Only one justification for trade protection has widespread support among economists: to preserve “infant” industries, those just getting started and competing against well-established rivals. So it is ironic that the American industry that has sought and received the most protection over the years is not a new one, such as electronics or software, but the quintessential old industry: steel. It is always just on the verge of being competitive, the industry swears, and only needs a little breathing space to invest and modernize. Then tariffs and quotas can be relaxed.
But that day never comes. Since 1969 the U.S. steel industry has received continuous protection in one form or another. These barriers have cost U.S. consumers between $104 billion and $175 billion more (in constant 2006 dollars) for products made with steel, such as automobiles and appliances.
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.
By January 2003, the steel tariffs had cost far more jobs in steel-using businesses than could possibly have been saved among steel producers. According to the economists Joseph Francois and Laura Baughman, 200,000 jobs had been lost among steel users. There were only 187,500 total jobs in the steel industry itself. Substantial numbers of manufacturers had been forced to move their production outside the U.S. to escape the tariffs. It is unlikely these outsourced jobs will return.
In a September 2003 study, the International Trade Commission concluded that the steel protection policy had been a net loss for the country, calculating that, on balance, the nation was worse off to the tune of $42 million. Furthermore, in May 2003 the World Trade Organization had ruled that the steel tariffs were illegal under world trade law. After a U.S. appeal was rejected, the European Union prepared to impose retaliatory tariffs on U.S. goods.
In December 2003, Bush finally bowed to reality and lifted the tariffs. But he continued to pay a heavy price in the Doha talks, as other countries repeatedly rejected American entreaties to lower their barriers to U.S. goods. As The Wall Street Journal put it, “When the world’s main economic power indulges in protectionism, everyone else figures it’s safe to do the same.”
Dooming Doha
Congress traditionally produces a farm bill every five years. The 1996 law had eliminated a number of subsidies and regulations, but its 2001 successor was a return to the older, subsidy-heavy approach. The final bill, signed by Bush in May 2002, raised spending by almost $90 billion above the previous law; the Congressional Budget Office estimated that it cost $470 billion over five years.
The importance of the new agriculture subsidies went well beyond the burden on the budget or the impact on farmers. They basically doomed the Doha trade talks, which were primarily about reducing farm subsidies worldwide—especially in Europe, where farmers are even more politically powerful than they are here.
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