April 29, 1982

April 29, 1982 | Backgrounder on Trade, Economic Freedom

The Steel Import Crisis


(Archived document, may contain errors)

181 April 29, 1982 THE STEEL. IMPOR T CRISIS INTRODUCTION I America and Europe are again at war over steel. In March 1980, U.S. Steel filed anti-dumping suits against the producers of the European Economic Community, charging them with selling large volumes of steel in the U.S. at prices well below their cost of production. The Carter Administration, under preksure from its Europ e an partners, negotiated an end to the dispute.l In exchange for U.S. Steel's dropping its case, the Community provided assurances that future prices of European steel exports to this country would be in line with the ltrevisedlt Trigger Price Mechanism (T P M) which monitors steel imports into the United States. Now, a little more than a year later, the American steel industry is again confronting the Europeans with a similar charge But in these new cases, filed with the Department of Commerce on January 11, 1982, U.S. Steel has been joined by the other major producers in accusing the EEC and four other governments of engaging in "unfair trade practices.I' Furthermore, the recent actions allege that dumping and subsidy violations have been committed In the vi ew of American steelmakers, jobs and needed revenues have been lost to unfairly traded imports. In demanding prompt and effective enforcement of America's trade laws, they view their case as an elemental matter of economic justice.

Others would disagree, however. Proponents of "free trade" also view the steel import crisis as a matter of economic justice.

But they contend that the culprit is the domestic industry which has refused to modernize and make itself competitive not See David Fouquet US-EC Crisis Management: Steel conflict forces dramatic action," Europe, January-February 1981, pp. 48-49.

U.S. Department of Commerce News, January 11, 1982 2 foreign steel assistance of the Congress, to come up with a resolution to this pressing dilemma It is up to the Reagan Administration, with the This Administration has won the praise of the American steel industry for good reason. During the presidential campaign candidate Reagan pledged himself to policies that would end the unhappy period of government-steel i ndustry confrontation declared on September 16, 1980: "America needs a modern, world class industry. My Administration will support government policies which enable us to achieve It has. Stretch-outs of environ mental and anti-pollution regulations report e dly have saved the steel industry millions of dollars and will, in the future, halt the erosion of jobs.4 More important for the steel industry are laws which enable it to recover needed capital to be spent in the purchase of the most up-to-date machinery and technology Capital Cost Recovery Act of 1981 meets that need with its provisions for rapid depreciation of existing equipment and machinery. As a result of these positive developments, steelmakers are confident that they will be able to carry forward t heir I revitalization program stration's enforcement of the nation's trade laws. From the onset of the new import crisis last spring U.S. officials moni tored closely the growing flood of European steel imports into the country flagrantly violating its pr e vious agreement not to sell steel in the U.S. market below the benchmark prices of the TPM, the Depart ment of Commerce took the unprecedented step of 'lself-initiatingll its own investigation on November 13, 1981.5 Shortly thereafter the International Tr a de Commission made a preliminary determination that llinjuryll had indeed been caused to the domestic industry by surging foreign imports. *en American steelmakers subsequently filed their own suits on January 11, 1982, the Commerce Department announced t he suspension of the TPM. Industry leaders, however did not view the TPM's suspension as retaliation for their having filed cases against U.S. trading partners, as they had when the Department took a similar step under the previous Administration.

The final outcome of the new cases remains in doubt. Consulta tions between Washington and the Community will continue for the moment, American producers are pleased with the Administra tion's responses to their import concerns He The American steel produ cers are equally pleased with the Admini Responding to industry charges that the EEC was But Steel at the Crossroads: One Year Later (American Iron and Steel Institute June 1981), p. 10.

See "Environmental Policy for the 1980's Steel Industry" (Arthur D. Little, Inc 1981).

See John M. Starrels, "Steel Crisis Adds to Strain in US-EC Ties The Journal of Commerce, December 8, 1981 Impact on the American 3 The honeymoon between the Reagan Administration and the American steel industry may be coming to an end, however present anti-dumping and subsidy cases will be decided one way or another by early 1983 at the latest. What then? Industry analysts such as Brookings's Robert W. Crandall (author of The United States Steel Industry in Recurrent Crisis believe that the U.S. govern ment has come close to exhausting the available policy options vis-a-vis steel." At the same time, the Administration is not confronted with steel's import problems alone shipbuilding, and textiles, among others, have also been damaged by growing import competition over the past decade. Undoubtedly changes can be introduced into the operation of those industries which will over time visibly improve their performance.

