THE UNINTENDED CONSEQUENCES OF
INCREASED STEEL TARIFFS ON AMERICAN MANUFACTURERS
Statement of the
Consuming Industries Trade Action Coalition ("CITAC")
CITAC is a coalition of companies - most of which are 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. While our comments in these proceedings deal specifically with the unintended consequences to steel-using manufacturers of Section 201 tariffs imposed on steel imports, CITAC members care equally about open markets for other inputs. CITAC commends the Committee and especially the Chairman for conducting this hearing and allowing small businesses to be heard.
Last year, CITAC commissioned studies that analyze the economic impact of trade restrictions on America's steel-consuming industries, a part of the U.S. economy that, until recently, has received scant consideration in public policy debates. At least two other respected studies, by experts with the Institute for International Economics and the Brookings Institution, projected similar consequences for steel users. With the implementation on March 20 of tariffs of up to 30 percent on steel imports these unfortunate consequences are being realized.
201 Steel Tariffs Have Seriously Harmed American Steel-Using Manufacturers
America's steel-using manufacturers must compete with efficient global manufacturers of many types of consumer and industrial goods, machines and conveyances - everything from earth movers to construction materials, from complex auto parts to nuts and bolts. Forcing U.S. manufacturers to pay considerably more for steel inputs than their foreign competitors deals U.S. manufacturers a "triple whammy:"
- (1) increased raw material costs;
- (2) threatened denial of access to steel products not produced in the U.S. or in short supply; and
- (3) increased competition from abroad for the products they make.
Domestically, bellwether steel products like hot rolled sheet have increased in price by as much as 70 percent in the past six months. (Incredibly, domestic steel producers call these increases "reasonable and modest.") Since steel represents between 40 and 70 percent of the cost of manufacture for many steel users, the impact of these steel price increases has been disastrous - and many predict that the worst is yet to come.
These precipitate price increases are devastating to U.S. steel users because they cannot pass higher costs on to their customers in most cases. Moreover, downstream customers have ready access to imports of steel-containing products from abroad. These "downstream" products are not subject to steel 201 tariffs, because they are no longer "steel;" they are auto parts, machinery components or other value-added products. The tariffs thus put U.S. manufacturers in a cost-price squeeze that the government cannot protect them against and that customers can avoid by sourcing their products from foreign competitors. This is not "circumvention" of the tariffs; it is simply business.
In the meantime, despite some increases in steel prices abroad - far less than those seen in the U.S. - the U.S. has become an island of extremely high steel prices in the world. For example, hot rolled sheet currently sells for 32 percent less in European markets, and 34 percent less in Asian markets. How can steel-using manufacturers be expected to compete in the global marketplace when placed at such an enormous disadvantage with respect to raw material costs?
Today, steel-using manufacturers cannot pass along these staggering price increases to their customers in the automotive, appliance, electronics and other markets. Instead, steel users are typically expected to reduce their prices by up to 5 percent per year through productivity improvements. Despite domestic steel producers' unsupported claims to the contrary, customers increasingly are looking overseas to source their requirements for parts, components and assemblies. This trend is especially frightening since business leaving the country is unlikely to return.
At the same time, despite rhetoric to the contrary, shortages of some steel products are intensifying. Steel inventories are at historic lows. Steel imports have declined significantly in recent months, due to the "double whammy" of 201 tariffs and antidumping/countervailing duties (see below). Some steel suppliers are on allocation, i.e., rationing. One steel producer has completely stopped taking orders. The problem is so severe that one U.S. automotive manufacturer, Honda, had to air freight 200 tons of specialty steel from Japan to the U.S. along with as much as 2,000 tons of coated sheet to keep from running out of steel. (Airlifting 2,000 tons of steel is said to require at least 20 747 flights and cost as much as $300,000 per flight). Without question, the shortages are creating serious uncertainties regarding future steel supplies and adding further upward pressure on steel prices.
