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Policy Brief 02-1

Time for a Grand Bargain in Steel?

by Gary Clyde Hufbauer, Peterson Institute for International Economics
and Ben Goodrich, Peterson Institute for International Economics

January 2002

© Institute for International Economics. All rights reserved.

Gary Clyde Hufbauer is Reginald Jones Senior Fellow at the Institute for International Economics. He is coeditor of The Ex-Im Bank in the 21st Century: A New Approach? (2000) and coauthor of World Capital Markets: Challenge to the G-10 (2001) and Steel: Big Problems, Better Solutions, International Economics Policy Brief 01-9 (2001). Ben Goodrich is a research assistant at the Institute for International Economics and coauthor of Steel: Big Problems, Better Solutions, International Economics Policy Brief 01-9 (2001).

The Steel Crisis

Everyone agrees that the US steel industry is distressed. The disagreement is over the role of imports: to what extent is foreign steel the culprit? Before turning to this critical issue, it is worth recounting the highlights of the steel industry’s difficulties. In the past four years, 29 US steel companies have entered into bankruptcy proceedings (21 since the 2000 presidential election). Table 1 lists the companies that have filed for bankruptcy and their current operating status. Many are still operating, although some have closed and a few have emerged from bankruptcy. Bethlehem Steel and LTV are the two largest companies that filed for bankruptcy. Together, these two companies represent about half of the steel-making capacity and jobs embroiled in bankruptcy filings.

In the second quarter of 2001, about 142,000 people were employed in the US steel industry, down from 163,000 in 1997 before the import surge caused by the Asian financial crisis.1 In 1974, employment in the US steel industry was 521,000—so there has already been substantial restructuring and downsizing in the industry, and enormous gains in productivity (measured in tons of steel per worker-year). Between 1997 and 2001 alone, labor productivity and total compensation rose 9 percent (from $34.78 per hour to $37.91 per hour) in the US steel industry.2

Total compensation per hour in the steel industry is high relative to plausible benchmarks. Table 2 shows that total compensation per hour in 2001 is $17 higher for a steel worker than the average worker in private industry, almost $14 more than the average manufacturing worker, $17.50 more than the average in the Midwest, and $10 more than the average union worker. Generous compensation packages are not new. Steel workers have been well paid for decades as a result of collective bargaining agreements buttressed by import controls.


Trade disputes between the
United States and its trading
partners, especially the European Union,
are numerous and rising.
Handling the steel issue in a way
that satisfies most countries
will be essential for maintaining
the momentum behind
trade liberalization.

Starting in the late 1960s and continuing through the mid-1980s, import controls enabled integrated steel firms to acquiesce in liberal wage settlements with less fear of foreign competition. Until 1968, steel wages were in line with average wages in the manufacturing sector. Between 1972 and 1981 when import controls were severe, steel wages rose 179 percent while productivity actually declined.3

The piper is now demanding payment. Generous health and pension benefits from years past, combined with mass layoffs, have now erupted in high “legacy costs” for the integrated steel industry. The legacy cost problem is compounded by the inability of bankrupt firms to pay health and pension benefits to their retired workers. The burden of legacy costs varies from firm to firm, but the United Steelworkers Association puts the aggregate figure at about $1 billion annually (on average, $9 per ton of steel produced in the United States). Legacy costs over the actuarial lifetimes of workers and retirees are said to total $13 billion.4 Several foreign countries have less generous company benefit packages, more generous government health care programs, and explicit or implicit subsidies that give their steel firms a cost advantage versus integrated mills in the United States. Most economists would say that is comparative advantage at work, but the steel industry sees unfair competition at play.

US minimills also have a cost advantage because their legacy costs are much lower than those of integrated mills. Moreover, minimills require much less capital than integrated mills. By one estimate, minimills incur $30 of fixed costs per ton of hot-rolled steel compared to $130 of fixed costs in integrated mills. This advantage is partly offset by higher variable costs for minimills, but the total costs of a ton of hot-rolled steel are said to be $350 in an integrated mill compared to $315 in a minimill. As a result of their cost advantage, the minimills’ share in US steel production has doubled since 1975 and reached 45 percent in 2000.5
At the same time, there is persistent overcapacity (defined as capacity minus actual production) in the steel market—both in the United States and abroad—as a result of various market distortions. To be sure, some overcapacity (and undercapacity) must be expected from time to time as a result of business downturns. But persistent overcapacity in the steel industry is not just a cyclical phenomenon. It reflects the proclivity of most governments to slow down the closure of high-cost steel mills—using a variety of supports and subsidies. Persistent overcapacity drives down the price of steel and makes it more difficult for steel firms to make a profit over the course of the business cycle. As one result, US steel firms have turned to the government for trade restraints and various types of subsidies such as loan guarantees. These “solutions” typically prop up weak firms, perpetuate the cycle of overcapacity, and stimulate another round of calls for government aid. Michael Gambardella of J.P. Morgan estimates that the US steel industry needs to reduce capacity by 20 million short tons.6 Capacity reduction is also needed abroad to curtail the output of high-cost mills that finds its way directly or indirectly into the global market.


