Testimony of Timothy N. Taylor

Before the House Ways and Means Subcommittee on Trade

March 26, 2003

Subject: Effect of Steel Tariffs on Steel Consumers

Mr. Chairman and Members of the Subcommittee, my name is Timothy N. Taylor and I am President of MacLean Vehicle Systems, a wholly-owned subsidiary of MacLean-Fogg Company. MacLean-Fogg is a privately held manufacturing company, based in suburban Chicago, employing about 2000 people in 24 facilities in eight states and six countries.

We produce fasteners and component parts for the automotive, transportation equipment, general industrial, electrical equipment and telecommunications markets worldwide. Approximately 10 percent of our $400 million in annual sales is exported, and we import a similar amount of products from our own facilities and suppliers in Europe, Latin America, and, increasingly, Asia.

The majority of products we produce at MacLean-Fogg have steel as a primary raw material. We purchase approximately 50,000 tons of steel annually in our businesses. About half of this steel comes from U.S. producers, 40% from Canadian producers and the remainder from European and Asian producers. We purchase wire rod in the form of finished alloy steel wire for our cold forming operations, hot rolled bar, cold rolled bar, and stainless steel wire rod as well as a small amount of plate and cold rolled sheet steel.

We support a strong, profitable, viable steel industry. We prefer to buy locally made steel when it is competitive in price, quality and delivery. But we must have access to globally priced steel, on the same basis as our competitors around the world, if we are to remain competitive in the markets we serve.

Mr. Chairman, I am also Immediate Past Chairman of the Industrial Fasteners Institute, an industry trade group representing 85% of North American fastener production. As Chairman of IFI, I am very familiar with what happens when tariffs and other trade barriers are enacted on steel. In the 1970s and 80s, Voluntary Restraint Agreements, tariffs, quotas and other trade restraints enacted to protect steel producers resulted in 40% of the U. S. fastener manufacturing capacity disappearing or relocating offshore as a result of the higher U.S. steel prices that resulted from these protections. I'm here today in the hope of preventing an additional similar decline in the fastener industry and other steel-consuming industries.

This economic principal of production never changes: when a base raw material is protected by tariffs or other constraints, imports of value-added products made from that material increase, and U. S.-based manufacturers are placed at a competitive disadvantage. Very shortly, production of those value-added products moves offshore, and those jobs are lost forever. What is different today is only the speed with which this happens. What used to take decades now takes years; what used to take years now takes months. In our globally competitive economy production changes happen far more rapidly than they did 30 years ago and I am concerned by the pace with which we are exporting steel consuming jobs.

MacLean-Fogg has suffered steel price increases averaging 7% on most of our purchased steel items from both US and overseas sources, and up to 15% on our stainless steel wire as a result of the 201 steel tariff implemented in March of 2002 and prior administration actions implemented in 2000. That may not seem like a lot, given the 30-50% increases that other steel-consumers have suffered, but it is more than enough to place us at a competitive disadvantage, especially when we started with a 25% disadvantage on steel costs before the 201 tariff. That is a fundamental point: the price of the raw material is irrelevant, so long as it is a global price. When it is artificially increased in one country, manufacturers in that country are disadvantaged and production moves to the lowest cost.

We have approached our customers, primarily large automotive producers, who have denied our requests for relief from these increased raw material costs. They have threatened to replace our products with products originating outside of the United States if necessary. They have indicated that their own vehicle prices are under severe pressure and they are actively seeking lower cost components from other suppliers while at the same time demanding that we lower our prices further or face the loss of business to our competitors around the world.

Our government has provided repeated tariff, countervailing duty and other protection to the large integrated steel producers since the 1970s. Despite these numerous "temporary" tariffs many of the large integrated steel producers have not been able to earn an acceptable return. I would suggest that, after more than 30 years of almost continuous protection, there are structural problems in the steel industry that would be better solved by market forces than by continued government action.

My concern is that in attempting to "save" jobs in the domestic steel industry, we have severely damaged domestic steel consumers. There are at least 50 manufacturing jobs in the products produced from steel for every one job in the steel making industry. To protect one job in steel making with tariffs we are placing the 50 steel consuming jobs at risk. In fact, according to a recent economic study commissioned by the Consuming Industries Trade Action Coalition (CITAC), 200,000 jobs in products produced from steel were lost between December of 2001 and December 2002 as a result of higher steel prices, brought on largely by the tariffs. To put that in perspective, there are only about 180,000 jobs in the entire steel producing industry.

Faced with increasing raw material costs, and with no ability to recover those costs from their customers, many companies, including MacLean-Fogg, are buying or building factories outside of the United States to avoid increased raw material prices here. We have purchased three factories in Mainland China recently in order to have access to competitively priced raw materials. I cannot overemphasize the importance of raw material costs. Many of these products, fasteners included, have such low labor costs that labor is not the critical factor. In our fastener product lines, for example, labor is less than 10% of the cost but steel is 30 - 50% of cost. Since the steel we buy is 33% cheaper in Asia we are buying and manufacturing in Asia increasingly because of raw material costs, not labor.

The products we will be buying and manufacturing in Asia include products produced with some sophisticated manufacturing technologies that without the pressure of raw material costs would best be kept in the United States. In other words, to remain a viable supplier to our customers, we are being forced to export our technology by government-induced economic forces, such as tariffs and other imposed constraints. We would not need to make these decisions if we had access to competitively priced raw materials in the United States.

Let me be more specific. We have a plant in Richmond, Illinois that employs 19 people making steel nuts. This plant is the most productive fastener plant in the world. It is so automated that these 19 people produce the equivalent of $12 million of sales value of fasteners, which is three times the industry average on a per person basis.

However, the steel we buy for our Richmond plant costs $.30 - $.35 per pound today. We can buy these nuts in Asia, complete and delivered to Chicago, for $.44 per pound, because the same steel we buy here for $.30 - $.35 per pound costs $.20 - $.25 per pound in Taiwan and China. As a result, these 19 highly skilled people may well lose their jobs this year if the tariffs remain in place, because we will be forced to manufacture these nuts in Asia where we can find competitively priced raw materials.

We won't make this decision because we want to. We will do this because, if we don't, our customers will do it for us. Mr. Chairman, this is a travesty of the worst sort. It is an example of the unintended consequences of government actions to meddle in the market. And, when we go offshore the steel making jobs that supply us will go offshore too, and none of these jobs will return once the technology is transferred.

Let me say again that MacLean-Fogg supports a strong, globally competitive domestic steel industry. We also support a strong, globally competitive domestic steel-consuming manufacturing industry. In our view the best way to accomplish those two goals is to allow the market to work without undue influence from government. We therefore urge the removal of the tariffs at the earliest possible opportunity, and we ask Members of Congress to support that goal.

Thank you for the opportunity to appear before you today. I would be pleased to answer any questions you may have.

Timothy N. Taylor
President
MacLean Vehicle Systems