Term Paper: Government Intervention in the Steel

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[. . .] This was followed by successful lobbying by the steel industry for steel cartels during President Roosevelt's "New Deal" program.

During World War II, the government policy had turned in favor of labor unions and the U.S. steel industry quickly unionized to win government contracts. After the war, the industry continued to depend on a "trigger price policy" that automatically triggered import quotas whenever the price of imported steel fell below a certain level.

Over the last two centuries, the U.S. steel industry and its lobbyists have used all the arguments in the book, ranging from "infant industry" argument in the nineteenth century to a "senescent industry" argument (i.e., that the industry was old and creaky and "stuck" with outdated equipment) in the post World War II period.

The result of all these protective measures over the years was that the U.S. steel industry has failed to become economically efficient and has lacked innovation to remain competitive, as it has depended on government bailouts. It has also been a laggard in adopting new technology -- the Bessemer process in the nineteenth century and the oxygenation process in the twentieth century. The March 2002 Steel Tariff is a green signal to the industry that it can carry on with its bad old ways.

Details of Latest Tariffs

The details of the extent of tariffs imposed on different categories of steel products in the March 2002 U.S. Steel Tariff announcement by President Bush are as follows:

30% tariff on imports of plate, hot-rolled sheet, cold-rolled sheet and coated sheet

30% tariff is to be imposed on imports of tin mill products

30% tariff on imports of hot-rolled bar and cold finished bar

15% tariff on imports of rebar

15% tariff on certain welded tubular products

13% tariff on imports of carbon and alloy fittings and flanges

15% tariff on imports of stainless steel bar

15% tariff on stainless steel rod

8% tariff on stainless steel wire

Imports of steel slabs are to be subject to a tariff rate quota (TRQ), with an in-quota volume of 5.4 million short tons and a 30% tariff on out-of-quota imports

Source: UNCTAD / WTO

Were the Tariffs High Enough?

The March 2002 U.S. tariffs were 10% lower than what the U.S. steel industry had demanded. (The industry had demanded a 40% tariff rate). There was also a demand of a $10 billion bailout for the pension, healthcare and life insurance costs that was not acceded to. However, the tariff of up to 30% on certain categories of steel was higher than those recommended by a majority of the International Trade Commission (ITC) -- the body that under American law considers whether domestic industries need help to cope with foreign competition. Hence it is difficult to say whether the tariffs imposed were high enough or too low or of an optimum level. According to the government plan, the bailout is enough to enable the U.S. steel industry to turn around and come out of the present crisis in three years. If past history is an indicative of the future, this is highly unlikely.

Reasons for the Imposition of the Latest Steel Tariffs

The Decline in Steel Industry

The steel industries in the former major steel producers like the U.S.A., Japan, Britain and Germany have been in a slow but steady decline since the early seventies. Over capacity has just been one of the problems facing the industry. Total employment in the major steel producing countries that stood at 2.4 million in 1974 has declined to 900,000 in 2002.

Lower Production Costs

The collapse of the Soviet Union in the early 90s resulted in the emergence of six steel producing countries instead of just one, each having pressing reasons for exporting their product abroad at even cheap prices to earn precious foreign exchange. At the same time, China emerged as the world's biggest steel producer and found the financial and corporate resources to export its steel to the world market. The bottom line, of course, is that production costs in some countries are less than in others. For example, while it costs $293 to produce a ton of hot rolled coil steel in the U.S., it costs just $212 in the former Soviet Union, and $185 in Brazil. Apart from the lower production costs, the Asian financial crisis of 1997 and the strengthening of the dollar, enabled steel producers from several countries to export steel to the United States at much cheaper prices than the U.S. Steel Industry was able to produce it.

