Written Testimony Submitted By Consuming Industries Trade Action Coalition Steel Trade Task Force Submitted To The Trade Subcommittee House Ways & Means Committee

Steel Users Speak Out

Written Testimony Submitted by CITAC Steel Task Force
to the
Trade Subcommittee of the U.S. House Ways And Means Committee
For Inclusion in the Record of the March 26, 2003 Hearing

The Consuming Industries Trade Action Coalition Steel Task Force (CITAC STF) is a coalition of companies and associations many of them small businesses that rely on open channels of trade to be competitive in their U.S. manufacturing, transportation, construction, retailing, energy production and other activities. CITAC STF commends the Subcommittee for conducting this hearing and for finally allowing steel consuming industries to be heard concerning the impact of the steel 201 remedies on our businesses and workers.

CITAC STF also commends the Ways and Means Committee for requesting that the ITC initiate a Section 332 investigation to institute a fact-finding investigation of the current competitive conditions facing the steel consuming industries in the United States with respect to the steel safeguards measures and to foreign competitors not subject to such measures. This investigation is critically important to steel consumers. The steel safeguard remedies have had a profound and negative effect on steel consumers since their imposition in March 2002. Steel-using manufacturers have lost numerous orders and many thousands of jobs to offshore competitors. These unintended effects are clearly relevant in the Presidents determination whether the safeguard remedies should last another 18 months at further cost to steel consuming industries. The Mid-Point Review provides the opportunity for a full analysis. The 332 study, which will be presented to the President in the same document as the mid-point review report, must provide that information.

Since the hearing on March 26, 2003, the International Trade Commission (ITC) has formally initiated the 332 investigation on the impact of the steel remedies on steel consumers. CITAC STF urges the Committee to assure that the 332 investigation and the Mid-Point Review of the safeguard remedies are integrated and complement each other, as was the Committees intention.

The Safeguard Measures Should Be Terminated as Soon as Possible

CITAC STFs top priority is the termination of the steel safeguard measures because they are wreaking havoc in the markets for downstream steel-using manufacturers. Skyrocketing prices, uncertain supply due to allocations and lengthening lead-times, broken contracts and growing quality problems are forcing many steel users to the brink of disaster. These unintended consequences are not only disastrous for steel users but for steel producers as well. We hope that the Bush Administration will act to end this destructive tax on American steel-using industries as soon as possible.

At the March 26 hearing, several steel producer witnesses suggested that the steel industrys survival is essential in this time of war. While we agree that it is in everyones interests to have a strong U.S. steel industry, any concerns about defense are misplaced. The Defense Departments usage of domestic steel only amounts to 0.3% of domestic steel delivery and the Department of Defense generally does not buy imported steel. The steel safeguard measures are completely irrelevant to national defense.

The tariffs should be ended at the Mid-Point Review for the following reasons:

The tariffs are doing far more harm to steel consumers than any benefit to steel producers could justify.
The economic downturn since March 2002 has vastly magnified the injury to steel using manufacturers.
Price increases during 2002, which have abated only moderately in 2003, are far beyond any predicted level of price increases. These prices have seriously damaged the international competitiveness of American manufacturers that use steel.
The steel safeguards threaten trading relationships. When the WTO case is over this fall, a loss in the WTO could result in retaliation against exports of U.S. products of $1 billion or more.
The safeguards can do no more than they have already done to realize the goal for which they were imposed the rationalization, restructuring and consolidation of non-competitive U.S. steel capacity.
The safeguards do not address the root causes of the steel industrys problems, which is the non-competitiveness of certain integrated producers due to relatively high costs and operating inefficiencies.
The safeguards interrupt critical steel imports that are absolutely essential, since we must depend on imports to supply 20 to 25 percent of our domestic demand. Exclusions have not permitted sufficient quantities of the steel American manufacturers need.

More Jobs Have Been Lost From The Tariffs Than Have Been Saved

A particularly onerous consequence of the tariffs is the threat to U.S. jobs many of which are union jobs in steel-consuming sectors. Steel-using jobs vastly outnumber steel-producing jobs in every state. Nationally, the ratio is 59 to 1. Already, jobs are being lost as business leaves the country. As the damage mounts, studies show that eight steel-using jobs will be lost for every steel-producing job saved, even in the short run. We believe that steel-using jobs are no less important than steel-producing jobs. A recent economic analysis published by the CITAC Foundation, Inc. concluded that about 200,000 jobs were lost in steel consuming industries due to higher prices. The steel safeguard measures caused the price increases in large part.

