Steel 201 Remedies and U.S. Steel Consumers

Studies

Steel Protection and Job Dislocation

Gary Clyde Hufbauer and Ben Goodrich ¹
Institute for International Economics
Washington DC

February 12, 2003

Contact: Ben Goodrich x336

Steel protection inevitably leads to worker layoffs in steel-using industries. Some steel-users - particularly small fabricators - are forced to shut down. Many other firms, faced with higher steel costs and red ink, have to scale back production and discharge employees. Still other firms decide to expand at a slower rate than otherwise. Job losses in steel-using industries are an unintended consequence of the Administration's steel safeguard tariffs, implemented in March 2002. ²

Neither trade protection nor trade liberalization makes much difference to the overall level of employment in the vast U.S. economy. Workers dislocated in contracting firms will sooner or later find jobs in expanding firms. The net effect of trade protection is to lessen economic efficiency. While efficiency effects are of little concern to laid-off workers, we oppose the steel safeguard tariffs both because workers in steel-using firms are needlessly discharged and because protection worsens economic performance.

The immediate question is: How many jobs have been lost so far in the steel-using industries? The Knollenberg Resolution (H. Con. Res. 23) represents a constructive way to arrive at a reasonable answer ³. The Resolution directs the International Trade Commission to conduct a study and report back to the Administration and Congress. Indeed, the impact of protection on employment in consuming industries should become a regular feature of all ITC determinations in anti-dumping, countervailing duty, and safeguard cases.

Until something like the Knollenberg Resolution leads to an ITC study, analysts can only make educated guesses as to the magnitude of worker layoffs. In reporting these estimates, journalists naturally gravitate to the highest number - it makes a better story. Thus, on February 5, 2003, Edward Alden reporting for the Financial Times wrote:

US steel users are stepping up pressure on President George W. Bush to eliminate tariffs on steel imports, charging that higher steel prices have wiped out as many as 200,000 US jobs in the past year. . . The new Citac study says about 200,000 of those losses stemmed directly from the effects of the tariffs. ⁴

The CITAC (Consuming Industries Trade Action Coalition) study, referenced in the story, actually gave a range of 50,000 to 200,000 jobs dislocated (or not created) ⁵ . Moreover, the CITAC study did not say that all of these job dislocations were due to the imposition of tariffs. Rather, the tariffs on steel, along with other factors, contributed to an increase in domestic steel prices that resulted in fewer jobs in steel-using industries. The 50,000 figure was not cited in the Financial Times and is closer to the mark for the group of industries most commonly regarded as "steel users." The following gives a rough indication of how many of these job dislocations can be attributed uniquely to the steel safeguards.

According to our estimates, after giving effect to exclusions, the Administration's steel safeguard tariffs increased the revenue of the steel producers by about $1 billion in the 2nd and 3rd quarters of 2002. On an annualized basis, the revenue increase may be $2 billion, though for reasons cited in our Policy Brief, the revenue gains could be higher or lower. ⁶

Core steel using industries (SIC categories 34 through 37) shipped $1,733 billion in the year 2000. These industries employed 7,237 thousand persons. Payroll per employee was $61,000, and value added per employee was $87,000. The last two figures imply that non-payroll value added - primarily capital costs - was $26,000 per employee. ⁷

Higher steel costs of $2 billion, distributed over $1,733 billion of shipments by core steel-using firms, imply an average upward shift in their supply schedules of 0.12%. Greatest layoffs (for a given upward shift) occur when steel-users cannot pass higher steel costs forward in higher prices - because steel-users face intense competition in their own product markets. Given slack conditions in the U.S. economy, we assume this was the case in 2002.

Since capital costs are a fairly large proportion of value added, and since capital cannot be discharged the same way workers can be laid off, many steel-using firms may absorb higher steel costs in lower operating margins, rather than cut production. This consideration leads us to believe that the average elasticity of supply among steel using firms does not exceed 3.0.⁸ Assuming a supply elasticity of 3.0, and an upward shift in the supply schedule of 0.12%, the implied decrease in production is 0.36%.