Persistent overcapacity in
the steel industry is not just
a cyclical phenomenon. It reflects
the proclivity of most governments
to slow down the closure of
high-cost steel mills—using a variety
of supports and subsidies.

Table 3 presents estimates of overcapacity in various countries in 1998. The most disturbing fact is that, even in a year of global prosperity, capacity exceeded production by 35 percent. The ratio of overcapacity to production in the United States and Japan was lower but still substantial. It is sometimes difficult to identify the least efficient, highest cost steel mills, but these determinations will be necessary if the Organization for Economic Cooperation and Development (OECD) is to agree on a plan for dealing with the industry’s structural problem.
In our previous policy brief (Steel: Big Problems, Better Solutions, PB01-9), we observed that the OECD talks to reduce overcapacity in the global steel industry are unlikely to succeed, an opinion we still hold for negotiations in the present context. President Bush has little leverage and the political pain of closing steel plants is severe.7 However, chances of success at the OECD would be enhanced if the United States initiates a credible program to reduce its own steel overcapacity. The United States can also offer a carrot (discussed later): withdrawing its antidumping (AD) and countervailing duty (CVD) orders against countries that are willing to shut down their high-cost overcapacity.

The year 2002 will be critical for international trade. Following the September 11 attacks, the international community generated momentum for global trade liberalization by agreeing at Doha (November 2001) to launch a new round of negotiations. In the United States, the passage of Trade Promotion Authority (December 2001) in the House of Representatives bodes well for the new WTO round and the negotiations for the Free Trade Area of the Americas. However, trade disputes between the United States and its trading partners, especially the European Union, are numerous and rising.8 Handling the steel issue in a way that satisfies most countries will be essential for maintaining the momentum behind trade liberalization.


The Section 201 Investigation

In June 2001, in response to industry pressure, President Bush requested the US International Trade Commission (ITC) to conduct a Section 201 investigation. A Section 201 investigation seeks to determine whether imports are a “substantial cause of serious injury or threat of serious injury” to the affected industry—the steel industry in this case. Whether the imports are traded fairly is not at issue. Imports may be fairly traded but they can still cause injury—and be restrained by Section 201 remedies. However, if the imports are unfairly traded, they can also be restricted by AD and CVD penalties. In the case of steel, well before the Section 201 case was launched, the US industry had mounted 159 AD and CVD cases and has managed to get as much as 79 percent of steel imports under current AD orders.9 It seems odd for Section 201 remedies to be superimposed on AD or CVD penalties on imports of the same product from the same country. If an AD or CVD order is currently in place, it seems unlikely that the product would continue to be a substantial cause of serious injury to the US industry (the test for Section 201 relief). Despite this oddity, there appears to be some overlap between AD and CVD orders and the ITC’s findings of injury.10

On October 22, 2001, the ITC decided that US manufacturers in 16 out of 33 steel product categories were injured by imports, making those products eligible for additional trade restraints. Table A1 gives the details of the injury findings.11 After determining injury, the next stage at the ITC is recommending remedies. Although the ITC can recommend trade adjustment assistance, its recommended remedies usually take the form of trade restraints, such as tariffs, quotas, and combinations of the two called tariff-rate quotas (TRQs). The products eligible for Section 201 trade restraints accounted for 27 million short tons, some 74 percent of the steel imports under investigation, and $10.7 billion of imports in 2000. On December 7, 2001, the commissioners of the ITC announced the remedy recommendations that they formally presented to President Bush on December 19, 2001. President Bush has the final say: he can implement the ITC’s proposed remedies in whole or in part, he can devise totally different remedies, or he can do nothing—but the President must state his decision by March 6, 2002.12


The “Joint Remedy”, which calls for
tariffs of 15-20 percent on most
products, would slash affected
imports by 20 percent. Domestic prices
and output would increase slightly,
resulting in somewhat larger
revenues for the steel industry.
About 3,500 actual and potential
jobs could be “saved” but at an
annual cost of $2 billion to the
steel users—or $584,000 per job saved.

Table 4 summarizes the remedy recommendations made by the six commissioners of the ITC. Three of the six made a joint recommendation and the other three spoke only for themselves. Overall, there is little consensus among the commissioners on the remedies. ITC Commissioners Lynn M. Bragg and Dennis M. Devaney generally agreed that high tariffs should be applied to the products that were found to be injuring the US industry, while ITC Vice Chairperson Deanna Tanner Okun generally recommended straight quotas. The other three commissioners made a joint recommendation for the most part and usually recommended straight tariff increases of 20 percent. With no ITC consensus on the remedies, President Bush will have a very free hand—politically as well as legally—to choose whatever remedies suit his purposes.