The CITAC Foundation study evaluated job effects in steel consuming industries both narrowly and broadly defined. In the steel consuming industries, narrowly defined, about 50,000 jobs were lost in 2002 from higher steel prices. In steel consuming industries, broadly defined, some 200,000 jobs were lost in 2002. The CITAC studys numbers indicate that serious damage was done to downstream industries from steel price increases and the safeguard tariffs. ¹

Between 1995 and 2001, steel-using manufacturers added 1,255,000 new jobs to the economy, according to the Bureau of Labor Statistics (while jobs in the manufacturing sector as a whole actually declined by 829,000). Today, steel-using manufacturing employ nearly 13 million Americans, compared to less than 200,000 jobs in steel-production. Many steel users are small businesses, which have been and remain the engine of growth for the American economy. Steel-using industries provide good jobs and are invaluable contributors to their communities. Furthermore, the steel safeguards have had a ripple effect. As U.S. steel-consuming industries suffer, so do the companies that supply those industries, such as service centers, finishers, platers, assemblers and port workers. We urge the Committee to find policy options that assist industries throughout the economy, rather than imposing tariffs, which only transfer pain from producing to consuming industries.

The Steel Safeguards Have Made U.S. Steel Consumers Uncompetitive

Steel consumers are in trouble because of price hikes and other dislocations in the U.S. that have resulted in a severe competitive disadvantage for steel consumers compared to their overseas competitors. While some of these price increases have moderated in the last few months, as indicated on the attached chart, the United States remains at the high end of the worlds steel price markets. As a result, U.S. manufacturers that use steel are operating under a competitive disadvantage compared with their foreign counterparts. It is not important to compare prices to the levels in the past; it is important to compare U.S. prices to overseas prices to competitors.

Accurate international pricing data is a key component of sound policy making. Unfortunately, data in this area is very incomplete. For example, a chart published by the American Iron and Steel Institute in January provided an incomplete and misleading picture of the situation faced by steel consumers in the United States. The AISI chart was misleading in the following respects:

AISI only posted prices for hot-rolled steel and excluded cold-rolled and galvanized steel the latter products are more important to steel consumers than hot-rolled. When all three flat-rolled products are included in the calculations, and countries such as Russia and Japan are added (Russia, for example, is the worlds largest steel exporter, although trade restrictions keep much Russian steel from the U.S. market), the U.S. is shown to have higher prices than in most markets.

AISI failed to include prices on the West Coast of the U.S., where a large portion of steel users manufacture products, and where prices are substantially higher than in the Midwest or Gulf Coast.

AISI failed to note that prices in most world markets are stated in C&F or delivered terms, while U.S. prices are listed in FOB mill terms. This means that world market prices are based on the steel cost plus freight charges, while the U.S. prices are based on the price of steel at the factory gate, with no freight charges added in. AISI, in making a comparison using the FOB mill prices for the U.S., therefore understates U.S. prices.

The attached CITAC STF information corrects these problems and gives a more accurate picture of global market prices. The price differential between steel in the U.S. and foreign markets has led to a dramatic increase of imports of value-added products made from steel, as well as shifts in production of these value-added products offshore. These production shifts have occurred very rapidly in response to the steel safeguards. As Timothy Taylor testified before this Subcommittee, in our globally competitive economy, production changes happen far more rapidly than they did 30 years ago. Thus, if the tariffs remain in effect for another year and a half, even more U.S. steel-consuming jobs will be lost. Once these jobs are lost, they are lost forever. ²

In recent Senate Steel Caucus testimony, steel producers repeated their refrain about pricing. It is important to note that their attempts to rebut the hard evidence of competitive disadvantage for steel consumers are entirely wrong. For example:

US Steel Claims: Prices have risen faster abroad than in the United States.

The Facts: Even if true, what matters is whether prices are lower abroad than in the U.S. for comparable steel products. They are lower abroad, and domestic producers do not argue the contrary. US Steel Claims: Steel tariffs are not responsible for US manufacturers moving offshore.

The Facts: Because prices abroad are lower than in the U.S., our steel consuming manufacturers are at a competitive disadvantage. Jobs are being lost every day because prices in the U.S. are higher than they would be without the tariffs. US Steel Claims: Steel consumers have not been denied important steel imports, because imports are higher for flat-rolled steel than they were in 2001.
The Facts: Steel consumers need certain grades and specifications of steel. Many cannot get them due to the safeguard measures. Exclusions do not fill the gap. Aggregate import levels do not change this fact. Indeed, a major reason for increased imports of flat-rolled steel is the slabs and hot bands that are used by the steel companies themselves. Even steel companies, therefore, are steel-using manufacturers.

US Steel Claims: Inventory levels of flat-rolled steel were higher at the end of 2002 than the end of 2001, meaning that there were not shortages of steel.
- The Facts: Increasing inventory levels from one year to the next do not reveal whether companies suffered from steel shortages during 2002. In fact, many companies did suffer supply disruptions, and these continue.
US Steel Claims: Steel consumers arent hurt by price increases, because prices have come down from levels of last summer and fall.
- The Facts: Price levels in mid- to late 2002 had risen 50-70 percent for flat rolled products from January 2002 levels. Steel users could not absorb these increases. Jobs lost overseas, plus the general economic downturn, led to a decline in demand, and prices moderated. But prices are still well above 2001 levels, continuing to hurt steel users.
US Steel Claims: 201 tariffs are not hurting manufacturing because the ISM Index has gone up 10 of the 12 months since the steel tariffs were put in place.
- The Facts: US Steel apparently is unaware of the serious plight of US manufacturing. The ISM Index in March 2003 is at its lowest level in nearly two years. The steel tariffs are contributing to the malaise in US manufacturing.

