Restructuring American Steel
Safeguard Tariffs and the Politics of Unfair Trade
September 25, 2003
On September 19, the U.S. International Trade Commission (ITC) submitted to the White House its mid-term review detailing the impact of the tariffs implemented in March 2002 to safeguard America's steel industry from unfair trade. President Bush will now decide which of three options he will exercise after evaluating the ITC’s review:
- Leave the safeguards in place for their full, three-year term. The tariffs were automatically reduced to a maximum of 24% in the second year of the program, and will be further reduced to a maximum of 18% in year three.
- Modify the safeguards, as the administration has repeatedly done by granting additional exemptions and exclusions. Following the administration’s initial 727 exclusions, only 29% of steel imports — just 7% of domestic consumption — are subject to the tariffs. An additional 295 exclusions were granted by April 2003.
- Lift the tariffs.
While the President’s decision is the subject of much speculation — administration officials indicated it could be a lengthy process — the conclusions of ITC reports are anything but ambiguous. The steel tariffs are working exactly as intended:
- Steel prices have stabilized and many domestic producers are returning to profitability.
- The domestic industry is undergoing the most significant consolidation and restructuring in decades.
- Labor unions and steel companies are working together to reach groundbreaking agreements that have dramatically streamlined operations, reduced costs, improved productivity and profitability, and helped facilitate industry consolidation.
- Bankruptcies and layoffs have slowed.
Equally significant, the results of the ITC’s investigation reveals that arguments against the tariffs have little or no basis in reality. As reported by both the Associated Press and The New York Times, the tariffs "have not significantly hurt small U.S. steel-consuming businesses." Instead, they "offered a counterpoint to growing complaints from small- and medium-size American manufacturing companies that use steel." The ITC investigation into the effects of the safeguard measures on steel-consuming industries concluded that:
- Many steel-consuming companies "had difficulty distinguishing between the effects of the safeguard measures and other changes in market conditions."
- "Overall sales and profits increased, while capital investment fell, for most steel-consuming industries in 2002/03 (the year following the imposition of the safeguard measures) compared with 2001/2002 (the year preceding the safeguard measures)."
- "In many cases, employment fell by a greater amount (and percentage) in the year before the safeguard measures were implemented than in the first year after they were implemented."
- "A majority of steel-consuming firms indicated that neither continuation or termination of the safeguard measures would change employment, international competitiveness, or capital investment."
Nonetheless, the administration remains under intense pressure from steel importers, who have mounted a large-scale lobbying and public-relations campaign. It is apparent, however, that a decision to lift the tariffs would have profoundly negative consequences, both economically and politically, including a resurgence of the dire straits which made the need for tariffs so obvious that they received a rare unanimous, 6-0 bipartisan recommendation by the ITC.
Global Economy, Global Crisis
The safeguard tariffs implemented last year have their roots in the Asian financial crisis, which undermined steel demand throughout that continent and beyond as shockwaves from the crisis spread across the global economy in 1997 and 1998. To avoid production cutbacks and layoffs, steel producers in Asia and exporters to the region, such as Brazil and Russia, turned to the United States as the market of last resort.
More than 31 million tons of foreign steel poured into U.S. markets in 1997. A booming steel market absorbed these record-level imports, and prices remained strong. But when imports surged over 41 million tons in 1998 — an unprecedented 33% increase over 1997’s record level — the bottom fell out of the U.S. steel market in spite of a strong economy and increased demand. (It is worth noting that before 1997, U.S. steel imports reached the 30 million ton level only once. Since 1997, imports have never dropped below 30 million tons.)
Worse than the increased volume were the extremely low prices of imported steel. "It appeared as if foreign producers were trying to beat each other in a race to the bottom," according to the U.S. Commerce Department. By the middle of 1998, prices had fallen well below the point where American producers could make a profit — and they continued to drop. In February 1999, for example, hot rolled steel prices had dropped $100 per ton — nearly 30% below pre-crisis levels.
Unfair Trade and Overcapacity
The 1998 crisis prompted the most comprehensive government investigation of global steel markets ever performed, an investigation which found that world trade in steel is anything but fair. Citing "the thirty-year history of repeated unfair trade actions" and "market-distorting practices," the Commerce Department’s Report to the President: Global Steel Trade — Structural Problems and Future Solutions describes a world steel industry "characterized by a variety of anti-competitive practices."
"One way or another, steel companies around the world benefit from government practices and policies that forestall adjustments mandated by the market," the report charges. "As a result, market forces are not able to bring world capacity and supply in line with demand," leading to over 300 million tons of excess steelmaking capacity, according to 1999 data from the Organization for Economic Co-operation and Development.
