Many academic studies have concluded that steel industry protection has done nothing to improve its competitiveness. The higher prices simply raise industry profits or reduce its losses—and reduce incentives to innovate. Despite that, many analysts who usually support free trade have made an exception for steel on national security grounds, arguing that we need adequate domestic manufacturing capability to build ships and tanks in the event of war. But today’s weaponry depends much more on high-tech composite materials than on ordinary steel. According to an October 2001 Commerce Department study, no weapons system is dependent on imported steel; there will be more than sufficient domestic capacity for all Defense Department needs for the foreseeable future; and there are far cheaper ways of ensuring the Pentagon’s needs than through trade protection.
In late 2001 the Doha Round officially started. But well into 2002, the U.S. could not meaningfully participate because Congress had yet to pass fast-track authority. Steel and agriculture were the hang-ups.
On March 5, 2002, Bush sought to assuage those concerned about steel by imposing a 30 percent tariff on steel imports. In an amazing example of doublespeak, Trade Representative Zoellick explained that this was a major step toward free trade. The tariffs, he said, would compensate for government subsidies often given to foreign steel producers. Most observers saw Bush’s action as nothing but buying a few votes in politically important swing states.
The Europeans and Japanese immediately drew up lists of American goods they’d subject to retaliatory tariffs. On a trip to Beijing in April, hoping to open the Chinese market to more U.S. exports, Zoellick found Chinese officials unresponsive. Why should they open their market, they asked, when the United States was in the process of closing its own?
The Wall Street Journal worried that Bush’s direction on steel was weakening his ability to influence other countries on a variety of issues. “The policy mattered less than the abandonment of principle,” it editorialized. “It signaled to the world that Mr. Bush was not the president he had seemed after September 11; his moral and strategic clarity could be compromised for a price.”
By summer, a wide variety of steel-using businesses in the U.S. were complaining about a cost squeeze. Their raw material cost had risen by 30 percent, but they were unable to raise their own prices to compensate. This was especially the case for businesses facing international competition, since finished goods made with steel were not subject to the tariffs. Hence the tariffs put U.S. manufacturers at a competitive disadvantage in both domestic and foreign markets.
Bush’s steel policy probably did get him the last couple of votes he needed in the House to get trade promotion authority, so that the U.S. could finally participate meaningfully in the ongoing Doha Round. On July 27, 2002, 215 House members voted for the conference report on the trade bill, while 212 voted against it.
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