Following the ITC’s remedy recommendations, the European Union released a statement condemning the ITC’s decisions in harsh terms:

The measures recommended by the ITC today are totally unjustified. If this approach is accepted and implemented, it would constitute a violation of the WTO rules. The EU would immediately launch a complaint and is confident that this would lead to a rapid condemnation of the US measures. The US has already been condemned a number of times by the WTO as its anti-dumping, anti-subsidy and safeguard procedures do not conform to its international commitments. This is another case where the ITC has found injury despite the absence of any recent surge in imports. US legislation gives the US President a wide margin of manoeuvre to adopt any action which he considers ‘appropriate and feasible’ in response to an ITC recommendation. The EU calls on the President to choose measures, which favour market adjustment and restructuring, not market closure.13

Pascal Lamy, the trade commissioner of the European Union, stated that the European Union was willing to reduce its steel capacity and output if the United States refrained from imposing Section 201 trade restraints and took parallel measures to reduce high-cost capacity.14 His statement was made on the eve of the December 18, 2001, OECD ministerial declaration that announced a goal of reducing world steel capacity by 97.5 million metric tons over ten years. This nonbinding goal would only reduce overcapacity by a third (relative to the overcapacity estimates in table 3) and is not substantially greater than capacity reductions that might occur anyway from market forces. The tone of the meeting foreshadows political and economic retaliation if the United States largely relies on trade barriers to “solve” the steel problem. However, if the United States takes constructive steps to address the domestic roots of its steel crisis and backs away from “strong” Section 201 trade restraints, the prospects for renewed OECD negotiations that lead to meaningful cuts in world steel capacity would be
brighter.

The European Union and other countries—as well as the US steel users—stand to lose considerably if President Bush adopts any of the “strong” remedy recommendations. Table 5 calculates the gains and costs of potential Section 201 remedies.15 The “Joint Remedy”, which calls for tariffs of 15 to 20 percent on most products, would slash affected imports by 20 percent. Domestic prices and output would increase slightly, resulting in somewhat larger revenues for the steel industry. About 3,500 actual and potential jobs could be “saved” but at an annual cost of $2 billion to the steel users—or $584,000 per job saved. The “Devaney/Bragg Remedy”, which calls for tariffs of 35 to 40 percent, would generate the same pattern of gains and costs but with more extreme effects (reducing affected imports by more than half). The Grand Bargain (discussed at length later) would impose a much smaller cost on foreign steel exporters and domestic steel users since it entails a straight tariff of only 5 percent.


The “Devaney/Bragg Remedy”,
which calls for tariffs of 35 to 40 percent,
would generate the same pattern
of gains and costs [as the Joint
Remedy] but with more extreme
effects (reducing affected imports
by more than half).

A hypothetical TRQ designed to increase the import price to $473 per short ton would “save” approximately as many jobs as the Devaney/Bragg Remedy but would generate less tariff revenue and more quota rents.16 TRQs are politically popular because the government can determine who gets to collect the quota rents—in effect the government hands out money to the holders of the quota tickets (foreign producers, established importers, or domestic producers that fabricate imported flat steel). TRQs have the political advantage of partially “compensating” favored foreign suppliers for their loss of market share by allocating valuable quota tickets to them. TRQs have the further advantage that they are hard to figure out—and therefore can be presented in different lights to different audiences. They can be advertised as “liberal” to foreign suppliers and “restrictive” to domestic producers. Despite the marketing advantages of a TRQ approach, we prefer straight tariffs at genuinely low levels. Straight tariffs maximize the revenue that the government takes in for a given amount of protection, and the impact of a tariff is highly transparent.

The figures in table 5 are roughly consistent with other careful estimates of the effects of Section 201 steel remedies. For example, Francois and Baughman (2001) use a computable general equilibrium (CGE) model to estimate that a strong tariff (20.7 percent on average) would cost the United States $450,000 annually for each job saved in the steel industry (8,900 steel jobs). Steel imports would fall by 36 percent. Moreover, they estimate that 74,500 jobs would be lost in other sectors of the US economy due to higher steel prices and lower steel consumption. On the other side of the ledger, they predict that a strong Section 201 remedy would only increase the revenues of steel producers by about $500 million annually.


The President’s Choice

A discussion of the presidential choice of remedies must begin with the Administration’s grand strategy in launching the Section 201 case. The Administration had four motivations, only the first of which was publicly articulated:

