Painless Steel

In pushing for protectionism for the steel industry, Bush flunks his first free-trade test.

"I didn't expect this out of Bush," says Bill Adler, owner of Stripmatic Products, Inc. "I think there were a lot of political pressures rather than long-term, solid reasoning."

Adler, whose Cleveland Ohio-based company manufactures small metal parts that eventually wind up in cars and trucks, is shaking his head over President Bush's first official trade act. Last week, the supposedly free-trading Bush requested that the International Trade Commission investigate whether U.S. steel companies are being hurt by imports. If the bipartisan commission says yes, the likely result is even more quotas and tariffs on imports of steel than already exist. The steel industry and its labor unions have been seeking such protectionism for years. Clinton, for the most part, rejected the industry's entreaties. That Bush has given in so early has everyone from trade analysts at free-market think tanks to purchasing agents at manufacturing companies grousing.

"If I don't have steel I don't have a product," says Jim Evans, a purchasing agent for Gentzler Tool & Die, Co, whose products are used in the manufacturing of automobiles and appliances. In 2000, Evans says another government restriction on steel increased the price of one of his must-have materials. Now he's worried that Bush's investigation will whack him again. "If they cut out the imports like they did in 2000 and the steel mills jack the prices, we are going to hurt and hurt bad," says Evans. "Anything we quoted in the last six months we are going to lose money on."

Stripmatic's Bill Adler also stands to lose a chunk of his business, which he's grown from $1 million in revenues to $5 million since purchasing it nearly a decade ago. He points to one product he makes—a brake component for big-rig trucks—that uses a low-grade stainless steel. Domestic companies could produce it, but they don't, opting instead for higher-grade, and higher-margin products. As a result, he buys his steel from Mexico and France. "If they put import tariffs on a product I can't get in the domestic market, they are going to raise my price and my price has to go up for me to make a profit. There's a chance it could result in layoffs."

In D.C., it's layoffs at bigger steel companies–the ones with influence-peddling CEOs and big union backing–that have politicians worried. Since 1980, steel employment has fallen from 800,000 to roughly 160,000 today. Although some companies remain profitable, 18 steel companies have filed for bankruptcy since 1997. Industry and union officials blame their current problems on a flood of imports in 1997, when the Asian economic crisis prompted producers to sell excess product the US market. Others find fault closer to home. "A lot of the steel industry has survived on the backs of the rest of us," says Cato trade policy analyst Daniel Ikenson. Ikenson says decades of government protection, including the subsidization of pension funds, loan guarantees, and friendly revisions to anti-dumping laws, allowed the companies to remain inefficient and agree to cushy union contracts. "In the 1950s ad 1960s, they had the opportunity to invest in new production technologies and instead chose to invest lobbying and public relations efforts."

That's the path most steel makers are still walking. Ikenson says the industry already enjoys 103 anti-dumping orders, which impose tariffs on specific products from specific countries. They now want a blanket approach and Bush seems ready give it to them. The beauty of the investigation Bush set in motion under the Section 201 of the 1974 Trade Act is that government officials need not find any wrongdoing on the part of foreign competitors. They only need to establish that competition from imports is cramping the style of domestic producers.

This sorry scenario points to the endemic problem in political economy that 19th century French economist Frederic Bastiat called the "seen and the unseen," which is related to what modern economists call concentrated benefits and diffuse costs. Many of the steel companies are large and unionized. Their executives and union reps head to Washington, promise money votes, and deliver campaign contributions. They are easily seen, heard, and felt. In the 2000 election cycle, steel companies, their PACs, and executives pumped $2.7 million into Washington. The United Steelworkers delivered another $1.2 million. Union officials and CEOs travel to D.C. together to testify before Congress on the merits of protectionism. As a result, politicians work overtime to bestow benefits on them.

"The [Bush folks] lose me if we don't do something about this steel thing," said Sen. George V. Voinovich (R-Ohio) a day before the Bush administration was set to meet with steel executives from the Buckeye State in late March. Voinovich made clear to The Cleveland Plain Dealer that the price for his support of free trade for some industries was protectionism for his steel producers. "Fair is fair," he told The Plain Dealer. "And I expect them to get the job done."

Yet for every person who earns a living producing steel, there are 40 others who pay their mortgage, buy their groceries, and send their children to college with paychecks from companies that rely on steel as a critical input. These companies also face international competition. Some of these other companies are large and easily seen, such as GM and Ford. But many others are not. Bill Adler at Stripmatic, the Cleveland manufacturing firm, employs only 31 people. Evans, the purchasing agent for Gentzler Tool & Die, estimates that he works with 34 others. Smaller firms aren't as visible to politicians. It's easier—and more politically rewarding—for pols to cater to the unions and big-company CEOs. "I've written all my letters," says Adler, whose Congressman is Rep. Dennis Kucinich (D-Ohio) is pushing hard for protection. "I've invited Congressman Kucinich to visit my operation, but I haven't had a response yet."