A production cut of 0.36%, applied across 7,237 thousand persons, would translate into 26,000 jobs lost over the course of 12 months in the steel-using industries specifically due to the steel safeguards. In our Policy Brief, we may have understated the revenue gain to steel-producing firms. If the revenue gain is $4 billion a year rather than $2 billion, the jobs lost in the steel-using industries could be twice as large, say around 52,000.⁹

These figures are in the range of an earlier CITAC estimate of 15,000 jobs dislocated in steel-using industries (narrowly defined) as a result of proposed tariff remedies.¹⁰ Whether steel-using firms discharged 15,000 or 26,000 workers or 52,000 workers on account of safeguard tariffs, a lot of unnecessary misery was created. The misery is especially hard to justify when there was little pickup in employment among steel-producing firms.

The opinions expressed are solely those of the authors and do not necessarily represent the views of the Board or Advisory Committee of the Institute for International Economics, nor the views of Joseph Francois, Laura Baughman, or CITAC, with which we are not affiliated.
For details on the steel safeguards, see Gary Clyde Hufbauer and Ben Goodrich, 2003 Steel Policy: The Good, The Bad, and the Ugly, Policy Brief 03-1, Washington DC: Institute for International Economics, January.
A press release by the American Iron and Steel Institute (AISI) wrongly implied that Gary Hufbauer opposes the Knollenberg Resolution. Dan DiMicco, "AISI CHAIRMAN PRAISES FINANCIAL TIMES ARTICLE FOR SPEAKING TRUTH TO CITAC DECEPTION", February 10, 2003, Washington DC: American Iron and Steel Institute.
Other press accounts have made similar errors on this and other trade liberalization issues. Also, the AISI press release accurately quotes another Financial Times article (February 10, 2003) that incorrectly characterizes the CITAC report as blaming all of the job losses on the steel safeguard tariffs.
Joseph Francois and Laura M. Baughman, 2003, The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002, study prepared for the CITAC Foundation, Washington DC: Trade Partnership Worldwide LLC, February. The cited figures cover hires not made, as well as workers laid-off in the steel-using industries. The high and low CITAC estimates correspond to their broad and narrow definitions of steel-using industries. Our estimates correspond to a narrow definition of steel-using industries.
Hufbauer and Goodrich, op. cit. The revenue gain could be higher if our estimated coefficient is too low. However, the annualized figures could also be lower due to the fact that the first and fourth quarters of a year have historically been the weakest for steel producers.
SIC categories 34 through 37 cover: fabricated metal products, industrial machinery and equipment, electronic and other electric equipment, motor vehicles and equipment, other transportation equipment. Note that the narrow definition of steel consuming industries used by Francois and Baughman excludes SIC 36. The source is the Bureau of Economic Analysis data on gross domestic product by industry and shipments by industry (http://www.bea.gov/bea/dn2/gpo.htm). Employment data is taken from the Bureau of Labor Statistics (http://www.bls.gov/ces/home.htm).
We are not aware of econometric estimates that are higher than 3.0 for supply elasticities in the core steel-using industries.
Responding to an inquiry from the Financial Times to respond to the article cited February 5, 2003, one of the authors of this statement was quoted as saying in the Financial Times (February 10, 2003) that jobs dislocated in the steel-using industries might be in the range of 5,000 to 10,000 thus far. A figure as low as 10,000 jobs dislocated (15,000 on an annual basis) is possible, but upon more careful review, it is not our central estimate.
Joseph Francois and Laura M. Baughman, 2001, Estimated Economic Effects of Proposed Import Relief Remedies for Steel, study prepared for the CITAC Foundation, Washington DC: Trade Partnership Worldwide LLC, December. In the 2001 study, Francois and Baughman predict that 15,300 jobs would be lost in steel consuming industries (narrowly defined) due to an average tariff increase of 9.2 percent. If the 2003 CITAC figure of 50,000 job dislocations due to the total increase in domestic steel prices is multiplied by the 39 percent share of the total domestic price increase that we attribute directly to the steel tariffs (see our Policy Brief), we would conclude that 19,500 jobs were dislocated due to the steel tariffs.