  • To set the stage for trade and other measures that would help restore the industry’s financial health. This was the goal publicly articulated by the Administration. How President Bush and his advisors shape the remedies will go a long way toward determining whether this objective is met.
  • The second reason was to enlist support from senators and representatives from steel districts for Trade Promotion Authority (TPA), which passed the House (215-214) on December 6, 2001. Of the 30 Representatives who both voted against TPA in 1998 (when it failed to pass under the name of “fast track”) and voted for TPA in 2001, 8 were from the House Steel Caucus. Presumably, President Bush promised that he would be very attentive to the needs of the steel industry to get this increased support.17 Since the TPA conference report will probably be voted up or down at the same time (early March 2002) that the president announces his Section 201 remedies, the stage is set for tight political linkage.
  • The president’s third reason for launching the Section 201 case, back in June 2001, was to divert momentum from the congressional consideration of the Steel Revitalization Act (HR 808), which would impose strict quotas and violate WTO provisions. This bill had accumulated 226 cosponsors in the House before President Bush successfully stalled it by initiating the Section 201 investigation. However, considerable congressional support endures for one of its primary elements—providing money to cover the legacy costs of integrated mills. If not conditioned on closure of excess domestic capacity, legacy aid that enabled high-cost mills to stay in business could also violate WTO provisions.
  • The fourth reason for the Section 201 case was to enlist foreign cooperation in the president’s initiative to close excess high-cost steel capacity in OECD countries and elsewhere (such as Russia and Brazil). This endeavor remains a work in progress, although there has been a preliminary agreement. The president’s implied offer to foreign steel producers is simple: “I’ll impose less Section 201 protection if you shut down your high-cost capacity.” President Bush is more likely to succeed in this initiative if he can persuade US steel firms to permanently close their own excess capacity and if he can wean integrated mills from their dependence on various forms of trade protection.

 

While President Bush will want to honor any private commitments he made to gain congressional support for TPA, he still has room to maneuver. Members of the Steel Caucus from both sides of the aisle support legacy aid to integrated mills, and this is a card President Bush can still play. In fact, adroit Administration action could serve as the catalyst for a “Grand Bargain” with the steel industry that addresses its two primary problems—overcapacity and legacy costs.
Done right, a Grand Bargain would enable the US steel industry to get back on its feet and compete without indefinite trade protection. It would provide real assistance—not just promises—to retired and displaced steel workers. And, it would take a lot of steam out of the steel trade war that is shaping up across the Atlantic and Pacific Oceans.


The Grand Bargain

US Steel and Bethlehem Steel publicly announced on December 4, 2001, that they had entered merger discussions with at least two other firms (believed to be Wheeling-Pittsburgh Steel and National Steel). Presumably, one or more of these firms would buy some of the assets of LTV, which has received permission from its bankruptcy judge to idle its mills. US Steel is the largest steel producer in the United States with a domestic production capacity of about 12 million short tons. Bethlehem Steel (11.3 million short tons) and LTV (7.6 million short tons) are currently the second and third largest integrated producers of steel in the United States, but both are in bankruptcy. National Steel is the fourth largest integrated US producer (6 million short tons) and is financially viable. Wheeling-Pittsburgh Steel is smaller (2.2 million short tons) and is in bankruptcy. If all these firms band together, the resulting steel conglomerate could produce 25 million to 40 million short tons, depending on how much capacity they agree to shut down.


The Grand Bargain would impose
a much smaller cost on
foreign steel exporters and
domestic steel users since it entails
a straight tariff of only 5 percent.

These firms have floated a proposal to obtain government assistance to facilitate the merger. They want the government to pick up the tab on legacy costs and to provide strong trade remedies as an outcome of the Section 201 investigation. They also want to renegotiate their labor contracts with the United Steelworkers in order to reduce labor costs. The interested parties have released a flurry of press statements staking out their positions. The Bush administration and Congress have only stated that they are willing to discuss these matters.

Any consideration of a Grand Bargain for the steel industry must begin with an understanding of the major players in the potential agreement and their core interests:

  • Integrated mills want legacy aid, merger approval, trade protection,and new union contracts.
  • Minimills want trade remedies but oppose legacy aid for integrated mills.18
  • United Steelworkers want legacy aid and trade protection. They are open to renegotiating compensation rates and oppose massive layoffs. Very recently—after long opposition—the United Steelworkers endorsed consolidation and asked for trade adjustment assistance.19
  • When other industries, such as textiles and apparel, get into trouble, they could cite the precedent that would be set by a Grand Bargain for steel. This possibility is distasteful to the Administration and some members of Congress.
  • President Bush wants to maintain support for TPA in the House of Representatives.20
  • Republican members of the Congressional Steel Caucus who voted for TPA want to stay in the good graces of the steel industry.21
  • Foreign countries welcome the closure of high-cost US steel mills and oppose US trade protection. Some may have concerns about legacy aid. At the same time, few foreign countries are willing to withdraw financial support and opaque protection for their own high-cost mills.22
  • Finally, while steel consumers are not well represented at the negotiating table, they are not enthusiastic about trade protection that would raise the cost of steel.

 

In light of these conflicting interests and concerns, we propose a Grand Bargain. The Grand Bargain would not completely satisfy any of the parties, but it might mark the beginning of the end to 30 years of steel disputes.

