By David H. Feldman

August 15, 2001

WILLIAMSBURG, Va. - President Bush has asked the International Trade Commission (ITC) to consider broad sanctions against imported steel. The result could be higher import taxes. His position is neither partisan nor ideological. The Democratic leadership in Congress would have pushed for the same action had the president not gotten out in front. This bipartisanship does not signify a wise public policy, nor is it evidence of broad public support.

Mr. Bush's request is a controversial use of a provision in U.S. trade law that permits temporary trade barriers to shield domestic firms from sudden import surges. Originally intended as an escape clause to give peace of mind to industries whose protective barriers were being negotiated away, "Section 201" is now used to protect against any substantial rise in imports. This is the third time since 1983 that the steel industry has petitioned for relief under this act. The European Union has threatened retaliation if barriers are imposed, and the World Trade Organization would likely support its view.

The industry currently employs fewer than 160,000 workers, a mere 20 percent of its size 40 years ago. Yet domestic output of steel today is every bit as great. Like most manufacturing industries, rapid technological progress in steel has been labor-saving. This inexorable rise in productivity, not nefarious foreign business practices, is at the heart of the employment downsizing of the U.S. steel sector. Eliminating all imports would add but a few thousand jobs to the industry.

Nearly half of domestic output is now produced in "mini-mills" that start from scrap metal instead of ore. Unlike their giant brethren Bethlehem or LTV, these smaller firms are not clustered in the old steel states of the Midwest and Northeast. Together with employment downsizing, this fragmentation means today's industry lacks the lobbying punch it once enjoyed.

By contrast, millions work in industries for which steel is an important input. The automotive sector and commercial construction are but two examples. A U.S. trade policy that could add 20 percent to the cost of steel makes American firms like Caterpillar cringe. Make no mistake, a tariff is a tax that raises the price of all steel purchased, not just the imports.

State governments are another important consumer group, through their contracting for things such as highway overpasses, Potomac River bridges and college dormitories. States such as Virginia, whose Republican majority is struggling with fiscal difficulties, will no doubt be delighted to pay extra to help out the steel giants that have been sheltered behind a variety of import barriers for much of the past half century.

If a group of "deserving" U.S. firms is suffering financial distress, and private lending isn't feasible on account of the risk, the federal government ought to make the case for guaranteed long-term loans on the Chrysler bailout model. A tariff that subsidizes these select firms penalizes other industries and their employees while needlessly complicating our trade relations with close friends.

The steel crisis began in 1998 as exporting nations as diverse as South Korea, Brazil and Russia experienced severe recessions. The resulting glut of steel drove down its price on the world market and fueled a sharp increase in U.S. imports. Yet imports are already falling toward their historical share of the domestic market. So why the push to protect this industry now?

When the political balance teeters on a knife-edge, every member of Congress and each sizable interest group assume disproportionate importance. Ohio, Pennsylvania, and West Virginia are home to many of the remaining large-scale mills that are currently under financial pressure from low international steel prices.

Mr. Bush narrowly won Democratic-leaning West Virginia and narrowly lost politically divided Pennsylvania. Without this delicate political balance, the steel industry's plea would not likely receive such a receptive hearing. If steel users find their political voice, perhaps the outcome will be different.

David H. Feldman is a professor in the Department of Economics, College of William & Mary.

Copyright © 2001, The Baltimore Sun