Prop Up Steel?


The big steel companies are up in arms again. For the past several years they've been sounding the alarm about the evils of imported steel. Not that it's defective or overpriced, mind you—only that it's foreign and therefore ought to be prohibited, at least to some who want to buy it.

Big steel's latest cause célèbre is the Justice Department's new-found hostility to mergers among the industry's largest firms. According to the department's mathematical formulas, the initial merger plan of Republic Steel and LTV would have made the domestic steel industry too "concentrated" in the hands of big firms. But if mergers are prohibited, say big-steel executives, the only alternative to wrenching bankruptcies is tougher protectionist measures against imports.

What sense can we make of these arguments?

First of all, it's true that the big steel companies are in terrible shape. The seven largest steel firms lost $6 billion over the past two years. But part of the blame can be laid at their own feet. For a variety of reasons (including the shift to smaller, lighter cars), world demand for steel has been declining ever since 1973. Yet until very recently, the big steel companies failed to adjust. They kept in service patently inefficient, obsolete plants and kept granting wage increases twice as high as in other industries, thereby pricing themselves right out of the market.

What led the steel companies to such irrational decisions? In a word, protectionism. Since 1969 there have been various forms of government intervention aimed at limiting imports, and this has allowed big-steel executives the illusion of business as usual. Nonetheless, as each new barrier against Europe or Japan was erected, a Korean or Brazilian company, with even greater cost advantages, would enter the US market offering steel users a better deal. Just since 1979, imported steel's market share has climbed from 15 percent to over 20 percent. The big steel firms have belatedly had to shut down huge amounts of excess capacity, laying off some 40 percent of their work force in the process.

The steel giants like to blame their problems on governments. They cite US government funding of World Bank and Export-Import Bank loans to help Third World firms build modern steel mills, and they cite further subsidies by the governments of those countries. All those subsidies do account for a portion of foreign steel's cost advantage. But when US steelworkers demand $23 an hour while Koreans are willing to work for $3, it doesn't take a genius to figure out who's going to produce lower-cost steel.

The subsidy argument is irrelevant, anyway. What difference should it make why Brazilian or Korean steel costs less—the bounty of nature, cheap labor, or their government's subsidies? (The taxpayers of Brazil or Korea have a legitimate gripe about the use of their money, but that isn't our problem.) Shouldn't consumers of steel be free to get the best deal they can?

Moreover, the idea that American companies cannot compete with imports is contradicted by the growing success of the so-called minimills, which are doing just that. Nucor, for example, entered the West Coast market for steel bar products in 1981. At that time, Japanese firms had some 50 percent of that market. Today, their share is down to 15 percent, while Nucor has won more than 50 percent.

Nucor's secret is much higher productivity. It is building specialized rather than general-purpose mills—for $300 to $400 per ton of annual capacity, compared to over $2,000 a ton for conventional mills. Even more impressive is Nucor's labor situation. It has kept its mills nonunion and thereby free of inefficient work rules by providing an extensive system of production bonuses, profit sharing, and fringe benefits. Its employees are among the world's best-paid steelworkers, with a turnover rate of virtually zero. The result? Nucor turns out 850 tons of steel per employee, compared with big steel's average of 350 tons per employee.

That kind of "reindustrialization" is the future of US steel-making. But it only comes about under the spur of open competition. Remove the competitive threat of foreign steel, and the dinosaur companies will have no real incentive to face the realities of their obsolete facilities; too-large, overpaid work forces; and restrictive work rules.

Seen from this perspective, the Justice Department's resistance has a certain perverse logic to it. In calculating the effect of the proposed LTV-Republic merger on the US steel industry, the antitrust watchdogs in the Justice Department excluded European and Japanese imports, looking only at the share of the market held by US firms. Those imports are restricted by quotas, you see; so if a merged firm were to engage in monopolistic pricing, this would not lead to competitive responses from European or Japanese producers. But this just shows the perversity of government protectionism.

In principle, of course, it should not be the business of government to use the force of the law to prevent the shareholders of two companies from engaging in the voluntary transactions that constitute a merger. But it is also not the business of government to use force to prevent willing buyers from purchasing steel from willing sellers—even foreigners.

The big steel companies have been caught in a trap of their own devising. They wanted big government, all right, and now they've got it, good and hard. One can hope that maybe now, with their survival at stake, they will realize what a bad deal big government turns out to be.

In today's deregulatory climate, there might well be political and popular support for a new kind of deal for big steel: no restraints on mergers in exchange for no restraints on imports. The only losers would be a fraction of today's steelworkers who are redundant—but they will be laid off sooner or later anyway. The winners would include the remaining steelworkers and stockholders of revitalized, high-tech steel firms, as well as everyone who would benefit from lower steel prices—and that means essentially all of us.