Few industries have been harder hit by rising imports – and have made greater demands at the political level – than the steel industry. Its persistence apparently paid off when, in March 2002, George W. Bush agreed to impose a tariff of up to 30% on steel imports. The steel industry claimed that was barely enough to offset the combination of a stronger dollar and ‘‘dumping’’ by steel companies around the world because of a glut of excess capacity. It also requested, but did not receive, money from the government to pay the retirement and healthcare benefits for those pensioners who had received generous benefits when the industry was profitable. Without jettisoning this cost, the industry claimed, it could not consolidate and hence become competitive against worldwide competition. The positive impacts of such a move to employers and shareholders of the steel industry are obvious. But what about the negative impacts? Most economists pointed out that an increase in the cost of steel would (a) raise prices domestically, (b) make exports of goods that use steel even less competitive, and (c) would invite retaliatory tariffs or other barriers to trade from most countries that export steel. The steel industry might benefit, but most other exporting industries would suffer. Figure 11.19 shows that the vast majority of the drop in steel industry employment and production relative to total manufacturing occurred before 1995, a year in which the dollar was approximately 10% undervalued. The recent overvaluation of the dollar had relatively little impact on steel production, which has remained almost a constant proportion of manufacturing production since then. Instead, the decline in the steel industry reflected the gradual switch away from heavy-metal to high-tech industries, an increase in the relative price of steel, and until 1982, an increase in the relative wage rates of steelworkers. Compared to these factors, increasing net imports of steel – which now account for about 25% of total production – have played a relatively minor role. To help focus this argument, assume for a moment that a further increase in steel imports would leave GDP unchanged because of the beneficial aspects of higher productivity, lower inflation, and greater foreign saving. However, because of a worldwide glut of steel production, free trade would eventually cause all steel mills in the US to shut down, which would leave the US totally dependent on foreign steel, put 191,000 people out of work, and terminate pension and healthcare benefits for 110,000 retirees. Is that a good idea? Advocates of free trade argue that reducing the price of steel will also reduce the cost of products that are intensive users of steel, such as motor vehicles, fabricated metal products, machinery, household appliances, and construction. Consumers and businesses will thus be able to buy more of these goods, and US exports of these industries will also remain competitive. Production and employment would increase in these industries, and the gains would be far greater than the loss of jobs in the steel industry. Is this a reasonable claim? Assume that steel prices would be 30% cheaper if all steel were imported, and the prices of the products in steel-intensive industries would decline an average of 5% except for construction, where the price reduction would be about 2%. Assuming a unitary price elasticity, that would boost demand for metal-using goods by 5%, and construction by 2%, hence boosting employment by approximately the same percentage. Since there are approximately 5 million jobs in each of these two major categories, total employment would rise by 350,000, about twice the loss of steel jobs. Furthermore, consumers would benefit from lower prices, so there would be additional multiplier effects. The greatest risk of higher steel tariffs is that firms in the fabricated metals, industrial machinery, electrical machinery, and motor vehicles industries would find themselves at a severe competitive disadvantage by having to pay up to 30% more for steel than do their international competitors. That could result in a substantial loss of those 5 million jobs, either to foreign competition or as plants move offshore. In markets with perfect labor mobility, displaced workers would find other jobs, but most of them are not young and would not be hired at wages approximating their previous paychecks. Some would end up in low-paid service occupations rather than highly paid jobs on the machinery assembly lines or on construction sites, and many would end up being permanently unemployed. These are the arguments that invariably surface when one side is for ‘‘free’’ trade and the other is for ‘‘fair’’ trade, by which they usually mean tariff protection high enough so firms do not have to cut their prices and workers do not have to cut their wages. The political arguments will always be vigorous when such high stakes are at risk. The steel industry poses a unique set of problems in the sense that steel demand has shrunk rapidly relative to total manufacturing production at the same time there has been a major increase in worldwide capacity. Unlike the textile and apparel industries, which primarily hire low-cost workers with minimal benefits, the steel industry has a very expensive legacy of retiree benefits to pay. One could argue with some justification that unlike textiles or apparel, steel is a basic material for the economy. Few economists would be comfortable with a scenario in which the US produced no steel. Yet because it is such an important raw material for a wide variety of other industries, raising its price puts many other jobs at risk. One can reasonably argue that the steel industry should have consolidated 30 years ago, but it does little good to second-guess what should have happened in the past. There is no optimal solution for this problem; there are only ‘‘second best’’ scenarios. From the viewpoint of the overall economy, the worst idea is to raise the price of steel to the point where other industrial jobs shift overseas. A much better idea would be to offer tax credits for firms that modernize, and provide some relief for pensioners who would lose their benefits under bankruptcy – although existing government programs would provide partial benefits. In the long run, the steel industry will survive in the US only if it is fully competitive with plants in other countries. Temporary relief from tariffs that raise the price of steel to all domestic users is a very poor solution.

