- The Washington Times - Monday, September 16, 2002

The Bush administration made clear at the Organization of Economic Cooperation and Development (OECD) in Paris last week that when it comes to the protection of the steel industry, foreign governments across the globe have a tarnished record. Large foreign steel producers have been insulated from free-market pressures through a variety of measures from tariffs to subsidies to special-purchasing agreements. Governments often chose to protect their steel industries for a variety of social and political reasons, but these measures prevent industries from becoming competitive and, when subsidies are involved, are an inefficient use of public resources. More importantly, these protections make it impossible for companies to make profit projections and investment decisions based on transparent market considerations, since they face competitors that are divorced from free-market pressures.
So the administration's efforts at the OECD to rally support for liberalizing the steel industry worldwide can only benefit the global trading system. But given the administration's decision in March to impose steel tariffs of up to 30 percent for three years, the administration doesn't appear too optimistic that progress will be made soon. The question remains, though: Was the administration's decision to impose steel tariffs the best way to confront protectionism abroad?
Clearly, global market distortions in steel have caused the U.S. steel industry to buckle due to oversupply. Russian steel producers, for example, receive support from state-controlled input suppliers which also provide transport to the industry. And Russian steel makers are subject to lax bankruptcy laws. In Japan, import barriers allow steel producers to charge high prices for their supply domestically and sell low-priced exports to the United States and other markets. In Korea, government subsidies and government-influenced bank lending to steel producers has led to overcapacity. Brazil also has import barriers on steel which allows producers to sell expensively at home and cheaply abroad, particularly since Brazilian companies tend to coordinate their pricing of steel domestically. China just last year devoted another $6 billion in subsidies to its steel industry, and the European Union has authorized more than $50 billion in government subsidies to help its steel industry restructure. Before the United States imposed tariffs in March, it was one of the most open markets for imported steel. According to the OECD's 1999 figures, steel imports claim about 30 percent of the U.S. market, 16 percent of the E.U. market and 9 percent of the Japanese market.
It is hardly surprising, then, that in the past five years, 30 U.S. steel producers have filed for bankruptcy. Since the production of steel requires significant labor and hardware capital, it is costly for steel producers to adjust to supply gluts. About 45,000 steelworkers have lost their jobs since 1997. Before the White House imposed steel tariffs in March, prices were at a 20-year low. Steel prices have since risen, with prices for cold-rolled steel rising from about $300 per ton in December to more than $400.
U.S. companies that use steel components, on the other hand, have benefited from cheap imported steel, and workers in steel-consuming companies outnumber steel-producing workers roughly 55-1. Still, it remains unclear what impact the tariff-driven increase in steel prices will have on these companies and their workers, since steel tends to be only a small part of their overall costs. For example, steel constitutes just 3.4 percent of the cost of motor and vehicle parts, 0.8 percent of construction and 6.8 percent of household appliances.
Economically, therefore, the scenario on steel tariffs is mixed. But what remains clear is that U.S. companies can't predict the impact foreign market distortions will have on supply and demand. If the White House doesn't attempt to check these unfair practices, U.S. companies may, over time, reduce investment in research, development, capital, etc.
Still, increasing tariffs is a last-resort measure. Far preferable would be a liberalization of the global steel industry as a result of negotiations as the White House tried to do last week in Paris. The OECD talks on steel protections will continue in December, when the 38 participating countries will meet again for high-level talks. Meanwhile, since the United States has tried to negotiate a global elimination of steel subsidies since 1989, the March tariff-increase was certainly a justifiable measure.
The common assertion that the Bush administration's decision to impose the tariffs was just political ignores the crushing injustice of foreign steel subsidies. Abstract principles of free trade must to be tempered in extreme cases such as steel with a practical recognition of the needs of an industry that is vital to our national and industrial security.

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