Declining Prices & Legacy Costs

This drove the steel prices down and as shown in the graph below the prices were at ten-year lows in 2001. Thirty-two U.S. steel companies had filed for bankruptcy since 1997 and several others were in serious financial problems. Cheap imports, however, were not the only reason for the U.S. steel companies' problems -- the older integrated steel companies, in particular, are also hampered by legacy costs such as large pension and health care obligations to retired workers. "These obligations have increased the cost for integrated steel producers by anywhere from $20 to $45 per ton," Thomas Watters, a director in Standard & Poor's Metals and Mining Corporate Ratings group reports. Companies that have been particularly burdened by such costs include Pennsylvania-based United States Steel Corp. And Indiana-based National Steel Corp.

Cheap Imports: A Scapegoat?

After hearing all the arguments advanced by the U.S. steel industry about the flood of cheap imports and unfair dumping practices from foreign sources, one would expect a big surge in the import figures to the U.S. In the recent past. Surprisingly, this is not so. The U.S. steel imports during last year were 27.4 million tons, down from 34 million tons in 2000. Moreover, imports constitute just one-third of total U.S. steel consumption and its share has not risen (rather declined) in the last few years. This seems to indicate that cheap steel imports into the U.S. are more of a scapegoat rather than the primary reason for the steel industry's malaise.

Why Tariffs instead of Subsidies?

The answer to this question is two-fold. The first reason is that, traditionally, the agricultural sector has been the beneficiary of subsidies from the government, while the industrial sector (including the steel industry) is supported through tariffs. Secondly, in the wake of increased military spending by the U.S. administration following 9/11, it can ill-afford to increase further spending by giving subsidies. Tariffs would actually increase the government revenues, with the burden being shifted to the consumers who will have to pay higher prices for steel products.

The Repercussions

The imposition of the latest U.S. steel tariffs has international as well as domestic repercussions.

Who Are Most Affected Internationally?

The countries that are likely to be most affected include China, Russia, the European Union, Japan, South Korea and Brazil. Members of the North American Free-Trade Area (NAFTA) -- namely Canada and Mexico -- remain exempt from the U.S. Steel Tariffs, as are member developing countries of World Trade Organization (WTO). However, Brazil, India, Moldova, Romania, Thailand, Turkey and Venezuela are not excluded from the tariff remedy for certain steel products although they are developing member countries of WTO. The EU, for example, exports 5% of its total production to the U.S. But is afraid that surplus production from Russia and some other Asian countries would find its way to the EU countries. It estimates $2 billion annual loss due to the U.S. tariffs.

China is presently the biggest producer of steel in the world and widely believed to subsidize its steel industry; hence one of the main countries at which the U.S. tariffs was directed. But the fact that it exports only 1% of its steel production to the U.S. means that the impact of the sanction on Chinese economy may not be substantial. There are other more serious implications of the tariff on the U.S.-China economic relations as the U.S. Trade Representative Robert Zoellick found out during a recent trip to China. When the Chinese were asked to open up their market to U.S. goods, they asked Mr. Zoellick: "why they should let in more American goods when the United States has slapped large tariffs on their steel."

Domestic Effect

U.S. domestic industries such as the car industry, construction, electrical equipment, and heavy engineering are likely to be badly affected by the U.S. Steel Tariffs due to rising prices. Some estimates predict that the tariffs could cost the U.S. consumers $2 to 3 billion a year. In addition, the Consuming Industries Trade Action Coalition says the tariffs will cost more jobs in industries that use steel than they will save, although the U.S. Steel industry, naturally, denies this.

What Is the International Reaction?

Most of the U.S.'s trading partners including the EU, Japan, Korea, and China have lodged formal complaints with the WTO challenging the U.S. Steel Tariffs. The complainants are led by the EU (which feels that it has… [END OF PREVIEW]

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Government Intervention in the Steel.  (2002, July 15).  Retrieved May 19, 2019, from https://www.essaytown.com/subjects/paper/government-intervention-steel/8290939

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"Government Intervention in the Steel."  15 July 2002.  Web.  19 May 2019. <https://www.essaytown.com/subjects/paper/government-intervention-steel/8290939>.

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"Government Intervention in the Steel."  Essaytown.com.  July 15, 2002.  Accessed May 19, 2019.
https://www.essaytown.com/subjects/paper/government-intervention-steel/8290939.