  • The US Government would commit up to $2.5 billion over five years to pay legacy costs for retired workers and $500 million over four years to cover the cost of wage insurance for displaced workers. In other words, the total price tag for government assistance would be capped at $3 billion. The steel firms themselves would have to pay legacy costs beyond what was covered by the government.23
  • The Justice Department would look favorably at any antitrust concerns raised by the proposed merger of integrated mills—on the premise that the domestic market would be more open to foreign competition as part of the Grand Bargain.
  • The merger parties would collectively agree to reduce capacity by about 15 million short tons. This would be accomplished by permanently shutting high-cost mills.24
  • Section 201 remedies would be designed to generate about $500 million annually in tariff revenue. Tariff revenue, not trade protection, would be the main goal.25 This would be accomplished by a flat tariff of about 5 percent for the next three years. In budget terms, the tariff revenue would cover about half the price tag of legacy and wage insurance costs ($1.5 billion out of $3 billion).
  • Firms that receive legacy assistance would withdraw their AD and CVD cases against countries that President Bush certifies to be cooperating in shutting down high-cost steel capacity and opening their markets to foreign competition. Also, the United States should repeal the Byrd Amendment, which gives the tariff revenue generated by AD duties to the petitioners.

We propose that up to $500 million
annually should be dedicated to legacy
costs over five years (total cost of
$2.5 billion). To be eligible for
this government assistance, steel
companies would have to permanently
close high-cost steel capacity.

Permanently Reduce Output and Employment: Reducing output by 15 million short tons would necessitate the layoff of about 18,000 employees. Substantial assistance should be given to these newly displaced steel workers as well as those among the 21,000 steel workers laid off since 1997 who have gotten new, but lower-paying, jobs. Our preferred solution is wage insurance.26 In our earlier policy brief, we proposed that displaced steel workers should receive 75 percent of the difference between their old salary and their new (lower) salary for one year, once they find new jobs.27 Moreover, they should receive subsidized health insurance for six months while they search for a new job. We also advocated wage insurance for workers who have been laid off in the last three years since there was a genuine import surge following the Asian financial crisis in 1997 and 1998.28 Taken together, the programs we propose would cost about $500 million over the next four years (table 6).

Legacy Costs: We propose that up to $500 million annually should be dedicated to legacy costs over five years (total cost of $2.5 billion). To be eligible for this government assistance, steel companies would have to permanently close high-cost steel capacity. They would also have to accord preferred debtor status for legacy claims not covered by government assistance—to guarantee that retired steel workers stand an excellent chance of collecting all promised benefits.29

Withdraw Unfair Trade Cases: Firms that receive legacy assistance should further agree to withdraw their existing AD and CVD orders and pending cases against any country that the president certifies has taken adequate steps to reduce its overcapacity and open its markets to foreign competition. This carrot would give President Bush negotiating leverage in the OECD talks. Also, the US government should repeal the Byrd Amendment, which requires that tariff revenue generated by AD duties be given to the parties that initiate the AD investigation. This law encourages AD actions and almost surely violates the WTO provisions. Several countries have already challenged the Byrd Amendment and a final ruling is pending in the WTO. Gracefully repealing the Amendment as part of the Grand Bargain would earn the United States negotiating points in the international community.

The European Union has indicated that it is willing to cut its steel capacity if it can get significant concessions from the United States. By eliminating high-cost capacity, reforming its unfair trade policies, and imposing only small Section 201 trade restraints, the United States would be in a position to demand significant capacity concessions from Europe. If the United States and the European Union can reach an agreement on steel, the prospects for successful OECD negotiations to reduce global overcapacity would be greatly enhanced and a persistent thorn in the side of the EU-US trade relationship would be removed.

Competitive Position of the US Steel Industry: A downsized US steel industry could operate profitably without recourse to trade protection. US steel firms are already among the most competitive in the world in terms of labor productivity (tons per worker-year), even though aggregate comparisons overlook the difference between integrated mills and minimills.30 The largest minimill firm, Nucor, produced twice as many short tons (1,383) per employee in 1999 as US Steel (647), which is the largest integrated producer.31 With consolidation, labor productivity in integrated mills would improve sharply. Productivity gains, combined with permanent mill closures and some relief from legacy costs, should enable integrated mills to operate profitably over the business cycle.

In modeling the Grand Bargain (table 5), we assume that permanently closing 15 million tons of high-cost capacity will reduce US steel output by 5 million tons. Correspondingly, we assume that efficient integrated mills and minimills will increase their output to make up the other 10 million tons. The 5 percent tariff will also encourage a small increase in domestic output. We calculate that domestic prices would rise by $12 per ton or 4 percent in the Grand Bargain. In addition (but not calculated), the US steel industry would benefit both from productivity gains following consolidation and from public relief for a portion of legacy costs.32 Imports would be little changed, falling only by about one million tons.

By contrast, tariffs of 15 to 20 percent on most products (the “Joint Remedy” in table 5) would reduce imports by 9 million tons but only increase the domestic price by $7 or 2 percent.33 Tariffs of 15-20 percent probably would not increase the domestic price enough to return integrated mills to profitability. If anything, the small domestic price increase would keep inefficient steel producers in business—in other words, delay needed plant closures. After all, it makes financial sense to continue production if the revenue per ton of steel exceeds variable costs, even when high fixed costs ensure that steel producers report large losses. The Grand Bargain, on the other hand, would raise domestic steel prices, to the same extent as a 40 percent tariff, but at substantially lower costs for steel users and with a far smaller penalty on foreign steel exporters.


