February 21, 2018

Steel Industry Protection Is the Wrong Way to Go

Veronique de Rugy

Senior Research Fellow

Christine McDaniel

Senior Research Fellow

letter sent last week to President Trump by 25 steel industry moguls demonstrates once again that this group does not like competition. They request immediate action under the rarely used "Section 232" of a 1962 U.S. trade law that allows for import restrictions in order to protect national security.

It's a persuasive argument, if we're comfortable with a weak (yet well-fed) American steel industry and higher prices for the rest of us.

Their justification is that Chinese and other foreign steel producers benefit from unfair subsidies in their own countries. As a result of foreign competition, domestic steel's market share is down to 70%. Numbers like this would make any other business owner's head spin, but these executives think they deserve more.

No doubt, state interference by China and other foreign governments has caused tremendous increases in steel production worldwide.

But for years this industry has avoided competition. As a result, they have not taken the tough steps needed to lean up and succeed on their own. With decades of special protections, billions in subsidies, and bloated executive compensation packages, it is no wonder U.S. producers are not competitive in this market with a low-wage country like China.

Thanks to his statements like last summer's "Tariffs. I want tariffs," these well-organized domestic steel executives see an opportunity with a president overly sympathetic to their pleas.

In an ideal world, no government would bankroll domestic companies. The urge to protect our own people against aggressive foreign subsidies is understandable, but not all protections actually help our country.

In particular, import taxes are known to be a net negative for the overall U.S. economy, and with intermediate inputs like steel the costs are more severe. Data from the Bureau of Labor Statistics show that 5.4 million workers are directly employed by steel-using sectors. The American Iron and Steel Institute reports that the steel industry directly employs 140,000 people in the United States.

In other words, for every steel worker that may be helped by the import tax, there are over 38 workers in steel-using sectors that may be harmed by it. Further, the vast majority of steel-consuming manufacturers are small businesses that don't command the ability to pass higher prices on to their consumers.

study by the Trade Partnership Worldwide found the 2001 Bush-era steel tariffs created supply shortages by deterring imports, and gave U.S. steel producers massive pricing power. The authors found a significant impact on steel-consuming industries.  "More Americans lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself," they reported.

Meanwhile, there is little or no evidence that steel imports threaten our national security. As our colleague Dan Griswold has noted, domestic steel production far exceeds any foreseeable need by the U.S. military, which is actually a relatively small customer.

"The freedom to trade is the greatest economic freedom we have," said chairman of the Ways and Means Committee Kevin Brady,  R-Texas, in January. "It is the freedom to buy and sell and compete anywhere in the world with as little government interference as possible."

But economic freedom and competition go hand in hand. And competition has never been for shrinking violets.

The steel industry's historic unwillingness to compete and the government's continued handouts are why they are in such poor shape today. It is why they are at the doorstep of the White House yet again asking the president, along with every American consumer, for help.

It doesn't have to be this way.

Trump's trade team should know that even without overproduction in foreign markets this industry would be in subpar shape due to its decades of government support. Import taxes have not solved and will not solve the industry's problem, and they will cause too much collateral damage here at home.

When it comes to foreign steel subsidies, U.S. industry can (and does) avail itself of the countervailing duty laws, which are aimed at neutralizing the negative effects of subsidies. They should not be allowed to abuse the national security process with Section 232 while the rest of the economy endures disproportionate costs.