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 "maintained." Are steel-using jobs less important than steel-producing jobs?
It is important to note that these job loss estimates may prove to be too low. The CITAC study's estimates are in fact very conservative. While the study projected that imports would decline between 18.5 and 35.9 percent, and imports are in fact down by 24.6 percent, the study estimated that average (domestic and imported) steel prices would increase between 2 and 4 percent. The job loss estimates were based on these price increase estimates. Clearly, we are seeing average steel prices increases significantly in excess of this estimate, so in all likelihood the job loss estimates are too low as well.
Another impact of the Section 201 tariffs is the well-documented threat of retaliation by our trading partners - a threat that is currently in the headlines. At least eight major trading partners of the U.S. have initiated proceedings in the World Trade Organization, claiming that the 201 tariffs are contrary to WTO agreements governing Safeguards measures. Most legal commentators note that the United States has a very weak position and will lose this case, at least in several important respects. The U.S. has already lost WTO cases on Safeguard measures on Wheat Gluten, Line Pipe and Lamb Meat. The shortcomings of Section 201 procedures noted in those cases are also present in the steel case. Accordingly, the U.S. is likely to face an international law defeat of major proportions sometime in 2003.
As bad as the steel 201 tariffs are, the avenues for relief for American steel using manufacturers are few. The only relief currently available to steel-using manufacturers is to request that the Administration exclude the steel products they need from the tariffs. To date only about 260 product exclusions have been granted from among some 1,200 requests. These exclusions cover only about 6 percent of the 13.1 million tons of steel affected by the tariffs. Needless to say, these exclusions are having little impact on the overall steel market. There are many more deserving exclusion requests that should be granted to give U.S. steel consuming manufacturers a fair chance to compete and survive.
The Vicious Interaction of "Unfair" Trade Laws and Section 201 Tariffs
One reason the impact of the 201 tariffs is so severe is that imports of many steel products have essentially stopped. This is due to the interaction of "unfair" trade laws (particularly antidumping) and the Section 201 tariffs.
Under the antidumping law, the Department of Commerce compares prices for products sold in the United States with identical or similar products sold in the home market of the exporter or producer. Before prices are compared, they are subject to numerous adjustments. Sometimes, these adjustments provide a fair comparison. Other times, they exaggerate or even create dumping margins that may not exist.
The 30 percent tariffs are a case in point. Under U.S. antidumping rules, U.S. Customs duties must be deducted from the export price before comparison with home market prices. The 30 percent tariffs on flat rolled steel therefore are deducted from U.S. prices. If the actual selling prices of steel products are the same, e.g., $400 per metric ton, the U.S. rule requires that $120 (the 30 percent tariff) be deducted from the U.S. selling price. The importer must not only pay a $120 per ton tariff under Section 201; in addition, the dumping margin increases $120 per ton also. The 30 percent tariff is in reality a 60 percent tariff because of the antidumping and 201 tariffs acting together. As a result, steel products subject to both 201 and antidumping are essentially not traded. This adds to the U.S. shortage of steel, since imports are needed to supply 20-25 percent of U.S. demand even at full domestic production.
The Steel Industry Ignores or Misstates Market Realities
The U.S. steel producers have persistently tried, without success, to portray the damage of steel tariffs to steel-using manufacturers as either non-existent or a fair "payback" for low steel prices over the last three or four years. Producers accuses those who oppose the Section 201 of using "false and misleading information," but fail to cite a single example. A recent report by Dr. Peter Morici, commissioned by a profitable minimill producer, represents another in this long line of baseless attempts to whitewash the harm being done to American industry. The report contains no evidence of steel industry improvement - productivity, efficiency, or competitiveness - the intended purpose of the tariffs. In Morici's analysis, only "price restoration" is a measure of success.