Over 70% of this overcapacity is located in just three regions: the Newly Independent States (former Soviet Union), Japan and the European Union. None of it is in either the United States or Canada, which are among the only industrialized nations in the world which lack the raw steelmaking capacity to meet their own domestic demand.
The Commerce Department calls this significant overcapacity one of the "long-standing structural problems" in the global steel industry. Other problems include "government assistance [abroad] to maintain older capacity, barriers to imports, anticompetitive practices and, in some countries, the direct or indirect involvement of the government in the steel industry.
"The result is the suppression of prices during times of crisis and even over the long term," the report continues. But "high fixed costs and other factors (including, for example, protected markets and subsidies) encourage steel makers to operate facilities at high levels of capacity." With increasing globalization, collapsing markets on the other side of the world can devastate strong market conditions at home, especially in open steel markets such as the United States.
Documenting Unfair Trade
The Commerce Department’s Report to the President meticulously details the tangled web of economic factors and predatory trading practices underlying the international steel industry’s historic resistance to market forces. But it failed to fashion a comprehensive solution, asserting that the crisis had run its course. By the time the report was released on July 26, 2000, however, imports had once again surged to record levels and prices had resumed their downward slide. But federal officials continued to rely on the same narrow, time-consuming, case-by-case approach to trade-law enforcement through the International Trade Commission (ITC) that had already proved ineffective.
Against this backdrop of growing devastation, the future’s steel industry – and the shameful history of federal neglect and failure to enforce the nation’s trade laws – became a pivotal issue in an increasingly close presidential election. "We can’t always tell you what you want to hear, but we will never lie to you," future Vice President Dick Cheney told steelworkers in Weirton, West Virginia, on October 26. "We will enforce our trade laws," he pledged. "There will be no more looking the other way."
Less than five months after taking office, President Bush announced a new program to reduce excess global steel capacity and eliminate market-distorting forces from world steel trade, including an ITC investigation of injury from steel imports under Section 201 of the Trade Act of 1974. The independent, bipartisan ITC — acting on initiatives taken by both the President and the Senate Finance Committee — conducted an exhaustive investigation of domestic steel markets and trade. On October 22, 2001, the Commission’s unanimous 6-0 decision ruled that foreign imports are seriously injuring America’s steel industry. The USW immediately called on President Bush to impose the strongest possible remedies before the damage got worse. A newly unanimous industry also joined the call for relief from unfair trade — not surprising since 18 of the 24 steelmaking plants shut down or idled since 2000 are mini-mills.
By the beginning of 2002, the U.S. steel industry had been devastated by an unprecedented five-year surge of imports, much of it dumped or subsidized:
- Steel prices had fallen to historic lows — price levels that were below cost, unrealistic and unsustainable — in spite of a booming economy and strong market demand. The recession which began in 2001 further weakened the market. By December 2001, the price of hot rolled sheet had dropped to $210/ton — a whopping 40% discount for steel consumers from pre-crisis levels, but economic disaster for producers.
- To date, 40 steel companies have been forced into bankruptcy (the most recent coming with WCI Steel’s September 17 announcement that it was filing for Chapter 11 protection); 17 of these have entirely liquidated their operations.
- Steel bankruptcies affected 51 million tons of U.S. steelmaking capacity, or about 40 percent of total domestic capacity as of 2000.
- Domestic producers idled or shut down over 26 million net tons of steelmaking capacity — about 20% of the industry — between January 2000 and January 2002. Nearly 15 million net tons of U.S. steelmaking capacity remains idled or closed.
- Domestic crude steel production declined 18 percent between December 2000 and December 2001.
- Wall Street’s capital markets virtually abandoned the U.S. steel industry, and producers in this capital-intensive industry were unable to acquire funds needed to maintain and modernize their facilities.
- Unemployment soared as more than 55,000 steelworkers lost their jobs. Thousands more faced reductions in work hours and income.
- More than 200,000 retirees, widows and dependents lost health care benefits in various bankruptcy proceedings.
- The Pension Benefit Guaranty Corporation (PBGC) initiated the terminations of the defined benefit pension plans of 14 steel companies, involving nearly 240,000 participants and nearly $7 billion in unfunded, guaranteed pension benefits.
The President’s Steel Program is Working
In light of the ITC’s unanimous finding that certain steel products were "being imported into the United States in such increased quantities as to be a substantial cause of serious injury or the threat of serious injury to the domestic industry," President Bush on March 5, 2002, instituted safeguard measures on 14 steel products. These safeguard measures included tariffs and tariff rate quotas "to facilitate positive adjustment to competition from imports of certain steel products." The safeguard program was to last for three years, with annual reductions in applicable tariff rates.