Clearly, the government has a role in this process of renewal.

At the same time, however, the Administration believes that its role in the modernization of the industry must remain limited.

This position was unambiguously emphasized by Secretary of Commerce Malcolm Baldrige in mid-1981 of the American Iron and Steel Institute, the Secretary said The Automobiles Addressing the 89th annual meeting We can free the economy from the impact of excessive government, we can develop tax practices which encourage capital investment, we can ease the regulatory burden imposed on industry, and we can vigorously enforce the fair trade laws of the United States. We are prepared to do all these. But you must remember that government business cooperation also puts a responsibility on your shoulders.

CURRENT INTERNATIONAL PROBLEMS OF THE AMERICA N STEEL INDUSTRY At one time, the United States possessed the world's most productive steel sector. No longer, observes a l.eading industry source Following World War 11, the domestic industry accounted for over half of total world steel production. That p osition has eroded steadily as new steel industries have sprung from a number of developing countries and existing steel capacity in Japan, Europe and elsewhere has been rebuilt and expanded.s This has been gradual and in no way detracts from the impor ta n ce of the steel industry to the American economy. It remains Conversation with author on November 10, 1981 Malcolm Baldrige, "Banquet Address," delivered at the 89th General Meeting Proceedings of the American Iron and Steel Institute (Wash*ngEon, D.C AIS I, May 28, 1981 p. 65.

Steel at the Crossroads: The American Steel Industry in the 1980s (American Iron and Steel Institute, January 1980 p. 9. 4 the backbone of the nation's industrial strength, employing a total of 600,000 as well as doing business with hundreds of thousands of other manufacturers (consider automobiles, for example) and suppliers throughout the United States. And despite its current difficulties, the American industry produced 118.7 million net tons of steel last year, making it the larg e st steel sector in the world after the Soviet Union.'g Favorable resource endowments of coke and iron; the influence and power of well organized groups dedicated to the survival and modernization of the domestic industry; and the central role of American s teel in the U.S. economy at the very least give the industry a fighting chance to survive in its present form Nevertheless, this country's steel sector is in trouble nowhere more so than from imports problem are interrelated Several aspects of this 1) Exp a nded global production and capacity. Between 1948 1952 and 197301977, annual steel production worldwide more than tripled, from 203 to 750 million tons.1 During this period spectacular gains were made in virtually every geographic region with the exceptio n of the United States, which marginally increased its production from 92.3 to 133.3 million tons In Japan, for example, production jumped from 5.1 to 120.9 million tons, while Western Europe's nearly tripled, from 54 to 152.4 million tons.ll 46 million to n s in 1965 to approximately 159 million tons in 1981, while the European Community's capacity grew from 60-66 million.tons to 192-198 million tons. The exception to this pattern was the United States expanded only at a minimal rate from 137 to 148 million t ons.l Though the demand for steel products has declined since the mld=1970s, the world now has a ,significantly larger capacity to produce it. The'result is an'excess of steel capacity According to a recent report by the New York-based consulting firm, Pa i ne Webber, the non-communist economies have been producing steel at a rate that far outstrips demand. The small excess of 42.9 million tons of steel in 1970 had jumped to 126.5 million tons by 1980 Steel-making capacity also soared. In Japan, it went from American steel-making capacity This crowded world steel market has been prompting many foreign producers to maintain, if not increase, their share of the U.S. market. Both tariffs and non-tariff barriers discourage DIE ZEIT, Number 3, January 22, 1982.

Unless otherwise stated, net, not metric, tons are being cited equivalents. tional Steel Trade," October 12 1981.

