Federal Triangle: The Antiquated Industry
The announced meeting topic in late February was "What's Wrong With the Steel Industry - Again?," a subject visited several times since this column first appeared nearly three decades ago. In fact, as noted by David Phelps, President of American Institute for International Steel (AIIS), "For the second time in three years the American steel industry is in crisis mode... in a classic example of why protection does not create a competitive industry." This protection, which has cost the nation dearly, deserves evaluation and change.
Big Steel "is gripped by a profound and persistent crisis" according to the Steel Manufacturers Association (SMA), in spite of receiving various forms of protection since the late 1960s, including direct and indirect subsidies. Big Steel includes integrated producers, LTV, U.S. Steel, Bethlehem, Ispat Inland, Wheeling Pittsburgh, and National. Spin-off companies, specialty producers and SMA members are not part of the core. An AIIS analysis notes that the industry was isolated from global competition for the first half of the past century, so had no requirement to be efficient or innovative. By the late 1960s, foreign steelmakers, rebuilt from WWII with modern, efficient facilities, began exporting to U.S. consumers. Big Steel responded with a demagogic attack, "a two-pronged retrograde strategy" to erect trade barriers and secure federal subsidies. The American Iron and Steel Institute (AISI), working with United Steel Workers of America union leaders, diligently exploited political processes to insulate the U.S. from free trade steel, so quotas and minimum prices cost American consumers an added $90-151 billion (all amounts are in 1999 dollars) over the past 30 years.
The first "voluntary" import quotas from 1969 to 1974 cost the U.S. $4.4-8.6 billion. When alleged European and Japanese price fixing and collusion was rejected in 1978, Big Steel enlisted the Congressional Steel Caucus to pressure for "trigger price mechanisms." The government-mandated import prices cost Americans about $9.6-38.4 billion. More import quotas from 1982 to 1992 cost consumers $5.1-9.2 billion. Big Steel sued every major world producer, including those in Canada and Mexico, which allowed free market access under NAFTA trade agreement. Does this pattern tell you something?
In addition to coercing protectionist restrictions, Big Steel benefited from $21.8 billion in federal and $1.4 billion of state and local subsidies. Essentially all terminated pension plans in the metals industries have come from Big Steel, which through 1998, had $2.97 billion in claims paid by Pension Benefit Guarantee Corp. and offered $639 million relief for deferred pension liability. The "safe harbor leasing" tax subsidy gave Big Steel a $1.32 billion break and under the 1986 Tax Reform Act, a special $735 million, 15-year carry back provision was awarded as a kind of a reward for not modernizing. A $386 million federal subsidy is targeted to applied R&D, and $10.4 billion came from Clean Air Act exemptions. Since 1978, $4.6 billion in subsidies to Big Steel were derived by eliminating competition via competitive bids to supply steel for federally funded construction projects. A recent congressional loan guarantee program for the industry cost taxpayers another $738 million. This all is a malodorous theft by Congress from taxpayers to prop up Big Steel, which collectively has a market capitalization of only 1.13% that of Intel Corporation! Big Steel learned long ago about politicians "on the take."
Overcapacity is a major problem. For the past six to twelve months, the strong dollar and pound sterling have harmed steelmakers as demand waned, a condition affecting all steelmakers. But in the 1990s, Big Steel increased capacity by 14 million tons while Japan, Western Europe, and Russia cut a combined 52 million. Further, Big Steel imported about one third of all U.S. steel imports in 2000 as semifinished product, unable to meet domestic demand for quality and cost of delivered products, yet railing against imports. And if the argument is ever made that the steel industry is critical for national security, be reminded that total consumption for this sector was 28,355 tons in 2000 or 0.026% of national use.
Big Steel is and continues to be a national shame. Next month, a few remedies will be discussed.