The underlying premise of the report is that higher steel prices per se are good for 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 historical averages." Steel users reject the notion that the "fairness" of prices should be measured by their 20-year averages. Steel as a production input should be priced in the United States at comparable levels to world competitive prices. Any higher price will damage American manufacturers that use steel by driving business offshore. Precisely this effect is currently observed in the U.S. What is relevant is that higher steel prices in the U.S. disadvantage our steel-using manufacturers who must compete in the world economy where foreign steel is significantly lower in cost, more available, and often higher in quality.
The fact that the U.S. is currently an island of high steel prices in the world marketplace is ignored, glossed over and covered up by Mr. Morici's study. And the fact that business is leaving the U.S. for foreign locations where competitively priced steel is available is simply not acknowledged or is even denied. U.S. steel producers appear to be studiously unaware of the global marketplace. In this condition of unawareness, the chances that domestic producers will use the tariff protection to become more globally competitive are extremely small.
As a "survey of some counterintuitive results," Mr. Morici's report ignores key harmful results, and incorrectly assesses others. Little recognition is given the deepening shortages of steel, mill allocations, and uncertain future supplies that threaten steel users. These effects have been documented by the Committee.
The Morici analysis also makes absolutely no mention of the rapidly spreading quality problems that have raised costs and threatened product reliability for many steel users, problems that were documented at the Committee hearing on July 23. Despite all the evidence, the Morici report asserts, without support, "the temporary tariffs do not appear to have placed U.S. manufacturers using steel at a competitive disadvantage." Ironically, this "study" ends with the conclusion that the overall effect of the 201 remedy has been "positive." CITAC disagrees.
Steel-using manufacturers would benefit from a strong and vigorously competitive U.S. steel industry. They understand better than most the continuing lack of competitiveness in global markets of certain integrated steel producers. However, such a benefit is not necessarily worth any cost.
It is up to policymakers to recognize the true facts in the steel issue, and take appropriate action. The 201 tariffs will not restore competitiveness to integrated steel producers whose products are not globally competitive, or even internally competitive with minimills.
Accordingly, we urge the Committee to consider the following recommendations:
1. End the Section 201 tariffs on steel at the earliest possible date.
The tariffs are doing far more harm than good to the U.S. economy. They threaten the jobs of millions of the 12.8 million American workers employed by steel using manufacturers - mostly small businesses. And by encouraging manufacturing to move offshore, where world-competitive steel is available, they threaten not only the domestic market for steel (and thereby the long-term competitive position of U.S. steel producers), but the long-term future of our manufacturing economy as well. The tariffs also subject American exports to potential retaliation because of WTO disputes. The longer the tariffs are in place, the greater damage they will do.
The tariffs do not create a "level playing field." They artificially inflate steel prices on fairly and unfairly traded steel alike, creating an island of high steel prices in the U.S. to the detriment of U.S. manufacturers, their employees and American consumers. Antidumping and countervailing duty laws are available to address unfairly traded steel. The U.S. steel industry makes more frequent use of these laws than any other-yet their competitive position has continued to deteriorate. The reason is simple: unfair trade is not the most important problem facing the industry. This proves that the industry cannot become competitive through protection.
2. Focus on realistic and effective policy objectives.
a. Policymakers Need to Distinguish Between Integrated Mills and Mini-Mills
"Save the steel industry" and "stand up for steel" are simple and attractive slogans. But policymakers must realize that there are two very different major segments comprising the steel industry. One is the minimills who use modern electric furnace technology to transform steel scrap into various steel products. The other is the integrated producers who transform iron ore, coal and limestone into steel products.
In general, minimills' costs of production are lower and more flexible than those of the integrated mills. They are therefore in general better positioned to compete and are more profitable. They do not need to be "rescued" through government action. In fact, in a direct comparison, Nucor, the largest mini-mill, enjoyed record sales and record profits during 2000, while LTV, a large integrated mill, was sliding into bankruptcy and liquidation - losing $40 on every ton of steel it sold. (In the recession year of 2001, while the fortunes of certain integrated producers were crashing, Nucor earned a net profit of $113 million.)