Price Restoration Is Not a Measure of Success

U.S. steel producers have persistently tried to portray the damage of steel tariffs to steel-using manufacturers as either non-existent or a payback for unsustainably low steel prices in the past.

The underlying premise of the steel producers argument is that higher steel prices somehow help steel consumers, and that, in any event, the dramatic steel price increases currently being visited on steel users are somehow justifiable because prices are only at or below their 20/22 year historical averages. CITAC STF rejects the notion that the fairness of prices should be measured by their 20- or 22-year averages. This is an obviously meaningless benchmark. Televisions, computers cars, auto parts and many other products have been declining in price for years. Productivity improvements and technological innovation enable companies in many industries to reduce costs and, in competitive markets, end product prices. Steel is no different from other industries in this respect. Nor have the steel producers made any connection between 20-year average prices and sustainable prices.

Steel users are largely unable to pass along price increases to their customers. Several witnesses made this point on March 26. The squeeze of sharply rising steel prices against product prices that are not changeable puts steel using manufacturers at risk of destruction. The steel safeguards, imposed by our own government, have sharply aggravated this problem.

Steel as a production input should be priced by the market. In the United States, the price must be comparable to prices charged in other world markets. Higher prices will damage American manufacturers that use steel by driving business offshore. This is precisely what is currently happening in the U.S.

The steel producer witnesses on March 26 largely ignored the fact that the safeguards inevitably hurt their customers. They cannot be successful by imposing punishing price increases on their own customers. The safeguard measures therefore are doomed to fail in their goal of making the U.S. industry internationally competitive. They are driving steel purchasers, and steel purchasing offshorenever to return. While some may argue that long-term decisions are not based on a three-year tariff program, our observation is exactly the opposite. Thus, the longer the steel safeguard measures remain in effect, the more damage will be done to consuming industries.

Exclusions Have Not Solved the Problems of Consuming Industries

While exclusions have benefitted some steel consumers, the exclusion process has not solved a primary concern of small- and medium-sized steel-consuming businesses in the U.S. reliable and competitively priced steel.

The exclusion process has many shortcomings. The tariffs had an impact on all steel, both imported and domestic. Steel consumers buying 100 percent of their steel from U.S. producers also experienced price hikes, shortages and long lead times. Exclusions do nothing to help these steel consumers. Also, exclusions do not benefit steel consumers that buy steel from service centers. Finally, the process is complex some steel consumers cannot afford to apply for exclusions that are at best uncertain.

Thus, the exclusion process cannot be viewed as a substitute for resolving the challenges the steel safeguards pose for steel consumers. Steel consumers who are continuing to suffer from prices and supply shortages from the steel tariffs should not have to come to Washington to buy steel.

The Safeguard Measures Have Served Their Purpose

Since the steel safeguard remedies were put into effect, the following significant changes have occurred:

The U.S. steel industry has initiated significant consolidation and restructuring.
The legacy costs of several bankrupt companies have been reduced or eliminated.
The Administration has made significant progress in its multilateral steel initiatives (especially defining subsidies).

To the extent these changes are a function of the tariffs (a doubtful proposition, since the consolidation and restructuring were poised to happen in any event), the tariffs have achieved a considerable measure of success. Little purpose would be served, however, by keeping the tariffs in place for another 18 months. Mergers and acquisitions without plant closures are not helpful to the industry since the excess capacity remains. To the extent that the tariffs allow uncompetitive plants to come back on-line and produce longer, the tariffs are, in fact, counterproductive to the long-term health of the steel industry.

Efforts to reduce the world excess capacity of non-competitive steel production are laudable (assuming governments of the world can define what is excess capacity). However, steel using manufacturers who are struggling now for their survival should not be held hostage to this process. The steel negotiations have proceeded to the point where they can clearly proceed without the stick of the tariffs especially when the tariffs have caused such harm to the economy as a whole.

Conclusion

The Section 201 steel tariffs are clearly causing far more harm than benefit to the U.S. economy. Thousands of American small businesses are threatened, and the threat is worsening. All available data support this conclusion. Yet until now, there has been no government analysis of the impact of the steel tariffs on steel consumers. We applaud the Committees role in initiating such a study. We now urge the Committee to monitor the progress of the study and the statutory Mid-Point Review of the steel safeguard measures to assure that the ITC and the President give full consideration to the effects of this program on the entire economy.

CITAC STF stands ready to work with the Committee toward these ends. We thank you for the opportunity to include our views in the record.

1. The study used a commonly employed regression analysis to develop these estimates of job losses. No other analysis exists of the jobs effects of the steel safeguard measures. Clearly a government-sponsored analysis is long overdue.

2. Obviously, the steel safeguard measures are one of several factors affecting U.S. manufacturers. We believe the evidence indicates that it is an important factor and one that the U.S. government is truly able to control. It has made a bad situation much worse and will continue doing so as long as it remains in effect.