Opinion Piece

This piece was written to be a quick-read commentary on steel tariffs and job losses.

Steel Industry Tariffs and Job Losses

Shayna Fields

The steel industry has played a pivotal role in the United States economy as well as the economy of the world as a whole. Tariffs and quotas have been implemented in America to try to guide importing and exporting, particularly to steer consumers towards U.S. firms. In the late 1800's and early 1900's, the United States was the leader in steel production, due to multiple factors including the foundation of technological advancement. In the 1880's, Andrew Carnegie found a way to mass produce steel for railroads which was the ultimate reason behind the U.S.'s lead in the industry. At the time, the United States was the lowest cost producer of steel and so the economic profits were astonishing. Seeing the importance of the steel industry and the immense wealth it brought to consumers and producers in the United States, other countries wanted in on the profits, and so new steel plants began to pop up in Asia, Europe, and the rest of the world.

Over the following century, America's title as the number one steel producer was taken by China, with the European Union and Japan above the U.S. as well. As other countries could hire cheaper labor, the cost of production of steel in those countries fell significantly. Cars produced overseas used cheaper steel from those same countries and the gap began to widen.

During the post-cold war era of the 1980's, the steel industry in the U.S. was producing at about half its capacity (CBO). Looking at the incident from the perspective of the year 1984, the attempt to remedy this fact was a five-year, 15% quota on steel imports. The Congressional Budget Office noted that the quota:

"Would increase prices, output, and employment in the domestic steel industry but would generate offsetting losses in the rest of the economy. The quota would release substantial sums for investment in the domestic steel industry, although it is questionable whether this would suffice to raise investment to the level that the industry claims is necessary to restore its competitiveness. Moreover, there is little prospect that the quota would reverse the secular decline in the industry, since it does not address the underlying factors that have conditioned this decline." (Congress of the United States, Congressional Budget Office Study).

The bill, H.R. 5081 along with S. 2380, sought mostly to boost employment in the steel industry and get it back to a higher level of production. The ramifications of which would be reflected in other markets due to the misallocation of resources. The problem with this is the result of the government attempting to alter consumer preferences. Any time policy interferes with the natural market, there is going to be dead weight and welfare loss. Since resources have to be allocated to the steel industry that normally would not be, there is an efficiency loss that especially affects steel dependent industries. As a result, both employment and production would fall in those industries. The increase in investment in the industry would depend on the quota induced cash flow being added to existing levels of production. However, since the steel industry has a marginal tax rate, the first year would result in an extremely low tax on the industry. The projected tax rate by year five was 46%. The estimates of the firm's cash flow would be almost entirely dependent upon assumptions of tax liabilities in the industry. Since the losses from 1982 and 1983 could be carried against future tax liabilities for 15 years, there would likely be no corporate income tax for the steel industry during that time. The Congressional Budget Office noted,

"The pre-tax increase in profits gained by the steel industry, as a result of the quota, would approximate the income transferred to steel firms. This income transfer, in 1983 dollars, would range from $1.5 billion in 1985 to $3.4 billion in 1989. If one assumes that the steel firms pay no corporate income tax throughout the quota period, the quota induced increase in cash flow would be equal to the entire value of the income transfer. Alternatively, one could assume that the increased profits generated by the quota are taxed at the corporate marginal rate of 46 percent. This would reduce the quota-induced increase in cash flow by about half." (Congress of the United States, Congressional Budget Office).

Ultimately, the quota would have falsely steered an estimated $1.5 billion to $3.4 billion to the U.S. steel industry, meaning it would take that much from other more efficient uses of the resources. The bill was introduced in the House, but never came to a vote.

In March of 2002, President George W. Bush placed a steel tariff that was scheduled to stay in place until the end of 2002. The given reason behind the tariff was that there had been a "detrimental" surge in steel imports that could potentially cripple the U.S. steel industry. Due to the implementation of NAFTA (North America Free Trade Agreement), the tariff did not apply to Canada or Mexico. In an article published on The Economist, the writer stated, "This steel-tariff plan, it is important to remember, lies well outside the ordinary run of bad economic policy: it is so wrong it makes other kinds of wealth-destroying intervention feel inadequate." The tariff would affect $8 billion of the industry (about 10% of the world market). Americans would end up paying much higher prices for steel. The day after the tariff was announced, National Steel joined other American steel companies and filed bankruptcy. The loss of jobs arguably voids any promised benefits and makes consumers worse off than they would have been to begin with. Once the U.S. tariff was put in place, Europe expected a surge in imports and could potentially choose the same solution as President Bush. The ramifications would be scaled up globally and have a ripple effect throughout nations, especially harming producers in developing countries.

According to the Consuming Industries Trade Action Coalition (CITAC), from March 2002 to November 2002, 200,000 American steel workers lost their jobs. This is the equivalent of about $4 billion in wages. A quarter of those jobs lost were in the metal manufacturing, machinery and equipment, and transportation equipment sectors. More people lost their jobs in the American steel industry than remained. The table below shows Steel Transaction Price vs. The Steel Consuming Job Impact. In the short amount of time shown (1 year), you can see that prices rose at a fairly constant rate while jobs declined at an inverse rate.

In the following months as foreign steel industries began to feel the effects of the tariff, they sought to put an end to the tariff. The European Union threatened to place retaliatory tariffs on the United States, and the WTO ended up ruling that imports had fallen, so the tariff was ruled “not warranted” and the United States would have to pay $2 billion in sanctions if the tariffs weren't removed. After more threats from the European Union about placing tariffs on many American industries, President Bush gave in and repealed the tariff in 2003. The tariff failed to do what Bush's proclaimed intent was, although he stated that it had done its job and that was the reason for the repeal.

In 2014, a new tariff was put in place after successful lobbying by American steel companies. The tariff was put in place for seven countries, one being China. However, Chinese steelmakers were not hit by the tariff, American manufacturers were. Overall, domestic steel producers gain a higher profit, domestic steel manufacturers face higher input costs and less profit, and American businesses and consumers pay higher prices for everything that contains steel. China's response to the tariff was to stockpile $2 billion worth of aluminum in Mexico in order to avoid the tariff (NAFTA protects Mexico).

Producers will find ways around restrictions where possible and tariffs intended to protect an industry will harm other unintended sectors of the industry. The steel manufacturers suffered incredible job losses and loss of profits. American consumers and businesses bore the cost and experienced higher prices in goods that contain steel. The interference in the steel industry has been massive and the negative impacts have been colossal. Policy Advisors should be wary of attempting to steer markets of such magnitude. The greater the misallocation of resources and misrepresentation of the functionality of the market, the worse the impact will be throughout the economy. After all, tariffs are taxes on consumers.

Works Cited:

A CBO STUDY The Effects of Import Quotas on the Steel Industry (n.d.): n. pag. Cbo.gov. Congress of the United States. Web.

Cendrowski, Scott. "Chinese Aluminum Company Stockpiling in Mexico." Chinese Aluminum Company Stockpiling. Fortune, 09 Sept. 2016. Web. 08 May 2021.

Dahan, Momi, and Udi Nisan. "Unintended Consequences of Increasing Block Tariffs Pricing Policy in Urban Water." Water Resources Research 43.3 (2007): n. pag. Trade Partners. Web.

"George Bush, Protectionist." The Economist. The Economist Newspaper, 09 Mar. 2002. Web. 08 May 2021.