FREE TRADE VS. PROTECTIONISM

Which Way for the US Steel Industry?

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continued from: PROTECTIONISM vs. FREE TRADE

The government's protectionist policies have adversely affected market efficiency and innovation in the industry. Imposition of Section 201 tariff measures would increase government intervention in an industry that was already protected, they felt. Statistics show that 80% of imports in to the US were already subject to tariffs under the US antidumping laws.¹⁴ These laws allowed the government to impose tariffs on steel products that were subsidized by the foreign governments and dumped in to the US. However, in spite of being protected, the industry was struggling.

Analysts also feel that the industry was struggling because of homegrown problems. Before the government started protecting the domestic steel industry in the late 1960s, the average compensation in the industry was almost equal to the average compensation in manufacturing sector. In the early 2000s, the average compensation was more than 50% higher than that in the manufacturing sector. This was mainly because the steel industry was highly unionized and the strong trade unions without any threat of foreign competition could negotiate high compensation packages. Thus protectionism was responsible for the ills of the industry in the early 2000s.

Another reason for the sufferings of the steel industry was that there was increasing domestic competition but correspondingly no increase in demand for steel. The mini-mills with their cost effective production techniques increased competition in the industry.¹⁵Along with the increase in competition there has also been an increase in productivity. Output increased from 400 tons in 1990 to 600 tons in 2000.¹⁶ However, during the same period there has been no increase in demand. With increase in productivity but no increase in demand, the steel manufacturers had to cut down their labor force. Moreover, though the demand has been stagnant, there has been no fall in capacity worldwide.

Analysts who favored free trade argued that as import of steel has been declining since the late 1990s (Refer Exhibit IV). and the market share of foreign steel products fell from 28% in 1998 to 21% in 2001¹⁷, there was no justification behind the president's Section 201 tariff measures. The Economist wrote in March 2002, "Te policy as it stands will make most Americans worse off, by forcing them to pay more for their steel. Except in the short term it will also do little to help the people it is intended to help - namely, workers in the parts of America's steel industry that cannot compete with foreign suppliers or with American's own more productive mini-mills."¹⁸ Analysts also felt that the new tariff measures was likely to violate the World Trade Organization (WTO) guidelines and that would lead to trade wars between the US and its trading partners. As steel imports were falling at the time when the tariff measures were announced and so also the foreign market share, Section 201 tariff measures was likely to violate the WTO's Agreement on Safeguards. According to the WTO Agreements on Safeguards, Article 8:2, a country on whom tariff measures have been slapped cannot retaliate during the first 3 years after the imposition of the safeguard measures provided the safeguard measures were taken because of "absolute increase in imports". Though the Agreement does not specify the time period for the increase in imports, the usual practice at WTO is to look at the last three years.¹⁹ Thus the government's decision to protect the industry was likely to force the WTO to issue a ruling allowing other countries to increase tariffs on import of US products. Increase in tariffs on US products by other countries would jeopardize US's gains from trade in other industries such as agriculture, automobiles, financial services etc.²⁰

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[14]Institute for International Economics.

[15]Mini-mills produce one ton of hot - rolled steel at a cost of $315 while an integrated mill produces it at a cost of $350.

[16]Institute for International Economics.

[17]Congressional Research Service.

[18]Tariffs on steel, George Bush, protectionist, The Economist, March 7, 2002.

[19]Eliza Patterson, The US Provides Section 201 Relief for the American Steel Industry, The American Society for International Law, asil.org, March 2002.

[20]Schavey Aaron, The Ailing Steel Industry Needs Less Government Intervention, Not More, The Heritage Foundation, February 22, 2002.

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