World Steel Dynamics (Paine s( Webber, et al September 9, 1981 p. 26 lo l1 Steel at the Crossroads, pg 26. These figures are in "raw steel l2 F rederick G. Jaicks, Chairman, Inland Steel Company, "Remarks on Interna l3 I' 5 some foreign steel from entering the United States, as they do in other countries, but the U.S. market remains one of the most open in the world. In 1981, for example, a total of 19,898,000 tons of steel mill products were imported by the U.S., compared with 15,495,000 tons in 19

80. By the end of last year, market penetra tion by imports reached nearly 23 percent, compared with 17.4 percent in December 1980.14 The Japanese hav e been exporting about 6 million tons of steel to the United States in recent years. With Japan's steel mills operating below 70 percent capacity in 1981, however, exports to the U.S. could easily increase bility of producer action in the United States fo l lowed by a call for a "Voluntary Restraint Agreement VRA) similar to last year's arrangement limiting Japanese automotive exports to this country. Likewise, the European Economic Community has a strong incentive to export steel to the United States the EE C sold more steel in the United States than did Japan approximately 6.4 vs. 6.2 million tons.15 Notwithstanding efforts by the American industry to become more competitive in its own market, excess global capacity will continue to exert pressure on foreign producers to export steel to the United States They are prevented from doing so by the strong proba Indeed, in 1981 2) America's declining steel competitiveness. As the U.S steel industry's fortunes have declined so has its ability to compete internationa l ly. Until the mid=1950s, the United States exported 2 million tons of steel more than it imported. By 1978 this surplus had changed to an 18.7 million ton deficit. While this country imported an average of 1.3 million tons of steel annually thirty years a g o, it was importing nearly twenty million tons by 1981.16 Likewise, America's percentage of world steel exports has decreased. Thirty years ago, U.S. steel exports made up more than 25 percent of the global steel total. The figure for 1977 was 3.7 percent of the wor'ld'-s steel in 1948, but only 17.8 percent by t.he late 1970s the end of World War 11, the United States was the strongest economy in the world and the main exporter of manufactured goods including steel. This advantage was bound to fade. Yet c e rtain factors have exacerbated the expected development. Japan's postwar business-government elite, for example, decided to make steel a major cornerstone of the national economy. Japan enjoyed a variety of institutional advantages over a number of countr i es The United States produced 45.4 percent To be sure, part of the American decline is relative. At l4 "Import Penetration of American Steel Market at Record High in 1981 AISI, Washington, D.C January 29, 1982 l5 Data on EEC and Japanese imports are taken from "Import Penetration of American Steel Market l6 Steel at the Crossroads, p. 9; and "Import Penetration of American Market l7 Ibid p. 27. 6 including the United States. These advantages included signifi cantly greater access to private bank capital to spur investment ltleveragingl liberal anti-trust policies which permitted the most cost efficient production methods (to put it another way the Japanese are not afraid of industrial l'bignesst1 and the absence of restrictive seniority and work rules of la bor unions that interfere with productivity improvements.

Crucial to Japan's success is the basic oxygen furnace. The first ItBOFIt was built there in 19

58. By 1963, the six major Japanese firms, accounting for 80 percent of total steel produc tion, were all using it By contrast, the first major U.S company to introduce ItBOF1' was Jones Laughlin in 19

57. As late as 1970, Youngstown Sheet and Tube was just beginning to install what had by then become a dated technology.

Over the past decade, the Japanese have been retiring unpro ductive facilities at a rate putting both Europeans and Americans to shame. From the end of 1977 through 1980, Japan eliminated the traditional open-hearth furnace, while reducing from 100 to 94 t he number of already dated basic oxygen furnaces. Since the late 1970s, Japan has remained ahead of its competition by intro ducing the most advanced technology, including continuous casting machines, ultra-high power operation, and vacuum-degassing equip ment and the increased use of automated systems for many of its steel production processes.. The Japanese steel industry today leads the world in the number of blast furnaces with inner volumes of more than two thousand meters As a consequence of these te c hnological advances frequent ly pioneered by other countries, including the United States Japanese gains in steel-making productivity have been equally dramatic. In 1980, for example, its steel output rose by 4 percent (to ,111 million tons) while labor i n put decreased by. 2.2 percent. Overall labor praductivity'doubled in Japan's steel industry in the last decade, in contrast with a modest 16 percent in the United States over the same period. These productivity gains have been stimulated by Itvolunteer wo rk group" (Jishu Kanri) activities which encourage employees to devise practical solutions to production problems.

