February 7, 2002

February 7, 2002 | WebMemo on Regulation

The Myths of the Steel Industry's Arguments for Increased Government Intervention

Since the late 1960s, the steel industry has sought protection in the form of tariffs or subsidies from the federal government. Now the steel industry wants the US government to protect the market even further by applying tariff rates as high as 40 percent on steel imports. Furthermore, the industry is seeking a federal subsidy of $10 to $13 billion to fund its legacy costs, the pension and health care benefits of retired steel workers.

The two most frequently cited reasons for this increased government intervention in the steel industry are for national security reasons and to counter "unfair" foreign competition.
But the justifications the steel industry offers for this increased government intervention amount to nothing more than myths and have no basis in reality.

Myth #1: The steel industry is essential for US national security purposes. The steel industry argues that if imports erode the United States' ability to produce steel or make the United States dependent on unreliable foreign suppliers, then the security of the United States could be in serious jeopardy during a time of war.

Reality #1: The United States produces far more steel than is needed for national security reasons. A Department of Commerce report released in October, 2001, found that current production levels are approximately 3 times the amount of steel that would be needed for national security purposes during a time of war. Moreover, the report found that even in the worst case scenario (and highly unlikely), where the United States had to import steel for national security reasons, US imports of steel come from a diverse range of reliable foreign sources. For example, the United States imported iron ore from more than a dozen countries in 2000, with Canada being the largest supplier.

Myth #2: The Steel Industry is a "victim" to unfair foreign competition. In a recent Wall Street Journal article, Thomas Usher, Chairman and CEO of USX Corporation, characterized the steel industry as "… the victim of a perverse system where foreign countries have used market barriers and subsidies to encourage excess capacity and production, which is then dumped in the U.S. -- the largest and most open market in the world."

Reality #2: The US government intervenes in the US steel industry just as foreign governments do. Mr. Usher's characterization of the US steel industry is highly misleading. Currently, 80 percent of steel imports are protected with tariffs through US antidumping laws, which are designed to protect US industry against "unfair" foreign competition (i.e., government subsidies to steel manufacturers).

Furthermore, last year alone, the US steel industry was the beneficiary of more than $1 billion in subsidies through US loan guarantees. When the involvement of the US government in the US steel industry are highlighted, the US steel industry hardly looks like a "victim" as Mr. Usher would have the American public believe.

Harmful Effects of Government Intervention

If the federal government does raise tariffs on steel or subsidizes steel manufacturers, it will cause far more harm than good. For instance, there are far more people that work in industries that use steel as an intermediate product to produce final consumer goods products such as automobiles, housing, or home appliances than those who produce the steel. When the price of steel rises - as would happen if the government protects the industry through tariffs - then workers in the steel using industries suffer as one of their chief input costs rises. In fact, a study by the Consuming Industries Trade Action Coalition found that if the government applied 40 percent tariffs on steel imports, then approximately 8 jobs would be lost for every steel job that is saved.

Even worse, protecting the industry would do nothing to help resolve the industries ills, which is chronic over-production. Currently, steel manufacturers around the world are producing approximately 40 million more tons of steel than consumers demand. This over production puts downward pressure on steel prices and makes it difficult for companies to survive.

As long as governments, including the US government, continue to intervene, the steel industry will continue to be plagued by the same problems of over-production. Why? Because subsidies encourage production, even when production levels already exceed consumer demand, and protection allows inefficient firms to survive. Neither policy gives steel manufacturers the incentive to reduce production levels. Only when government intervention in the steel industry is eliminated will the steel industry be able to survive on its own.

Conclusion

The steel industry is attempting to convince the American public and lawmakers that protection is necessary for the industry for national security reasons and to counter the "unfair" advantage foreign steel makers have over US steel manufacturers. These arguments, however, are nothing more than empty justifications for increased government intervention in the industry. The danger of these misleading arguments is that if the American public and lawmakers believe the steel industry's claims, far more harm to the US economy will occur than any good from the protection.

Aaron Schavey is a Policy Analyst in the Center for International Trade and Economics (CITE), at The Heritage Foundation.

About the Author

Aaron Schavey Policy Analyst
Finance and Accounting

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