FREE TRADE VS. PROTECTIONISM

Which Way for the US Steel Industry?

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PROTECTIONISM vs. FREE TRADE

President Bush's tariff measures to protect the domestic steel industry were hailed by supporters of protectionism but were vehemently criticized by proponents of free trade. There could be justification behind both protectionism and free trade in the US steel industry. Many analysts feel that the US steel industry should be protected not only because of the pride associated with it but also because of its key role in the US economy. The importance of steel as a commodity in the US economy was next only to oil. Steel was a source of political and economic strength for the country. According to some analysts, US did not seem to have friendly and dependable relations with major steel producing countries such as Japan and Korea. These countries along with others were historically involved in allegedly unfair trade practices such as dumping to predatory pricing. Thus it made sense for the US steel industry to be protected.

Some analysts are also of the opinion that without protection the US steel industry would find it difficult to reorganize and become more competitive. They argued that protection from foreign competition allowed the industry in the1980s to cut down 60% of its workforce and to spend $23 billion on modernizing facilities. Because of protection, the industry regained its leadership position in quality and productivity and in 1991 experienced the highest level of exports since 1970.

In the early 2000s, the industry was finding it difficult to fund the so-called legacy costs which included health care and pension benefits to around 600,000 retirees and their dependents. In 2002, the number of employees in the industry was 142,000, 60% down from its peak in the early 1970s. With this number, the industry would not be able to finance the legacy costs of the large number of retirees. The government could use the funds generated from higher tariffs to help the industry meet its health care and pension costs.

Supporters of free trade argue that protectionism was not the panacea for all the ills of the US steel industry. The industry was suffering not only because of foreign competition but also because of worldwide excess capacity and overproduction. Overproduction was mainly because of government protection. Without government protection, steel producers would not produce more than what the market can absorb because this would add unnecessary costs to their operations. However if the government protects the industry and offers subsidies or other protection measures, then steel producers would be encouraged to produce more than what the market demands. Analysts feel that subsidies were quite common in steel industry including the US steel industry. Reports suggested that the foreign steel manufacturers received subsidies over $100 billion between 1980-92 and the US steel industry received more than $1 billion in federal loans in 2001 alone.

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