Cleveland Association for Business Economics
September 17, 2001
Jon E. Jenson
Good afternoon. As chairman of the Consuming Industries Trade Action Coalition (CITAC) I should be in Washington today presenting a part of the CITAC testimony at the Section 201 hearings on steel before the International Trade Commission. But, I had earlier accepted your invitation, and someone else is delivering the testimony. And, in view of recent developments -- including the closure of Reagan National Airport -- I can assure you that I'm genuinely delighted to be with you today.
CITAC's mission is to maintain trade so that U.S. consuming industries can obtain the products they need to remain competitive in the global marketplace. Where steel is concerned, that's the issue -- and the only issue.
In the next few minutes I'll describe the threat to our economy posed by steel quotas, some of the consequences, and five reasons why new restraints on steel imports are not the answer.
Although scarcely noticed, many of the 70 U.S. steel producers have been operating profitably. Mini-mills, which account for about 50 percent of domestic steel production, enjoy much lower operating costs and higher productivity than their integrated cousins. Not surprisingly, several had record sales and record profits last year.
But, over the same period, several of the least competitive steelmakers -- mainly integrated mills -- have declared bankruptcy, and a few more are in financial trouble.
So, for the umpteenth time, certain integrated producers and their unions are leading the march to Washington DC to seek a bailout on the backs of their customers, American consumers and taxpayers. In doing so, they threaten far more American jobs than they protect, disadvantage their customers, inflate the price of steel products, soak the taxpayer, and jeopardize our international relationships.
They blame "dumped, subsidized, illegally and unfairly traded" imports as the cause of their problems, and are seeking further trade restrictions. Despite steel industry mythology to the contrary, most knowledgeable observers agree that the roots of the steelmakers' problems lie at home - not overseas - and no amount of protectionism will improve the quality or availability of domestic steel, or the productivity and competitiveness of U.S. producers.
In Washington, two measures --one legislative and the other administrative -- have emerged as the greatest threats to steel using manufacturers.
The first is the "Steel Revitalization Act" (H.R. 808), which contains four major provisions:
- a five-year quota on all steel imports (whether fairly or unfairly traded);
- a 1.5 percent surtax on every ton of steel shipped in the U.S., to fund legacy costs;
- a $10 billion steel loan guarantee fund; and
- a $500 million grant program to assist in steel industry consolidation.
The second is an investigation by the International Trade Commission (ITC), under Section 201 of the Trade Act of 1974. Finding itself under increasing political pressure from organized labor, the Bush Administration has recently requested that the ITC examine the trade situation to determine whether imports of steel have seriously injured domestic steel producers. If the ITC finds injury, the President is granted extraordinary authority to protect the industry. Administration spokespersons have indicated that, if injury is found, a likely action will be a three-year quota on steel imports.
H.R. 808 is heavily endorsed by organized labor, but several of its provisions are not supported by the American Iron and Steel Institute (primarily integrated producers) and the Steel Manufacturers Association (primarily mini-mills). On the other hand, the Section 201 investigation, currently underway, finds wide support across the steel industry, since the prospect of new quotas and the resulting inflation of steel prices would benefit all steel producers.
Here are five reasons why new restraints on steel imports are not the answer:
1. Because They Do More Harm Than Good
The essential purpose of import quotas is to restrict supply and raise prices. All sides agree that the proposed quotas in H.R. 808 would raise steel prices by at least 15 to 20 percent.
The many thousands of American steel consumers -- metalworking companies, manufacturers of machines and conveyances, and others serving diverse markets -- must compete globally, and therefore must have access to steel that is internationally competitive in quality and price. Restraints on steel imports deal these steel-using manufacturers a double whammy: (1) increased raw material costs; and (2) greater competition from abroad for the products they make.
There are more than 50 American workers in steel-consuming industries for every steelworker. In Cuyahoga County the ratio is 16 to 1. In Ohio, it's 20 to 1. Steel-using jobs are threatened when trade restrictions cause work to leave the country for foreign destinations.
In fact, a CITAC Foundation study -- which I'll share with you in a few minutes -- finds that H.R. 808, with its quotas on steel imports and steel surtax, could cost as many as nine jobs in steel-using industries for every single job it protects in the steel industry. Also, quotas under H.R. 808, or similar quotas arising from the Section 201 investigation would cost American taxpayers as much as $565,000 per year for each steel job protected -- a total of $2.9 billion per year. The cure is worse than the disease.
2. Because They Don't Address the Problem
We need a strong and vigorously competitive domestic steel industry, but restraints on steel imports will not make U.S. producers stronger or more competitive. Thirty years of protectionism have amply demonstrated this. Steel imports are the result, not the cause, of certain integrated mills' inability to compete internationally.
The root cause of the integrated producers' woes are high energy and raw material costs, poor productivity, unfortunate management decisions, outdated work rules and technology, and other factors -- not imports. For example, "legacy costs" for retiree health benefits add nearly $30 per ton to integrated producers' costs.
Indeed, for many major products, U.S. steelmakers are actually underselling imports. The recently published market price for hot-rolled sheet was $240 per net ton. The import value (from the Census Bureau) was $261 per ton for the same product. For cold-rolled the spread was $320 (U.S.) vs. $392 (import); and for hot-dipped galvanized, $331 (U.S.) vs. $426 (import).
How can foreign steel products, coming in at higher prices, be hurting U.S. producers' profits?
3. Because Steel Imports Are Essential
Since domestic steelmakers can supply only about 75-80 percent of the nation's demand for steel, imports are not optional. They are a necessity for the well being of our industrial economy. Quality and availability, as well as price, are reasons why steel is imported. In fact, steelmakers, themselves, are the largest importers of foreign steel. They bring in mostly semifinished material, and account for about 30 percent of all steel imports.
4. Because Adequate Protection Already Exists
Steel is one of America's most protected industries. Antidumping and countervailing duty laws, created expressly for the steel industry, are already in place. In fact, more than 50 percent of steel imports are currently covered by antidumping and countervailing duty actions, and nearly every major steel producer in the world has been sued under these laws.
Dumped and otherwise unfairly traded steel is not the issue. Existing trade laws should be enforced. Unfortunately, the harmful new trade restrictions proposed by the steel industry would affect fairly traded as well as unfairly traded steel.
5. Because New Trade Restraints Would Threaten America's Relationships
The quota provisions of H.R. 808 are a direct violation of our WTO obligations, and have already caused concern among many of our trading partners. Similarly, quotas arising from the Section 201 investigation would spread dissatisfaction throughout the world. These and other arbitrary trade restraints on steel could produce damaging retaliation by the international community, and threaten future trade agreements, to the ultimate detriment of American consumers.
In this discussion we have not solved the integrated steel producers' problems, or the problems of the hundreds of other companies in dozens of industries that each year find themselves unable to compete, experience financial difficulties, declare bankruptcy and lay off workers. We have not addressed the challenges faced by the hundreds of thousands of American workers who have lost their jobs since the first quarter of this year.
We have tired to explain the consequences of ill-advised trade restraints that will surely cause more harm than good, and hurt more workers than they help. I'm looking forward to your questions.