June 26, 2017

Steeled for Politics

Daniel Griswold

Director of Trade and Immigration
Summary

The Trump administration's steel protections won't help U.S. industry or security.

In defense of the domestic steel industry, U.S. Commerce Secretary Wilbur Ross has invoked an obscure provision of U.S. trade law, Section 232 of the Trade Expansion Act of 1962. The provision allows the president to unilaterally "adjust" imports, through tariffs, quotas or other means, should the Department of Commerce find evidence that those imports threaten national security.

By any objective measure, imported steel is not a threat to U.S. national security. Between domestic production and friendly foreign suppliers, the U.S. military has access to all the steel it needs to maintain our national defense.

The United States remains one of the world's top steel makers, producing about 80 million metric tons a year. While Americans import another 30 million tons, the top seven foreign providers – Canada, the European Union, Brazil, South Korea, Mexico, Turkey and Japan – are all allies and friends. Together they supplied four-fifths of the steel we imported in 2016, and they would remain reliable suppliers in time of national emergency.

National defense and homeland security combined required only 3 percent of steel shipments in the United States in 2015, according to the American Iron and Steel Institute. A similar Section 232 investigation in 2001 came to the commonsense conclusion that steel imports did not threaten U.S. national security or "fundamentally threaten the ability of domestic producers to satisfy national security requirements."

Ross has tried to expand the definition of national security to include infrastructure, power generation and the general health of U.S. industry. He claims there are insufficient domestic suppliers for specialty steel required for industrial transformers and for military hardware. But assuring access to the widest variety of specialty products is all the more reason for keeping the U.S. market open and not forcing domestic consumers, including the military, to rely only on domestic steelmakers.

Imposing tariffs on imported steel would actually weaken America's industrial base. That's because a lot more U.S. manufacturing companies consume steel as an input than make steel. While the steel industry itself directly employs about 140,000 American workers, steel-consuming industries employ several million.

The construction industry alone consumes 42 percent of the steel supplied each year in the United States, followed by the automobile industry, which consumes another 25 percent. Other key steel-consuming industries are machinery and equipment, energy, and appliances. Higher steel prices would drive up their production costs, raising the price of their final products, reducing sales at home and abroad, and destroying more jobs in those sectors than would be saved in the steel industry.

Steel tariffs would also jeopardize U.S. exports. If the United States wraps itself in the national security flag to justify protecting a politically connected industry, other nations will do the same. Tariffs will go up against key American exports, from computers to soybeans, disrupting even more U.S. jobs.

Protection would not even be good for the steel industry in the long run. Protected industries tend be lazy about innovation and customer service because they are shielded from normal market competition – think the U.S. Postal Service. A protected domestic market will render the U.S. steel industry less able to face global competition in the future. It will spur domestic users to seek alternatives to steel, further reducing long-term demand.

In a recent interview, Ross said, "Since we are the world's largest importer of steel, we're the main victim of the overcapacity, so that is the issue we have to grapple with." His view turns economic sense on its head. If you are the biggest buyer of a commodity, lower prices are a benefit, not a burden.

The United States is also a major importer of oil, but it would be ridiculous to argue that Americans are thus "victims" when abundant global supplies lead to lower oil prices. In 1973, certain Arab countries sought to punish the United States for supporting Israel by embargoing oil exports in a deliberate effort to drive up the price of a key commodity. In a perverse appeal to national security, the Trump administration is seeking to do the same with steel.

Invoking Section 232 against steel imports is not about national security but about politics. The chief architects of Trump administration trade policy have deep ties to the steel industry. Ross made a fortune buying steel companies that benefited from import protection. U.S. Trade Representative Robert Lighthizer and his deputies have made careers representing the domestic steel industry in antidumping cases. For them it is not "America First," but America's steel industry first.

What is good for the U.S. steel industry is not necessarily good for America as a nation. In fact, protecting the steel industry from foreign competition will allow steel companies and their unions to benefit at the expense of their fellow Americans, leaving our nation less prosperous and less secure.