Best of all, a Grand Bargain
could signal the beginning
of the end of steel trade disputes
that have plagued the United States
and the world economy
for more than 30 years.


International Negotiations: If the Bush administration is able to strike a Grand Bargain with the domestic steel industry, the United States will be in a strong position to seek parallel reforms abroad. As illustrated in table 3, the European Union, Russia, and other countries have substantial overcapacity, and some of these countries profess a willingness to discuss capacity reduction in the OECD. Substantial consolidation by the US steel industry, coupled with presidential discretion on AD and CVD orders, could jump-start the OECD talks and undercut much of the criticism that is leveled against the United States. Russia, India, China, and Brazil are not members of the OECD but they can be brought into the negotiations. Since it is intellectually and politically difficult to single out only a few countries as high-cost suppliers, a more promising tack is to obtain commitments from all participants to follow the US lead and reduce their least efficient capacity.

To summarize, each player in such a Grand Bargain would score gains while making concessions.

  • Integrated mills would achieve many of their objectives, but trade protection would be far less than they want and they would have to permanently shutter 15 million tons of high-cost capacity.
  • Minimills would have to accept some legacy aid for integrated mills but would accomplish their goal of getting integrated mills to slash their high-cost overcapacity that overhangs the market and depresses prices. They would not get their wish of a steep tariff on imported slab. However, in a downsized industry, minimills can take advantage of their high productivity to make a healthy profit.
  • Retired workers would receive their pensions and health insurance, and displaced workers would get wage insurance and continued health benefits. These are real dollars for real people—people who would otherwise be left with empty promises. However, steel workers would have to accept some benefit cuts and the leadership of the United Steelworkers would have to accept the reality of a smaller union.
  • Democrats are keen to help retired and displaced workers and President Bush needs support from Republican members of the Steel Caucus to enact TPA. A Grand Bargain would help both parties—but there is a budget cost. Under our proposal, about half of the budget cost would be offset by higher tariff revenues.34
  • Foreign steel producers would welcome the US industry’s consolidation and the new approach to Section 201, AD and CVD remedies. However, to benefit fully, foreign producers would have to correct their own steel market distortions.

Best of all, a Grand Bargain could signal the beginning of the end of steel trade disputes that have plagued the United States and the world economy for more than 30 years.

 

Appendix A
The ITC’s Injury Findings

Table A.1 summarizes the ITC’s injury findings. Injury was found in most (6 out of 7) flat products, about half of the tubular products (2 out of 5), half of the stainless products (5 of 11), and about a third (3 of 10) of the long products. The ITC determined that Canada did not make up a substantial share of any of the flat products that were injuring US firms and that Mexico did not make up a substantial share of any of the long products where injury was found. Some Canadian and Mexican tubular and stainless products were implicated in the injury determinations.

Table A.2 shows import trends in the four broad categories of steel products. The ITC analyzed steel imports over a five-year period. The Commission also compared the first six months of 2001 versus the first six months of 2000 in making its injury determinations. Imports from non-NAFTA countries in all categories as a percentage of the overall steel market increased from 1996 to 2000 (measured in short tons); however the absolute tonnage of imports peaked at 32 million short tons in 1998. Year-to-date (YTD) steel imports—both from non-NAFTA and NAFTA countries—decreased substantially in 2001 in most categories. The general fall in YTD imports helps explain why several product categories were found not to be injuring US steel producers.

The percentage gains in imports from NAFTA countries between 1996 and 2000 were smaller than from non-NAFTA countries. Moreover, imports from NAFTA countries by and large did not exhibit such sharp declines in unit values as imports from non-NAFTA countries. These differences contributed to the exclusion of several Canadian and Mexican products from the injury determinations.

Table A.3 depicts the share of imports in US apparent steel consumption. Under a Section 201 investigation, the ITC considers both the absolute and the relative increase in imports. As often emphasized by the US steel industry, various financial crises in 1998 caused the real exchange rates of many steel exporters to plummet, thereby boosting their exports to the US market. The US steel industry is less keen to point out that the upward trend in imports has since reversed and that, in the first six months of 2001, the share of imports dropped to 23 percent—a figure lower than the “pre-crisis” levels reached in 1996 and 1997. While it seems reasonably clear that the US steel industry was harmed by imports at certain times during the last five years, it is debatable whether imports are currently a substantial cause of injury to wide segments of the US steel industry. In principle, Section 201 remedies are not supposed to compensate the domestic industry for trade injury in the past.

