What does an 18th century British political economist named David Ricardo have to do with California's economy? He developed the idea of comparative advantage, which was a fancy way of saying that free trade is a win-win situation. Two countries, so the theory goes, can benefit each other by trading and producing what they can make most cheaply and effectively. The worst thing they can do is to drive up costs by protecting an inefficient industry.
President Bush's March 2002 decision to slap tariffs of up to 30% on imported steel to benefit domestic producers is leading to exactly that scenario, and export-dependent California could be particularly hard hit by the fallout. The World Trade Organization's ruling Monday that Bush's tariffs are illegal has prompted the European Union to ready more than $2 billion in retaliatory sanctions. Japan, South Korea and other countries also could impose such measures against the United States.
Before the ill-conceived tariffs create more of an economic mess, Bush should lift them. His support for these tariffs was supposed to earn him favor in industrial states like Pennsylvania. But steel imports were declining even before Bush imposed tariffs. And despite the industry's complaints, it's unclear how much tariffs help. Industry analysts expect prices to go up in coming months as China's surging economy increases the demand for steel.
The real result of the tariffs has been to punish consumers and manufacturers. While protecting steel makers, Bush hurt those who pay for a higher-priced product -- makers of everything from cars and motorcycles to office furniture and refrigerators. Fontana-based California Steel Industries Inc., which imports 2 million slabs a year, has seen prices soar. California, which has lost 300,000 manufacturing jobs since late 2000, can hardly afford to see business hit with higher costs that further increase job losses. Manufacturers complain that the tariffs have helped send jobs packing to China.
For California and Florida, it could get much worse in December when the EU imposes sanctions -- that is, unless Bush drops steel tariffs. The Europeans will target rice, fruits and vegetables, as well as Harley-Davidson motorcycles, textiles and farm equipment; as much as $1 billion of California's $6.5 billion in annual farm exports go to Europe.
The U.S. has rightly pushed for free-trade agreements since World War II, pacts that have created about $150 billion in annual exports. With the U.S. economy in a fragile recovery, a trade war with Europe benefits no one. Rather than clinging to tariffs, the Bush administration should declare a truce and ditch this boondoggle on behalf of Big Steel.