THE SHRINKING STEEL INDUSTRY

Few industries have been harder hit by rising imports – and have made greater demands at the political level – than the steel industry. Its persistence apparently paid off when, in March 2002, George W. Bush agreed to impose a tariff of up to 30% on steel imports. The steel industry claimed that was barely enough to offset the combination of a stronger dollar and ‘‘dumping’’ by steel companies around the world because of a glut of excess capacity. It also requested, but did not receive, money from the government to pay the retirement and healthcare benefits for those pensioners who had received generous benefits when the industry was profitable. Without jettisoning this cost, the industry claimed, it could not consolidate and hence become competitive against worldwide competition. The positive impacts of such a move to employers and shareholders of the steel industry are obvious. But what about the negative impacts? Most economists pointed out that an increase in the cost of steel would (a) raise prices domestically, (b) make exports of goods that use steel even less competitive, and (c) would invite retaliatory tariffs or other barriers to trade from most countries that export steel. The steel industry might benefit, but most other exporting industries would suffer. Figure 11.19 shows that the vast majority of the drop in steel industry employment and production relative to total manufacturing occurred before 1995, a year in which the dollar was approximately 10% undervalued. The recent overvaluation of the dollar had relatively little impact on steel production, which has remained almost a constant proportion of manufacturing production since then. Instead, the decline in the steel industry reflected the gradual switch away from heavy-metal to high-tech industries, an increase in

the relative price of steel, and until 1982, an increase in the relative wage rates of steelworkers. Compared to these factors, increasing net imports of steel – which now account for about 25% of total production – have played a relatively minor role. To help focus this argument, assume for a moment that a further increase in steel imports would leave GDP unchanged because of the beneficial aspects of higher productivity, lower inflation, and greater foreign saving. However, because of a worldwide glut of steel production, free trade would eventually cause all steel mills in the US to shut down, which would leave the US totally dependent on foreign steel, put 191,000 people out of work, and terminate pension and healthcare benefits for 110,000 retirees. Is that a good idea? Advocates of free trade argue that reducing the price of steel will also reduce the cost of products that are intensive users of steel, such as motor vehicles, fabricated metal products, machinery, household appliances, and construction. Consumers and businesses will thus be able to buy more of these goods, and US exports of these industries will also remain competitive. Production and employment would increase in these industries, and the gains would be far greater than the loss of jobs in the steel industry. Is this a reasonable claim? Assume that steel prices would be 30% cheaper if all steel were imported, and the prices of the products in steel-intensive industries would decline an average of 5% except for construction, where the price reduction would be about 2%. Assuming a unitary price elasticity, that would boost demand for metal-using goods by 5%, and construction by 2%, hence boosting employment by approximately the same percentage. Since there are approximately 5 million jobs in each of these two major categories, total employment would rise by 350,000, about twice the loss of steel jobs. Furthermore, consumers would benefit from lower prices, so there would be additional multiplier effects. The greatest risk of higher steel tariffs is that firms in the fabricated metals, industrial machinery, electrical machinery, and motor vehicles industries would find themselves at a severe competitive disadvantage by having to pay up to 30% more for steel than do their international competitors. That could result in a substantial loss of those 5 million jobs, either to foreign competition or as plants move offshore. In markets with perfect labor mobility, displaced workers would find other jobs, but most of them are not young and would not be hired at wages approximating their previous paychecks. Some would end up in low-paid service occupations rather than highly paid jobs on the machinery assembly lines or on construction sites, and many would end up being permanently unemployed. These are the arguments that invariably surface when one side is for ‘‘free’’ trade and the other is for ‘‘fair’’ trade, by which they usually mean tariff protection high enough so firms do not have to cut their prices and workers do not have to cut their wages. The political arguments will always be vigorous when such high stakes are at risk. The steel industry poses a unique set of problems in the sense that steel demand has shrunk rapidly relative to total manufacturing production at the same time there has been a major increase in worldwide capacity. Unlike the textile and apparel industries, which primarily hire low-cost workers with minimal benefits, the steel industry has a very expensive legacy of retiree benefits to pay. One could argue with some justification that unlike textiles or apparel, steel is a basic material for the economy. Few economists would be comfortable with a scenario in which the US produced no steel. Yet because it is such an important raw material for a wide variety of other industries, raising its price puts many other jobs at risk. One can reasonably argue that the steel industry should have consolidated 30 years ago, but it does little good to second-guess what should have happened in the past. There is no optimal solution for this problem; there are only ‘‘second best’’ scenarios. From the viewpoint of the overall economy, the worst idea is to raise the price of steel to the point where other industrial jobs shift overseas. A much better idea would be to offer tax credits for firms that modernize, and provide some relief for pensioners who would lose their benefits under bankruptcy – although existing government programs would provide partial benefits. In the long run, the steel industry will survive in the US only if it is fully competitive with plants in other countries. Temporary relief from tariffs that raise the price of steel to all domestic users is a very poor solution.