Drawing on these observations, several countries have criticized the ITC’s injury findings and will inevitably challenge them in the WTO. A common objection is that the surge in steel imports of the late 1990s has passed, as evidenced by the YTD decline in US steel imports and the decline in the import share. The WTO requires that imports surge recently and suddenly if safeguards are to be applied. It is also said that competition from the minimills, rather than steel imports, is the major reason for the distress experienced by integrated steel firms. To defend a Section 201 finding in the WTO, imports must be a more important cause of injury than any other single cause—this is the meaning ascribed to “substantial cause”. Many foreign suppliers challenge the ITC’s finding that imports are the most important cause of the industry’s distress.

Additionally the European Union and South Korea have criticized the way individual commissioners grouped diverse steel products together and made a single vote that applied to multiple steel products. In a few cases, imports of steel products decreased both from 1996 to 2000 and on a YTD basis but were nevertheless found to be injurious because they were grouped with steel products that experienced import growth between 1996 and 2000. This issue is especially acute for flat products, where flat slabs, which have no end uses, were grouped with end-use flat products in order to make the entire flat product group sustain a surge in imports. Commissioners would sometimes group in different ways, undermining the consistency of votes. Finally, South Korea has questioned the ITC’s seemingly disparate treatment of imports from NAFTA countries.35

[ Tables 1-6, A.1-A.3 ]

 

References

Letter to President Bush from 24 senators. 2001. “Letter to George Bush”. December 4, 2001. Inside U.S. Trade. December 7, 2001.

American Iron and Steel Institute (AISI). 2001. Selected Steel Industry Data. http://www.steel.org/stats/. December 11, 2001.

Barringer, William H. and Kenneth J. Pierce. 2000. Paying the Price for Big Steel. Washington: American Institute for International Steel.

Bureau of Labor Statistics (BLS). 2001. Employer Costs for Employee Compensation. http://www.bls.gov/news.release/ecec.toc.htm. December 11, 2001.

Cable News Network (CNN). 2001. “EU offers steel cuts”. http://money.cnn.com/2001/12/18/international/steel/index.htm. December 18, 2001.

Cox, James. 2001. “U.S. Steel Firms Weigh Merger”. USA Today December 5, 2001. http://www.usatoday.com/money/general/2001/12/04/steel.htm. December 11, 2001.

European Union. 2001. “EU Blasts ITC Steel Decision”. Press Release. December 7, 2001.

Francois, Joseph F. and Laura Baughman. 2001. Estimated Economic Effects of Proposed Import Relief Remedies for Steel. http://www.citac-trade.org/remedy/remedy.pdf. December 20, 2001.

Hufbauer, Gary Clyde and Ben Goodrich. 2001. Steel: Big Problems, Better Solutions. International Economics Policy Brief 01-09. Washington: Institute for International Economics. July.

Hufbauer, Gary Clyde and Kimberly Ann Elliott. 1994. Measuring the Costs of Protectionism in the United States. Washington: Institute for International Economics.

Inside U.S. Trade. 2001a. “Lamy Blasts U.S. Steel Safeguard Investigation, Threatens WTO Case.” December 14. p.10.

Inside U.S. Trade. 2001b. “Baucus Sees Fast-track Vote Pushed to 2002, Links Vote to Steel TAA.” December 21, p. 3.

International Iron and Steel Institute (IISI). 2001. World Steel in Figures Online. http://www.worldsteel.org/trends_indicators/contents.html. December 11, 2001.

International Trade Administration. 2000. Global Steel Trade. http://www.ita.doc.gov/media/steelreport726.html. December 11, 2001.

International Trade Commission (ITC). 2001a. ITC Details Determinations Concerning Impact of Imports of Steel on U.S. Industry. http://www.usitc.gov/er/nl2001/ER1023Y1.PDF. December 11, 2001

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International Trade Reporter. 2001. “Zoellick Calls Steel Industry Requests For ‘Legacy Costs’ Assistance Too ‘Rich’.” International Trade Reporter 18, no. 49. December 13.

Kletzer, Lori G. and Robert E. Litan. 2001. A Prescription to Relieve Worker Anxiety. International Economics Policy Brief 01-02. Washington: Institute for International Economics and The Brookings Institution. February.

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United Steelworkers Association of America (USWA). 2001a. Health Care Benefits for Steel Industry Retirees: Domestic Costs vs. Foreign Subsidies. http://www.uswa.org/sra/LegacyCosts.pdf. November 20, 2001.

United Steelworkers Association of America (USWA). 2001b. Steel Companies Filing for Bankruptcy, 1997-2001. http://www.uswa.org/sra/Bankruptcies2001_12-10-01.pdf. December 11, 2001.

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Notes:

1. AISI (2001).

2. AISI (2001).

3. Barringer and Pierce (2000, 36).

4. USWA (2001a).

5. Barringer and Pierce (2000), chapter 6.

6. See Cox (2001). A capacity reduction of 20 million short tons would bring the industry capacity down to about 100 million short tons. To be sure, this figure is not a magic number and the composition of the domestic industry is more important to competitiveness than is the aggregate output.

