreed to cut capacity by 97.5
million tons per year by 2010. This may sound like strong medicine.
But, in reality, it amounts to little more than popping a couple of
That's because over-capacity is a far more serious problem than
the agreement indicates. The Organization for Economic Cooperation
and Development (OECD) estimates that worldwide steel production
capacity now stands at 1 billion tons per year. Implementing the
cuts agreed to in Paris would trim capacity nearly 10 percent. But
that's not nearly enough.
By year's end, manufacturers will have produced only 835 million
tons of steel-an amount still way in excess of demand. The pricing
problem afflicting steel makers will never be "cured" unless
production is slashed to well below current levels. Cutting
capacity to a level far above already excessive production levels
will have no remedial effect whatsoever.
Steel firms still will have the incentive to lobby their governments for even more protection, even more subsidies to help them "compete" for market share in a hopelessly glutted market.
As long as governments, including ours, continue to intervene,
the steel industry will continue to be plagued by the same problems
it faces today. Why? Because subsidies encourage production, even
when production levels already exceed consumer demand, and
protection allows inefficient firms to survive. Neither is
The steel industry needs to eliminate over-capacity. For that to
happen, it must be weaned from the destructively enabling-and,
ultimately, debilitating-influence of government intervention.
Governments should adopt a "tough love" approach that acknowledges
that the industry's long-term health requires that untenable firms
be unhooked from government funded life-support systems and that
some inefficient firms will need to be merged with more efficient
Many in the industry will object that removing financial
crutches is a harsh treatment. However, the industry-and the
governments that prop it up-need to ask themselves exactly how
they've benefited from the present TLC approach. Steel certainly
has not grown less dependent on government subsidies and protective
tariffs. It has not grown more profitable.
Alas, few nations seem willing to write out an effective
prescription. Indeed, to protect our domestic steel industry, the
Bush Administration is considering slapping steel imports with
additional tariffs as high as 40 percent-even though nearly 80
percent of all steel imports already are hit with sizable
protective tariffs meant to discourage "dumping."
Worse, failure to resolve the global, structural problems of
steel could impede broader trade agreements, which have proven
reliable sources of significant economic growth.
For instance, the United States Trade Representative (USTR)
estimates that the NAFTA and Uruguay Round trade agreements have
increased the income of the average American family by $1,300 to
$2,000 annually in every year since those negotiations were
completed. The reduction of trade barriers agreed to at the World
Trade Organization meeting in November will generate $700 billion
worldwide, with nearly $200 billion-or $2,450 per family-of that
going to the United States, according to a University of Michigan
The good news is the representatives agreed to meet again in February. Perhaps by then, they will realize that cutting steel capacity amounts to more than just taking two Tylenol for a broken leg. Maybe by then, they will see the light, eliminate government interventions in the industry and get steel on the road to true healing.
Aaron Schavey is a policy analyst in the Center for International Trade and Economics at The Heritage Foundation, a prominent Washington research institution.
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