Why Excuse Some Steel Dumpers?

Orthodox free traders were stunned by the Bush administration’s recent decision to impose tariffs of 8% to 30% on some steel imports to protect U.S. producers. But if they read the law the administration used to justify its action, they would learn that the industry clearly qualifies for relief under long-standing rules of international commerce. Still, the Bush administration isn’t off the hook. While correctly acknowledging U.S. steel’s plight, it cynically manipulated the relief package in ways that will neither help the industry nor restore confidence in world trade.

Under the “safeguard” provisions of the U.S. Trade Act of 1974, industries that face serious injury from increased imports may petition the U.S. International Trade Commission (ITC), a quasi-judicial federal agency, for temporary protection. International commercial organizations, such as the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade, explicitly recognize such safeguard procedures. Their purpose is to afford a brief respite to an industry being decimated by rapid import growth so it can regroup or at least plan for an orderly decline. U.S. steel presents an almost classic safeguard situation.

In the early 1990s, after U.S. steel producers invested billions of dollars in new equipment and technology, the industry was on a generally solid footing. Larger, less efficient firms had stabilized their losses. A bevy of ultramodern, sophisticated producers like mini-mills were reinventing much of the sector.

Then the Asian economies collapsed in 1997. Global demand for steel products plummeted to 20-year lows. Suddenly, world steel producers were flocking to market their surplus wares in the United States, whose economy, driven by the tech-stock bubble, continued to soar. Low-priced imports became even more of a bargain as the dollar strengthened against other currencies.

Once healthy U.S. steel producers soon were bleeding red ink. Since 1998, 31 steel companies have shut down or filed for bankruptcy. According to American University economist Robert A. Blecker, the sector’s incipient collapse put at risk an estimated 325,000 American jobs and pensions that support as many as 600,000 retired workers and their families.

In the summer of 2001, both the Bush administration and the U.S. Senate asked the ITC to conduct a safeguard investigation. The commission’s analysis, one of the largest ever completed and sporting a witness list of more than 100 pages, examined the import history and evidence of serious harm for 33 separate steel products, or about 75% of total steel imports. In October of that year, the commission’s six members announced they had unanimously found that trade relief was warranted for 12 products, and that no relief should be granted for 17 others. The commission deadlocked over the remaining four products. Several weeks later, it sent its report and recommendations for tariffs ranging from 20%-40% to the president for approval.

Trade hawks generally decry any form of government intervention, particularly when the result limits the flow of cheap imports into the domestic economy. It doesn’t matter to them if U.S. producers are wiped out, so long as prices for the affected products stay low.

But trade laws don’t work that way. The rules of global commerce aren’t brushed aside when acts of piracy, theft or extortion, for example, reduce import prices. Countries have painstakingly negotiated the conditions under which their citizens are willing to realize the risks and benefits from exchanging trillions of dollars of capital and goods worldwide. Once the ITC sent its findings to the Bush administration, it would have been an unconscionable breach of faith to take no action.

But that action was shaped by politics. Under the law, for example, the administration was free to interpret the four ITC tie votes any way it desired. When the relief measures were announced earlier this month, it revealed that significant tariffs were to be applied to only two of the deadlocked products--tin and stainless wire products, not tool steel or stainless flange items.

Why the difference?

Tin plate products are produced in large numbers in West Virginia, a state President Bush unexpectedly carried in the last election. Tool steel and flanges are less geographically concentrated and are used by other powerful industries, such as autos, that care little about the health of their U.S. suppliers. Rather than apply the safeguard laws as broadly as possible, the administration gutted the relief measures in ways that undermined their effectiveness and legitimacy.

Worse still, the Bush administration decided to fully exempt Mexico and Canada, along with a mish-mash of other politically sensitive nations such as Jordan and Israel, from any protective tariffs whatsoever. Mexico and Canada alone account for 30% of the total steel imports found harmful to U.S. producers. The ITC explicitly held that relief was warranted from Canadian imports in the case of five steel products and from seven Mexican imports.

Fearful of turmoil in our hemispheric markets, the administration ignored these findings and imposed the full brunt of the tariffs on a select group of nations, including China, Japan, South Korea, Ukraine and Russia. Just why these countries’ steel imports, and not those from other, equally harmful sources should be penalized was never explained. Given the importance of steel to the economic development of many former Soviet states, it is difficult to comprehend why Canadian imports are of no concern while Ukrainian and Russian imports must be strictly regulated.

These exclusions effectively eliminate many of the tariffs. Western U.S. producers, for example, were particularly hard hit by imports of slab steel, a product other manufacturers mill into finished goods. The administration set a 30% tariff for all imports above 5.4 million tons.

Imports recently peaked at 7 million tons, however, and Canada and Mexico accounted for 1.6 million tons of that total. Since imports from our closest neighbors are exempt, the tariff-trigger point just happens to coincide with the highest volume of imports in recent memory. It is highly unlikely any significant protection will be afforded by this approach.

There remains the question of why the U.S. steel industry is worthy of subject of trade relief and not the myriad other sectors that likely also qualify under the law. Premier film-production jobs, for example, are being shipped to Canada so that Hollywood bigwigs, most of them ostensibly liberal and pro-labor, can slash employee costs and receive illegal subsidies. “John Q,” a movie that bemoaned the exodus of U.S. jobs and labor’s loss of health benefits, was filmed in Canada under just such arrangements.

The ITC’s report to the president also shows that U.S. aircraft and parts-production employment fell by 50%, or more than 230,000 jobs, during the last decade, six times the steel industry’s employment losses. Some 90,000 workers lost their jobs in computer and office-equipment manufacturing during the same period. Much of these losses were caused by foreign demands that parts production be shipped overseas as a condition of their buying finished U.S. goods or result from improper export subsidies.

The administration blundered when it selectively imposed tariffs on steel imports, but not for the reasons most commonly cited. It is proper to enforce the agreements under which America has consented to participate in global commerce. It is worse than not acting at all to do so in a capricious, indefensible manner. That is, unfortunately, precisely how the administration chose to make one of the most important fair trade decisions in recent times.