Yet neither technology nor high worker input entirely explain the present gap between the Japanese and Americans in the manufac ture of steel . Among the other factors are that the average hourly earnings in the United States are much higher than in Japan ($20.00 vs. between $12.50 and $8.50). Productivity and technology are nevertheless the factors that are considered by many analysts to be de c .isive in turning around the $8 per ton production cost advantage which the United States enjoyed in 1965 to Japan's present advantage of between $90 to $100'over the United States. Unlike the Western European steel industry, the Japanese have been able t o achieve this comparative advantage without government subsidies. For this reason, Japan's share of 7 the U.S. steel market is not currently being legally challenged by domestic producers 1-8 3) Less developed country (LDC) exports to the U.S. market.

Sin ce the early 1960s, a number of LDCs have established their own steel-making facilities, in most instances to decrease depen dence on the established European and Japanese suppliers advanced LDCs even have become exporters one LDC, Brazil, whose exports o f steel mill products to this country reached 547,000 tons in 19

81. The most important LDC steel exporter to the United States is South Korea whose U.S sales reached about 1.2 million tons last year. In general, more advanced LDCs, such aS Brazil, India, Mexico, South Korea, Taiwan and Venezuela have two major advantages over the U.S their labor costs are from one-fifth to one-tenth the American rate and government subsidies are substantial. In addition, South Korea and Taiwan have some of the world's fin e st production facilities. But these producers do not yet seriously challenge the European and Japanese suppliers to the U.S. because they do not produce the pipes, tubes, and other sophisticated steel products for which there is strong import demand 4) Th e European Export Surge. Between 1980 and 1981, the European Economic Community nearly doubled its steel exports to the United States, from 3,870,000 to 6,482,000 tons.l9 Advocates of "free trade" argue that this export surge has been caused by a rising do l lar and a strong American demand for European steel Industry advocates retort that the Europeans are massively dumping and subsidizing their steel exports to the United States. The Reagan Administration is attempting to determine the validity of these con t ending arguments value affect steel trade patterns other cases they do not. For the EEC and a number of other exporters Canada, for example changes in the dollar's value may affect the volume..o,f steel exports to the United States Brookings'mRobert W. Cr a ndall maintains, for example, that a strong dollar serves to reduce the price of imported goods including steel; when the dollar begins to lose value, steel imports will become more expensive and demand for them will fall accordingly While this argument a ppears to hold over short periods of time, it does not explain the rises and falls over the past decade in European steel exports to the U.S. If it did, it would have predicted record low EEC steel shipments to the U.S Some I..

The January 11 suits filed b y American producers name only a The. dollar and import demand. Do changes in 'the dollar In some cases they do, in l8 For a recent assessment of the Japanese industry's competitive strengths refer to "Japanese Steel Industry vity Kidder, Peabody Company, December 4, 1981 Import Penetration of American Steel Market. If A Study in Modernization and Producti l9 8 in 1978 when the dollar was drastically undervalued the Community's 7,463,000 tons of steel shipped to the United States in that year were nearly o n e million tons higher than in 1981 In fact b Unfair trade practices Over the past decade, the U.S. and the EEC, with Japan, have attempted to reach agreements barring unfair trade practices efforts was the Multilateral Trade Negotiations (1973-1979 The MT N concluded with a series of agreements, including "codes of conduct" to prevent dumping and subsidization in international trade.

Either practice occurs when an exporter sells goods in the home or export market at Itless than fair value the Europeans with having committed the latter offense anti-dumpingfl code provides a mechanism to be used by aggrieved parties in filing for relief fact taking place, and a separate determination that "injury" to the domestic industry has occurred. Dumping without injury is not considered to be a sufficient basis for awarding relief In the U.S., these two functions are performed by the Department of Commerce and the International Trade Commission, respectively.

If the U.S. government, or its European counterpart, finds in favor of a domestic industry, anti-dumping duties are then assessed against the foreign exporter.

Subsidies are grants of public assistance to industry.

