Last month, this column described problems of (and caused by) "Big Steel" and promised to discuss solutions to these real issues. Over the past three decades, the vertically integrated steel sector (with six companies remaining) cost American taxpayers and consumers between $100-150 billion. The industry is still troubled and seeks more subsidies, which are undeserved.
Big Steel has been inefficient for the past four decades compared with the rest of the world industry, but has sought government protection from losses through legislative and regulatory methods that are deceitful. This industry sector claims that foreign steel makers dump product in the U.S. at prices below fair value, never defining the term. Dumping is selling below the cost of production or sale price in the producers' domestic market. If government determines that dumping has occurred, a tax equal to the difference between the foreign and U.S. price is applied to the import, artificially raising the price to U.S. consumers. The U.S. has more antidumping orders in place than any other nation. U.S. judicial systems are complicitous with the industry and union position. So foreign products subject to extra duties are more costly to consumers and drive away supply, which in turn provides leverage for domestic producers to increase prices yet further and defer investments to improve efficiency. This cycle of behavior is expensive and agitates U.S. trading partners, such as those in Canada and Mexico who are caught in the same current market disruptions and market weakening as are U.S. producers, but without the same protection. When this is viewed in light of world over-capacity of about 300 million metric tons annually, as estimated by the Office of Economic Cooperation and Development (OECD), it is not a pretty picture.
A good argument can be made that American unfair trade laws are harmful and unfair. They cost taxpayers excessively and punish foreign producers. They raise prices artificially so that Americans buy their steel at lower prices via purchase of foreign made finished goods, a significant fact because such manufacturing affects nearly 50 U.S. manufacturing employees outside the steel industry for every steel worker. And these government subsidies, in terms of international agreements (GATT and now WTO), define these tax manipulations as illegal.
Other than not repeating past mistakes, what should be done about this situation? According to Charles Bradford, president, Bradford Research Inc. and Wall Street steel analyst, government is responsible for 60 to 70% of the problem with industry unions, with management sharing blame for the remainder. Bradford lists the following public and private actions needed for industry improvements.
1. The steel industry needs to consolidate. Government should stand aside and let failed companies close.
2. The federal industry-loan guarantee program must be eliminated. Guarantees only encourage irresponsible behavior (for example, three companies applying for loans filed for bankruptcy after filing but before receiving the guarantee).
3. Investment bankers must be forced to stand behind underwritings for a sufficient term. For example, in the case of Qualitech, a steel company in Indianapolis, Ind., restructuring lenders made the decision as bankers to become plant managers, bungled it completely, and backed out of the deal after losing double the investment.
4. The Kyoto protocols must change to eliminate discrimination against developed nation economies; provisions of this agreement will add about 20% to the net cost per ton and encourage undeveloped-nation suppliers to replicate the American mistake.
5. Federal, state, and local governments involved in plant-permitting processes must act in a timely manner; current government-approval methods to build a steel mill add about one third to the construction cost in the U.S. compared with building the plant in Japan, for example.
6. Better data collection and definition of industry performance parameters such as agreement on what constitutes dumping are essential.
7. The National Labor Relations Board and judicial processes must be prevented from being shills for organized labor and "legislative intent interpreters" for agencies like OSHA, which has the effect of increasing cost and deterring efficiency gains. Some consistency is needed in measuring work place safety that is realistic and not punitive.
8. A realistic option to improve trade economics is to develop a system of steel traded as a commodity. Prices would tend to be less volatile and equilibrate worldwide and the "dumping" problem would disappear. An on-line trading program by Enron Corp. has been tested, similar to that used for aluminum and copper trading.
Survival of a competitive steel industry is in the American national interest. A better way is needed to get from here to there.