Safeguard tariffs, however, are only one part of the president’s steel program, which also includes negotiations with our trading partners seeking the elimination of inefficient excess capacity in the steel industry worldwide, and establishing rules to govern steel trade in the future and eliminate the market-distorting subsidies underlying the current crisis. Most notably, the entire program is designed to facilitate the "further restructuring of the U.S. industry." The tariffs in particular — which decline every year before being eliminated entirely after three years — were intended to give the industry the breathing room necessary to fund and implement the restructuring and consolidation that will lead to long-term health and competitiveness.
The United Steelworkers answered this challenge by negotiating new breakthrough agreements which have led to the emerging consolidation in the American steel industry. First, our Union bargained with the newly-minted International Steel Group (ISG) to resurrect the steel making operations of LTV, which had liquidated, wiping out thousands of jobs in Northwest Indiana and in the greater Cleveland area. The agreement streamlined operations and improved productivity by vesting more decision making in frontline steelworkers and by reducing layers of bureaucratic management that had been a drag on production. The agreement then served as a template for ISG's purchase of bankrupt Bethlehem Steel, which was on the brink of liquidation, and further led to negotiations between our Union and U.S. Steel that facilitated that company's purchase of National Steel.
Management has also risen to the challenge, and the American steel industry is in the midst of its most significant restructuring since the formation of the United States Steel Corporation at the turn of the last century. This massive consolidation — nine major mergers and acquisitions since April 2002 involving nearly 40 million tons of productive capacity — is completely changing the face of the domestic steel industry. Domestic producers have invested more than $3.5 billion in consolidation, and committed additional funds to significant new capital investments.
While this restructuring is vitally necessary, it also involves increased risk and demands sacrifices. Steelworkers and the industry have willingly made these sacrifices and taken on additional costs with the understanding that safeguard measures would remain in place for three years. By stabilizing prices and returning producers to profitability, the safeguard tariffs have also been a necessary precondition for the return of vital investment capital to American steel.
Steel Prices and Jobs
Despite the shrill claims of tariff opponents, steel is neither prohibitively expensive nor hard to obtain in the domestic market. As even a brief examination of steel transaction prices demonstrates, costs to domestic steel consumers are only moderately higher than before the tariffs took effect, and significantly less than average world prices. For example:
- Hot rolled sheet dropped from a pre-crisis average $350/ton to just $210/ton by December 2001, according to Purchasing Magazine. Prices enjoyed a brief surge following the announcement and implementation of safeguard tariffs, reaching $400/ton in July 2002, and immediately began to fall. By November, they had dropped below pre-crisis levels, and eventually stabilized around $270/ton — $80/ton below pre-crisis levels. (In contrast, MEPS (International) Ltd. reported an "average world price" of $333/ton in August 2003, $63/ton higher than the domestic price.
- Prices of cold rolled sheet show a similar pattern, falling from a pre-crisis average of $475/ton to just $300/ton in the fourth quarter of 2001, then peaking at $525/ton in July and August of 2002. Like hot rolled sheet, prices for cold rolled exceeded the pre-crisis average for just four months — July-October 2002 — before stabilizing below $400/ton this year. Currently priced at $360/ton (August 2003) in the domestic market, cold rolled sheet remains a bargain for U.S. steel consumers, who still enjoy a 25% discount from pre-crisis levels (and $64/ton below MEPS’ average world price of $424/ton).
It is not surprising, therefore, that attempts to blame steel tariffs for the loss of hundreds of thousands of lost jobs and billions in lost wages are equally unfounded. The supposed "study" by the Consuming Industries Trade Action Coalition failed to mention that the job losses it cites took place in January 2002, two months before the steel program went into effect. In fact, between January and December 2002, employment in steel-consuming industries grew by approximately 52,000. An economist with the Institute for International Economics — which opposes the President’s steel program — concluded that CITAC’s study was "way out of bounds," and the Financial Times called its statistical manipulation a "new low."
Evidence presented to the International Trade Commission suggests that the methods of tariff opponents owe far more to the techniques of political campaigning than to the tools of economic analysis. The ITC is investigating a "tip sheet" distributed to witnesses testifying against steel safeguards advising steel consumers to exaggerate claims of harm in their official submissions to the Commission.
In fact, safeguard tariffs are at least partially responsible for one of the few bright spots in the administration’s job record. Industry consolidation has restored some 16,000 steelworker jobs at formerly idled mills since the tariffs took effect. Beyond that, the President’s steel program has helped to preserve as many as 1.1 million jobs at the thousands of companies that supply products and services to the steel industry and were struggling to survive during the depths of the steel crisis.