American manufacturers insist that the European Community lavishly subsidizes its industrial sector. Such practice, they argue allows individual EEC members to sell their goods in the U.S. at artificially low prices. Like the anti-dumping code, both "subsi dizati.on" and' llinjuryl' have to be found. before duties in this instance, counterirailing duties ) are assessed against' foreign exporters The culmination of these Dm is price or cost discrimination.

American steel producers have charged a finding that Itdumping" is in The As signatories to both codes, the United States and the European Community have attempted to implement them during a period of increased trade tension between themselves recent confrontation over steel highlights these tensions.*l The most U.S. producers assert that the Western Europeans have fla grantly violated the MTN dumping and subsidy codes. Indeed, much of the steel entering the United States at least between April and December 1981 would not have entered at competitive prices.

At a minimum, the present downturn in steel demand in the European market clearly might be prompting producers to export unfairly 2o 21 Data are taken' from Kiyoshi Kawahito Japanese Steel in the American Market: Conflict and Causes 1981, p 232 See John Starrels Playing by the Rules Europe, March/April 1982. 9 traded steel to this country even if it con travenes U.S. trade laws.

Commenting on the relationship between subsidization and steel exports, an American Iron and Steel Institute memorandum further states Tlhis enormous pressure to dump, and the resulting injury to the United States, are severely ex acerbated by the willingness of foreign governments to subsidize continuing heavy losses in the steel industry to protect employment. And foreign government subsidies, a critical problem for the U.S. industry, are not going to end soon A hard-fought battl e among European governments on this subject resulted in an agreement to phase-out subsidies by 19

85. The outcome of the agreement itself is highly uncertain and in any case the next four years are likely to see continuing massive steel subsidization in Europe and elsewhere.22 The domestic industry, moreover, insists that dumped and subsidized Europea n exports are directly undermining its "revital ization program.Il the matter succinctly Republic Steel's Chairman William DeLancy puts Our principal message is this in a private enterprise economy, our ability to build for the future is totally dependent u pon our present and future profitability. We are, right now, being seriously hurt by a flood of foreign steel, much of it coming from heavily subsidized companies. We have to tell you that this constitutes a clear and present threat to our ability to unde rtake the rebuilding programs -which are.so important to.our compantes, our employees, and our customers.23 Functioning as we do Trade law enforcement and steel revitalization are thus of one package in the view of industry leaders.

January 1982 petitions against the EEC present the sternest test to date of Europe's willingness to abide by the MTN anti-dumping and subsidy codes. If American steel wins its.case, dumping and countervailing (subsidy) duties will be applied against European imports.24 ate an e n d to the crisis before then, as occurred in September Domestic producers and U.S. trade officials agree that the Perhaps Washington and the EEC will be able to negoti 22 AIS1 Memorandum, November 2, 1981 23 24 Statement of William J. DeLancey before Senat e Steel Caucus, November 2 1981.

The range of duties being demanded by American producers varies.

Steel for example, is demanding between $20 and $300 a ton for dumping 50 and $300 a ton for subsidies U.S. lo 19

80. Such a prospect appears unlikely for the moment, however.

Observers in the United States further agree that, unless the EEC is able to master its own steel crisis, future actions by American producers against Community steel imports are a foregone conclu sion 5) Europe's Steel Crisis. The EEC Is steel industry is in serious trouble In the past eight years, 250,000 jobs have been eliminated being have been de~astated In some instances, as in Belgium governments have been toppled Regions dependent on the industry for their well Where the Communi ty produced 156 million tons of steel seven years ago, it barely produced three quarters of this amount in 19

81. Problems began to emerge as long ago as the late 1960s.

Nevertheless, many of the EECls producers ignored the trend.

Between 1968 and 1975, the Italian firm of Finsider lost about 200 million, for example, yet increased capacity by 50 percent over this period countries. By the mid=1970s, as employment and profits began to fall, EEC producers finally realized that they were in trouble.

