Big Steel

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Schumpeter's theory of Creative Destruction has been hailed not just by
conservatives, but also by neo-liberals, as the prime reason for the
unprecedented growth of the US economy in the past deacde, which was
supposed to spread similar benefits throughout the world through
globalization.  All economists know of course there is no free lunch.
Creative Destruction produces dead bodies, albeit that such dead bodies
aresupposingly  dispensable in exchange for a healthier economy in the
long run.  Globalization, despite disproportionate assignment of labor
and environment abuseon the poor regions of the worl, has also
accelerated the process of Creative Destruction in forcing production in
advanced economies to seek technological advances to preserve their
competitive edge.

The steel industry in the US has shifted to specialty steel production
in recent decades, leaving conventional production to foreign mills.
This was accomplished with government subsidies of $17 billion over the
course of the last 25 years. Even then, to stay in busienss, US Bid
Steel has resorted to imports of low price foreign steel and
metallurgical coke to feed its refining process to produce high priced
steel for both domestic use and export.  The formula worked for several
decades until dollar hegemony caused a global recession that left the
world with overpacity, including steel.  The resultant price deflation
of raw and partially processed material helped fuel the credit bubble in
the US with low inflation and correspondingly low interest rates.  We
now hve reached a point where steel production is merely economically
unsupportable in the US economy.  But Big Steel is a powerful force in
US domestic politics. To survive, it demands the government to assume
the financial burden of its pension and health care costs to the tune of
$10 billion (after a $1 billion emergency bailout in 1999) and to resort
to Smoot-Hawley type tarrifs on imports.  While Big Steel complained
about forcing "dumping", notwithstanding that it buys 30% of all US
steel imports, it practices price "dumping" inself in the domestic
market against its competitors in the Western US.  US transnationals
have profited by its ability to shop for cheapest assembled components
worldwide.  Their price competition has broadened to rely on vendor
financing and consumer credits. Like GM, some key US steel mills cannot
afford to lose cost advantage of imports in the manufacturing process.
The Stand Up for Steel campaign against foreign imports is largely a red
herring.

Bush is trying help domestic steel makers without endangering the
economic recovery. He hopes to win trade
negotiating authority from Congress by appeasing the Steel lobby without
starting a trade war that will jeopardize international support for his
war on terrorism. He was hoping to bolster his own re-election prospects
in battleground big labor states without being seen as abandoning his
free trade, antitax philosophy.

The Bush tariff schedule is a simplistic down-the-middle compromise in
an issue of economic and political complexity. Robert Zoellick, the
United States trade representative, said the plan would give the
industry an opportunity to get back on its feet "without any significant
effect on the economic recovery and growth."

Yet tariffs are in essence taxes that increase costs and prices. Robet
Kennedy did not drag steel executives of out bed in the middle of night
merely to show he was a power freak.  Steel price rises directly
translate into higher inflation.

Also, by acting to protect steel, Bush provided political cover to
members of Congress who might otherwise have felt obliged to vote
against giving the president fast track trade negotiating authority.

The ideological right views the Bush action as another triumph of
political opportunism over principle. Only a few weeks ago, Mr. Zoellick
stated flatly that tariffs "are nothing more than taxes that hurt low-
and moderate- income people."  The Heritage Foundation called the
compromise "a political decision. There is no economic justification for
it."

Steel producers from around the world immediately and angrily denounced
Bush's decision to impose protective tariffs on imported steel and vowed
to fight the plan at the World Trade Organization.  The US has been able
to get "voluntary" curbs from foreign producer with the threat of
tariffs. But the effect of a threat dissipates as soon as the threat is
executed. Justification before the WTO for import restrictions is
particularly weak because American steel imports declined substantially
last year.  Unlike a more typical antidumping case, the government is
not arguing that foreign producers are competing unfairly. Rather, it is
arguing that imports are causing serious damage to the industry.

The European Union immediately announced plans to attack any new steel
tariffs at the World Trade Organization, which has international
authority as a court in such trade disputes. "The U.S. decision to go
down the route of protectionism is a major setback for the world trading
system," said Pascal Lamy, the European Commission's top trade official.
"Imports are not the cause of U.S. difficulties, and the measures
announced today will not only not provide a solution but
aggravate matters."

South Korean steel producers complained that the United States was
arbitrarily discriminating against them, imposing tariffs on imports
from Asia but exempting imports from Mexico and Canada.

In Russia, the foreign ministry summoned the American ambassador in
Moscow to warn of the "serious impact on Russian-American relations."
Two weeks ago, Russia's agriculture ministry said it would ban imports
of
American poultry beginning next week as a result of what it said was
salmonella contamination. Russia accounts for about half of all American
poultry exports.

Western European steel makers are much less worried about exports to the
United States, which are modest, than they are about being swamped with
excess steel from Asian and South American producers that can no longer
sell in the United States.  The US cannot promote globalization and
unilateralism at the same time.

Imports are in many ways a false culprit.  The big problem in the United
States is the legacy costs of the integrated steel companies, i.e. their
responsibility for pension and health benefits for retired steel
workers.
The United States has led the consolidation in almost every industry
except steel.

Henry C.K. Liu