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later than March 6, President Bush must make a difficult decision
on whether to grant trade protection to the steel industry. While
he knows that the economics are totally against protection, Mr. Bush
is being strongly pressured to grant it on political grounds. However,
it is a false trade-off. Whatever he gains in the short-run, he will
lose in the long-run.
The history
of the U.S. steel industry over the last several decades has been
pretty much a continuous effort to get restrictions on imports,
which it blames for falling sales. In reality, unions deserve most
of the blame for saddling the industry with labor costs far out
of line with productivity. But management is also culpable for buying
them off with future pension and health benefits that would not
have to be paid until they were long retired themselves.
The legacy
of this live-for-today attitude has now come home to roost. The
few remaining steel companies must now pay massive sums each year
to retired workers. Retiree health benefits alone consume more than
$1 billion per year of steel industry profits.
In the years
since the promises were made to provide these benefits, the steel
industry has shrunk to a fraction of its former size. The economy
simply does not need as much steel as it once did. With less output
and fewer workers to bear the cost of paying benefits to retirees,
the cost of producing steel domestically is just too high to be
competitive, resulting in higher imports.
The steel
companies and unions believe that if tariffs were imposed on foreign
steel, then prices would rise by enough to make domestically-produced
steel competitive again. The problem is that in making steel producers
more competitive, higher prices will make industries that use steel
less competitive. Since there are many more businesses that use
steel than produce it, the economy as a whole suffers. Estimates
are that 8 times as many jobs will be lost in steel-consuming businesses
than would be saved among steel producers.
The best study
that has been done is by economists Joseph Francois and Laura Baughman
for the Consuming Industries Trade Action Coalition, a group of
steel consumers. Although this study has been criticized by the
American Iron and Steel Institute, which represents producers, its
critique is little more than an ad hominem attack. The results of
the Francois/Baughman study are well within the range of estimates
one would expect from standard international trade models, such
as those used by the U.S. International Trade Commission.
According
to Mr. Francois and Miss Baughman, a low tariff would impose about
$2 billion in additional costs on U.S. consumers. This might save
4,375 jobs that would otherwise be lost to imports. However, the
higher costs on steel consumers would likely result in a loss of
36,164 other jobs, for a net loss of 31,789 jobs. They calculate
that each job saved in the steel industry will cost the economy
$439,485.
Mr. Francois
and Miss Baughman also calculate the effects of a high tariff, costing
consumers $4 billion, that might save 8,902 steel industry jobs.
But it would destroy 74,502 jobs elsewhere in the economy. The cost
per job saved under this option is $451,509.
In short,
the costs of steel protection are far greater than the benefits.
There would be no real decision for Mr. Bush to make if there weren't
political considerations. The one that is weighing on him most heavily
is fear that he will not get Trade Promotion Authority from Congress
without the votes of a few members who desperately want steel protection.
TPA would allow Mr. Bush to negotiate a new international agreement
that would open up trade around the world, something almost all
economists support.
This is a
tough call. The optimists among Mr. Bush's advisers, such as U.S.
Trade Representative Bob Zoellick and National Economic Council
Director Larry Lindsey, believe that TPA will gain more for the
economy in the long run than steel protection will cost. Other advisers
argue that it will be very hard to negotiate a worthwhile trade
agreement if the president squanders his moral authority as an advocate
of free trade by caving in to the steel companies and unions now.
Moreover, congressional authorization for TPA is not assured even
if Mr. Bush imposes steel tariffs.
What clearly
tips the balance against protection, in my view, is the fact that
there are many other industries that would also like protection.
If Mr. Bush grants it to steel, he will be hard pressed to reject
protection for autos, semiconductors, and others less deserving
than steel.
One of the
reasons for Mr. Bush's high standing in the polls is that Americans
respect his willingness to make tough decisions about the war against
terrorism. He may be squandering that, too, if he bails out the
steel industry.
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