Fed by generous subsidies, however, most continued'to add capacity In October 1980, the EECls Council of Ministers at last proclaimed a "Manifest Crisis1# in their steel industry.26 that Ilvoluntary restraint measuresi1 had failed, the Community decreed an end t o industry subsidies by 19

85. The Council of Ministers further established production quotas for all large steel producing firms As a result, most European Community steel producers (except Italy) have cut back on uneconomic capaci ty over the past year b ack existing capacity. Acting 00 their.owy, German producers have been reducing domestic production in steel from approxi mately 59 million tons in 1974 to 46 million tons in 1981.

Overall, however, investment plans call for a modest 3 percent drop in EEC steel-making capacity over the next several years.

As the Economist says: IIEurope still endeavours to produce almost as much steel as in the last boom in 1974, when competition abroad was less keen and the world still wanted to import steel from The res ult: gluts of.underpriced and subsidized steel probably will continue to inundate the world market, includ ing that of the United States Similar cases exist in most other European Noting Denmark and Britain appear serious in their efforts to cut 25 Robert Ball Europe's Durable Unemployment Woes Fortune, January 11 1982, p. 72 26 European Community News, No. 29/1980, November 5, 1980 The Economist, December 21, 1981, p. 15. 11 ADMINISTRATION EFFORTS TO AMELIORATE THE STEEL IMPORT PROBLEM Until the late 1950 s , imported steel counted for a negligible portion of the domestic market advantage began to decline. In the late 1960s, American producers became alarmed over foreign penetration which by then had reached about 13 percent. Responding to these concerns, th e Nixon Admini stration negotiated a voluntary restraint agreement with European and Japanese producers. The agreement was renewed in 1972 and remained in force through 1974 when it was allowed to lapse Then the U.S.Is comparative In the wake of anti-dumpi n g petitions filed against Europeans and the Japanese by domestic producers, the Carter Administration in late 1977 announced a comprehensive relief program for the industry. From this came the Trigger Price Mechanism.28 Though there have been two TPMs sin c e the system was intro duced, the principle remains the same. The TPM is a formula that sets import price levels based on production costs in Japan deemed the worldls most efficient producer. Unlike the VRAs, the TPM does not set an absolute quota on fore i gn imports it monitors and analyzes steel imports to detect possible dumping and, since October 1980, subsidy violations. Whenever the TPM detects sales below the benchmark prices of the Mechanism; the Commerce Department (previously the U.S. Treasury) ex a mines the import for evidence of unfair trade practices.29 Rather The llrevisedll Trigger Price Mechanism was an outgrowth of the October 1980 truce between Washington and Brussels. It now contains a Itvolume trigger1' which Itwill under certain circum st a nces, accelerate government review of import surges and, at certain operating rates, result in the examination of import transactions to determine-if they are at less than fair value or are subsidized.1130 During fall and winter 1981, industry spokesmen f requently voiced frustration with the TPM, labelling it 'Iineffective'l and worse. Certainly it was not halting the flood of imports.

Domestic producers, nevertheless, support the TPM. It provides them, for example, with a price monitoring system. M oreover, the Trigger Price Mechanism lends an element of predictability to the 28 See Robert W. Crandall's brief description of the background surrounding the introduction of the TPM in his The United States Steel Industry in Recurrent Crisis (Washington, D.C.: The Brookings Institution, manuscript August 1980 pp. 1-3.

As previously noted, the original TPM was suspended by the Department of Commerce in March 19

80. The "revised" TPM was likewise suspended by the Department last January in both instances, after domestic producers filed massive suits against the Community 30 Steel at the Crossroads: One Year Later, p. 11 29 I 12 administration of U.S. import laws. Domestic as well as foreign manufacturers benefit from this. And the nation's steelmakers also know that the TPM represents the limit of what this govern ment will do to address the industry's ongoing import problems.

POLICY ALTERNATIVES AND DANGERS On the surface, the American steel industry is very pleased with Reagan Administration enforcement o f import laws. For good reason, U.S. Steel's Chairman David M. Roderick speaks for his colleagues in praising the Department of Commerce for its readiness to listen to the industry's import concerns and to act on them. Baldrige with U.S. Trade Representat i ve William Brock, has made it clear to the Europeans that they must demonstrate more understanding for the industry's domestic problems than in the past.31 But the Reagan Administration is looking primarily to industry to improve its own fortunes. Indeed, if the industry fails to take action in this area, its relationship wjth the Administration could change for the worse American steel leaders know that they need to carry out their ambitious I'revitalization program to retain credibility.

