February 26, 2002

February 26, 2002 | WebMemo on Trade, Economic Freedom

10 Reasons Why President Bush Should Not Apply Tariffs on SteelImports

The United States steel industry is suffering once again. Over the last four years, thirty steel firms have declared bankruptcy. The United States International Trade Commission (USITC) declared the steel industry is being harmed from foreign imports and recommended that President Bush apply tariffs as high as 40 percent on steel imports. In addition to the 40 percent tariffs, the steel industry is seeking a $10 to $13 billion subsidy to pay its legacy costs - the costs of funding its health and pension costs of its retired employees. President Bush must act on the USITC recommendation by March 6. President Bush should reject the USITC recommendation and refuse the steel industry's request to pay for its legacy costs for the following reasons:

Reason #1.
It will harm more people than it helps. According to the Consuming Industries Trade Action Coalition, if 40-percent tariffs were applied on steel imports, eight people will lose their job for every job that is saved in the steel industry. Steel is a key material used to manufacture other products such as automobiles, home appliances, and machine tools. The industries that use steel to make other products employ approximately 57 people for every person that works in the steel producing industry.

Reason #2.
It will harm American consumers. Applying a tariff on steel will raise the price of steel products and, hence, is equivalent to placing a tax on the American consumer. It is estimated that these 40-percent tariffs will cause the average family of four to pay an extra $283 each year for the higher prices on steel products.

Reason #3.
It won't work. Even if foreign imports were completely prohibited from entering the United States, the steel industry would still suffer from its own inefficiencies. The steel industry is a high fixed cost industry, which are costs that a firm pays regardless of the level of output. Industries with high fixed costs should only have a few large firms producing the bulk of the output. This way, the fixed costs can be spread out over a wide range of output, which lowers the average cost for each firm. In the European Union, for example, the majority of the steel output is produced by only six firms, whereas in the United States twice the number of companies produce far less output. Protecting the industry will allow inefficient firms to remain in business, when they should be either exiting the industry or consolidating with more efficient firms.

Reason #4.
It won't work (part 2). Steel is manufactured in the United States at mini-mills and integrated steel mills. It is the integrated mills that are having the greatest difficulty in making a profit right now. Mini-mills are much more efficient at producing steel than integrated steel mill and have a 25-percent cost advantage over producing steel than integrated mills. As a result of their cost advantage, mini-mills have increased their market share from 10 percent in the 1970s to about 50 percent today. Over the same time period, the share of imports in the United States market has increased by only 10 percent. Therefore, the real threats to the integrated steel mills are not imports, but the mini-mills.

Reason #5.
Bailing out the steel industry's health care and pension costs - its "legacy costs" - would set a bad precedent. Paying for the steel industry's legacy costs would set a dangerous precedent that other companies could point to when they run into financial difficulty. Furthermore, in 2001, over 40,000 companies with over 1 million employees went bankrupt. It is simply not fair that the federal government should bail out the health care and pension costs for the retired employees in the steel industry, while the employees of thousands of other companies receive nothing.

Reason #6.
It violates World Trade Organization (WTO) rules. The WTO allows a country to impose tariffs on a temporary basis when there is evidence that increases in imports are injuring the industry. Steel imports into the United States, however, are actually declining. Steel imports, after reaching a high of 4 million tons in August 1998, have declined by 36 percent to 2.6 million tons in November 2001. Moreover, the market share of foreign steel producers has fallen from 28 percent in 1998 to 21 percent in 2001.

Reason #7.
Other countries are likely to retaliate. The European Union and Australia have already indicated that they will file a complaint against the United States if these tariffs are applied. Because the WTO will likely rule against the United States, these countries will have the right to raise tariffs against US exports, which will hurt American farmers and U.S. exporters.

Reason #8.
It weakens the credibility of the United States. The global steel industry is suffering from excess-capacity largely because foreign governments heavily subsidize and protect their steel industry. The excess-supply of steel puts downward pressure on prices, which makes it difficult for firms to earn a profit. The only way, however, the United States will have credibility in requesting that foreign governments cease subsidizing and protecting their industry is if the United States stops subsidizing and protecting its domestic steel industry.

Reason #9.
It will not harm our national security. The steel industry currently produces far more steel than is currently required for national security reasons. According to a recent Department of Commerce study, the United States currently produces three times the amount of steel that would be required during a time of war. Furthermore, even if the worst case scenario did happen, where the United States had to import steel, the largest exporters of steel to the United States come from U.S. allies. In 2001, the European Union was the largest exporter of steel, followed by Canada.

Reason #10.
It is not in the national interest. The United States has the legal authority to apply tariffs on steel imports under Section 201 of the Trade Act of 1974. However, Section 201 requires that the President only apply tariffs on imports when it is in the national interest. A policy that harms more people than it benefits in terms of jobs, harms the American consumer, and harms American farmers and US exporters, is clearly not in the national interest.

About the Author

Aaron Schavey Policy Analyst
Finance and Accounting