7. See Hufbauer and Goodrich (2001). Our basic argument is that the domestic political pain of reducing overcapacity—in sugar, dairy, shipbuilding, or steel—is simply too great for most democratically elected governments to succeed at negotiating binding international accords. Moreover, the intellectual problem of defining “overcapacity” is severe—should the definition be based on total costs, average variable costs, some definition of marginal costs, or something else?

8. See Leibowitz (2001).

9. Letter to President Bush from 24 senators (2001).

10. See appendix A. At the petitioners’ urging, the ITC made broad injury findings by grouping seemingly different products together and applying a single vote to the entire group. For example, imports of hot-rolled flat products declined from 1996 to 2000 as a result of AD duties imposed in 1999. But, hot-rolled flat products were grouped together with other flat products (some of which experienced moderate import surges) and imports were deemed to have surged in the “flat product group”.

11. For more analysis of the injury findings, see appendix A.

12. The normal date would be February 17, 2002, but by requesting additional information from the ITC, the president can delay his decision until March 6, 2002.

13. EU (2001). In a subsequent statement, Pascal Lamy characterized the US steel policy as a one best summarized as “stop me before I kill again” since the ITC recommended Section 201 remedies on the eve of another round of OECD negotiations (Inside U.S. Trade 2001a).

14. See CNN (2001). Lamy said that the European Union was prepared to slash production of crude steel by 13 million metric tons, and finished steel by 16 million metric tons during the period 1998-2002. It is not clear how much production would be cut from the level in 2000. Lamy’s statement declared a willingness to cut capacity, but did not indicate where capacity might be cut.

15. The model is the same as that used in Hufbauer and Goodrich (2001) and Hufbauer and Elliot (1994).

16. The Joint Remedy and the Devaney/Bragg effects are calculated using disaggregated data at the product level. By comparison, the hypothetical tariff-rate quota and Grand Bargain effects are calculated using aggregate industry data. The high number of jobs saved under the TRQ, relative to Devaney/Bragg, partly reflects different parameter values used in the two approaches.

17. Of the 23 Republicans who did not vote for TPA in 2001, 6 were members of the House Steel Caucus.The House Steel Caucus has 59 Democrats and 45 Republicans. Of these, 4 Democrats and 39 Republicans voted for TPA.

18. Minimills would like high tariffs on imported slab, so as to hobble emerging competitors (“rollermills”) that process slab into finished steel products.

19. USWA (2001c).

20. Also, Senator Max Baucus, chair of the Senate Finance Committee, strongly suggested that if President Bush were to impose strong Section 201 steel remedies, it would be easier to bring TPA to a vote in the Senate. (Inside U.S. Trade 2001b.)

21. The same can be said of the four “wayward” Democrat CSC members who voted in favor of TPA.

22. While all parties rhetorically support the concept of reducing global steel overcapacity, the preliminary OECD agreement did not include a concrete plan of action that commits individual countries to reduce their own overcapacity.

23. Robert Zoellick, the US Trade Representative, stated that the integrated mills’ request of $1 billion annually was “a little rich”. See International Trade Reporter (2001).

24. The industry itself should decide which mills (or parts of mills) should be permanently closed. However, the US government should insist on certification from an independent audit team that the agreed tonnage has been permanently closed.

25. This recommendation sharply breaks from past practice. Section 201 remedies are customarily designed with an eye toward protection rather than tariff revenue. But experience teaches that protection often freezes an industry in its uncompetitive ways, whereas tariff revenue can potentially be used for adjustment and downsizing.

26. See Kletzer and Litan (2001).

27. See Hufbauer and Goodrich (2001). The wage insurance rate would drop to 50 percent of the salary gap in the second year and 25 percent in the third year.

28. This import surge has disappeared in the past two years, which is one reason why we are skeptical of strong Section 201 remedies.

29. Existing creditors of steel firms would need to agree that legacy claims would have preferred debtor status.

30. See Hufbauer and Goodrich (2001, 2).

31. Barringer and Pierce (2000), chapter 6.

32. These calculations do not take into account the effect of terminating AD and CVD cases or the companion effect of reducing global overcapacity.

33. The Joint Remedy contemplates a TRQ with a high in-quota allowance on imported slab. This TRQ would have little protective effect to the dismay of minimill petititoners who want to restrict imported slab as a means of hobbling competition from fast-growing rollermills.

34. Given present budget conventions, higher revenues from a Section 201 tariff on steel imports probably cannot be “scored” against an appropriated government contribution to legacy costs. However, Administration and congressional advocates can work out the arithmetic, even if budget bean counters cannot perform the calculations.

35. See Leibowitz (2001) for a summary of foreign challenges to Section 201 procedures.


RELATED LINKS

Paper: Three US-China Trade Disputes May 2, 2007

Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006

Book: Case Studies in US Trade Negotiation: Two Volume Set September 2006

Policy Brief 03-1: Steel Policy: The Good, the Bad, and the Ugly January 2003