Currently, Ameri can producers enjoy a large amount of public sympathy. Evidence exists that the EEC and Japan resort to ques.tionable if not blatantly illegal trade practices in their dealings with the United States. Nor has their tepid response to Washington's call for a unified economic response against Soviet aggression advanced the cause of lfinterdependence in the U.S Moreover, a number of objective studies of the American steel .industry conclude that domestic producers are able to match the.internationa1 competitio n on a product-by-product basis The key word is able arguing that our comparative advantage has been lost because the U.S. lacks the favorable government-industry climate which encour ages industrial innovation in other countries notably Japan.

But the res ponsibility for the decline of U.S. steel must also be placed on the shoulders of the nation's producers. For they have failed to respond to the challenges facing their industry In part, U.S. manufacturers are correct in Wages paid to the steel industry's workers not only are higher than those paid their counterparts in Europe and Japan, they are 20 percent higher than the average wage paid to workers in the rest of the U.S. manufacturing sector. Wage boosts have been awarded to workers even during a perio d of lagging producti vity.

The American steel industry must modernize to survive. The Reagan Administration has provided U.S. producers with appropriate 31 See New York Times, December 16, 1981. 13 tax incentives geared to encourage capital formation, inc reased research and development, and necessary investments in up-to-date technology. Yet there are signs that the industry's leaders have lost confidence in their own economic destiny. When the major steel-producing corporation of this country, U.S. Steel , pays 6.3 million for the purchase of an oil company, the Administra tion and the public have the right to ask whether the capital needs of the industry are as pressing as they had been led to believe If the nation's steelmakers are not prepared to invest most of their available capital in the modernizaton of their industry, the import competition battle will be deservedly lost.

CONCLUSION Over the past decade, a number of America's key manufacturing sectors automobiles, shipbuilding, textiles and steel ha ve been in decline. Administration policy toward steel thus must also address the broader challenge of restoring America's indus trial base. Integral to any such strategy is a sound posture toward the conduct of U.S. international trade policy.

The Reagan Administration has recognized that basic industries need time to modernize. Despite misgivings, the White House negotiated an automotive VRA with Japan last year, while agreeing to honor the government's loan commitments to Chrysler. The Administration h as demonstrated a similar readiness to assist steel.

The Reagan Administration is also committed to a free market I economy, believing that therein lies the guarantee of long-term economic success. The White House thus insists that the steel is not the gov ernment's, though Washington can ensure optimal fair market conditions within which the industries ought to be able to thrive industry must decide whether it will survive or not. This decision 1 The Administration must also manage trade relations with the major allies. Protectionist pressures are on the rise throughout the West. Stagnant growth, mounting unemployment, and large payment imbalances force governments to look inward. During such periods of difficulty, the United States must insist that the pri nciple of free trade is balanced by fair trade that U.S. import laws must be rigorously enforced.

This means At the same time, however, the Reagan Administration must be wary of retaliatory proposals which seek to penalize the Europeans and the Japanese fo r real or imagined violations against U.S producers. So-called reciprocity proposals, for example appear attractive on the surface, but cbntain self-destructive impulses that must be controlled policies of an export retaliatory, or import restraint, natur e "would raise American prices, lower competition and innovation Warns the Wall Street Journal and cut off our nose to spite our face.i132 32 The Wall Street 'Journal, February 4, 1982. 14 The Reagan Administration would be better advised to carry Only the n could the U.S. test the strength of its trade the present anti-dumping and subsidy investigations to a conclu sion laws and the willingness of the Europeans to abide by them.

Adoption of updated "beggar thy neighbor trade policies (such as those being ad vocated by reciprocity enthusiasts) would only weaken badly needed international support for the kind of competi tive, robust economy that America needs for the preservation of free enterprise abroad as well as at home.

Prepared at the request of The Heritage Foundation by John M. Starrels John M. Starrels is Adjunct Professor at the American University School of International Service in Washington, D.C.

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