High and relatively inflexible costs - including costs for raw materials, energy, "legacy costs" and labor - are the root cause of certain integrated producers' inability to compete. In some cases, outdated technology and equipment as well as inefficient labor practices compound the problem.
Minimills cannot make all the steel American manufacturers need. Integrated mills are needed to make certain kinds of automotive steels, for example. However, the portion of the market that needs more expensive integrated steel is steadily getting smaller. Donald Barnette, a respected steel industry economist, predicts that in ten years the integrated sector of the industry will be needed to supply only about 25 million tons (currently, that segment makes more than 50 million tons). Consolidation and down-sizing of integrated steel companies is essential. But the tariffs instead send faulty market signals, causing integrated mills to keep producing and bankrupt mills to restart.
b. Encourage Rationalization, Restructuring and Consolidation of the Industry.
Most steel industry experts in and out of government agree that the revitalization of America's steel industry requires substantial change -- the rationalization, restructuring and consolidation of those integrated producers who have been unable to successfully weather the forces of the marketplace. We strongly urge that these issues, rather than the perpetuation of current failed practices through trade protection and artificially inflated prices, be the focus of public policy.
We favor the consolidation of certain integrated producers, either with mini-mills or among themselves. The resulting reduction in obsolete and inefficient steelmaking capacity would produce long-term benefits for all concerned. Steelmaking capacity, in and of itself, is not the issue. Reducing inefficient, non-competitive capacity is the goal. Such capacity plainly exists in the United States.
It is clear that "legacy costs" - particularly health care for steel industry retirees - are a major obstacle to restructuring and consolidation. If "legacy costs" are to be addressed as a matter of public policy, we urge that the burden be shared as broadly as possible by American taxpayers, rather than solely steel-consuming industries and their workers who, as we have seen, cannot afford to bear this burden. Further, we favor coupling relief for retired steelworkers with closure of inefficient steelmaking capacity.
Environmental issues are another obstacle that must be addressed by policymakers. Clean-up costs are prohibitive for some companies and they keep open capacity that should be shut down to avoid the cost of clean-up. We would favor some government assistance, properly limited, for plant closures to accomplish this.
Additionally, it is essential that domestic steel producers learn to compete globally. Some of them lag far behind their foreign counterparts in thinking and acting in accordance with today's international marketplace. U.S. Steel has purchased a mill in Slovakia (which is operating at a profit, unlike its U.S. mills, according to the company's most recent financial report), yet other mills claim that foreign markets are closed (even though they have no realistic ability to compete in foreign markets). The facts are that in 2000, 280 million tons of steel crossed international boundaries before being consumed. That is more than one-fourth of all global production. Global competition is a reality in steel, and U.S. steel producers must recognize that seeking to protect and control the domestic market is an invalid strategy.
The Section 201 steel tariffs are clearly causing far more harm than benefit to the U.S. economy. CITAC predicted this and it is unfortunately coming true. Thousands of American small businesses are threatened, and the threat is worsening. The tariffs not only fail to address the real problems of steel producers, but they also send the wrong signals to American steel producers. America cannot protect its way to prosperity and cannot withdraw from the world economy.
We urge policymakers to: (1) end the tariffs as soon as possible to permit recovery by steel-using manufacturers, and (2) focus on the objective of rationalizing, restructuring and consolidating noncompetitive steel capacity rather than perpetuating current noncompetitive practices.
We support proposals that would take extraordinary action-to assist retired workers, to permit the orderly closure of inefficient steel making capacity and to clean up the environment.
Steel is an important industry to this country. It is not the only industry, however; the costs of preserving integrated steel producers must not be permitted to do great harm to other sectors of the economy.
CITAC commends the Small Business Committee for conducting these hearings into the unintended consequences of the steel import restrictions. We look forward to working with the Committee and with the Congress to address these concerns.