FREE TRADE VS. PROTECTIONISM
Which Way for the US Steel Industry?
 Article by - Sanjib
Dutta,
Senior Faculty Member,
ICMR (IBS Center for Management Research).
Abstract
The US Steel Industry has been historically protected.
The article explains the evolution of the industry and its penchant for
protection even in the twentieth century while the US expects others to practice
free trade.
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After the Second World War, the U.S. steel industry
continued its leadership position which it had acquired over the decades.
There was hardly any import of steel as the steel firms in Germany and
Japan were destroyed during the war. U.S steel industry exported a
significant amount of the steel produced. However, by the late 1950s,
Japanese and European steel industries recovered from the war and started
exporting to the US. While the domestic production of steel increased by
48 percent between 1950 and the end of the twentieth century, imports grew
by 37,000 percent during the same period. The dominance of the U.S Steel
industry seemed to be over by 1970, and domestic players became
increasingly dependant on cheap imports. During the same time, the
development of electric furnace technology reduced the barriers to entry
in the steel industry and the dominant position of the integrated steel
players was challenged for the first time.
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The structure of the US Steel industry has evolved from
being oligopolistic in the 1960s and 70s to a globally competitive one in the
late 1990s. In the 1970s, the industry was difficult to classify but it was not
highly competitive. U.S. Steel, Bethlehem Steel, Republic Steel, and National
Steel, were the four largest firms. These firms had some degree of market power
and some ability to use price as a competitive weapon. However, by late 1990s,
competition in the steel industry had increased substantially. The competition
was not only limited to domestic players but also cheap imports from foreign
players. The main reason behind increasing imports of steel in to the US was the
overcapacity in steel manufacturing in foreign countries. It has been reported
that between 1998 and 2000, excess capacity in foreign steel manufacturing (NIS,
EU, Japan, South Korea, Brazil) was more than twice the average domestic
consumption of steel in the US during the same period. The US steel industry
alleged that foreign governments and steel manufacturers did not show any
interest in capacity reduction. Some analysts opined that the overcapacity in
foreign markets put serious pressure on the US market as foreign players1 tried
to offload their excess capacity there. However, according to some analysts, the
US steel industry was in trouble not only because of excess capacity2 of foreign
steel manufacturers but also because domestic manufacturers (who catered to more
than 70% of the domestic market in 2000) had to pull back their capacity from
95% in 1999 to 65% in 2000 because of falling demand for domestic steel. As the
steel companies had high overhead costs, operating at low capacity was
unprofitable.
By the late 1990s, continuous rise in imports of low priced steel severely
undermined the competitiveness of the US Steel industry (Refer Exhibit I).
Prices of domestic steel went down to unsustainable levels (Refer Exhibit II)
Such was the impact of the import surge, that according to published reports,
around 35 companies went bankrupt and over 50,000 workers lost their jobs (Refer
Exhibit III). With many companies going bankrupt, the industry's production
capacity had gone down significantly. According to reports, around 20 million
tons of production capacity went offline in 2001.
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[1]Coffin A Donald, The state of steel, Indiana Business Review, Spring 2003,
Vol. 78, No. 1
[2]The difference between average annual capacity and average annual
consumption.
2010, ICMR (IBS Center for Management Research).All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted
in any form or by any means - electronic or mechanical, without permission.
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