Rusty Thinking on Steel Tariffs

There’s no such thing as a do-over in politics, but President Bush is about to get a rare second chance to make the right decision.

In March 2002, the Bush administration imposed a tariff of up to 30 percent on several imported steel products. The president has the option of eliminating those tariffs. Doing so would undo some of the damage the tariffs have done to our economy, smooth over relations with our trading partners and strengthen the administration’s free trade (search) credentials.

In retrospect, Bush’s decision seems more political than economic. After all, the tariffs offered little hope to revitalize the faltering steel industry. But politically, the tariffs seemed to offer Republicans some potentially important votes in the 2004 elections in steel-producing swing states (search) like Pennsylvania, West Virginia and Ohio.

Bush’s gamble appears to have backfired. In August, the United Steelworkers Union threw its support behind Democratic presidential candidate Richard Gephardt (search), an early endorsement that signals the union will work hard to defeat Bush next year.

Domestically, the steel tariffs (search) have hurt more workers than they have helped. That’s because industries that use steel to manufacture other products such as auto parts, appliances and buildings produce more products and employ more people than the steel industry does. In fact, according to the Consuming Industries Trade Action Coalition (search), for every employee in the steel-producing industry, 59 work in the steel-using industry. The tariffs increased prices in these industries, lowering demand. That’s why the Institute for International Economics estimates that as many as 52,000 jobs have been lost in the steel-using industry since the tariffs were enacted. Eliminating the tariffs would help strengthen the manufacturing sector by restoring some of these lost jobs.

Although they harmed our economy, the tariffs offered little hope of boosting the steel industry. Even if foreign imports were completely prohibited, the steel industry would remain inefficient. One reason is that steel makers have high fixed costs, including overhead costs that don’t change no matter how much -- or how little -- steel a company is rolling out. To be competitive, industries with high fixed costs should have only a few large firms. That’s why there are three American automakers, not 33. But steel tariffs prop up inefficient firms, allowing them to remain in business even though they’re actually losing money. In effect, they’re being kept alive by corporate welfare.

Internationally, the steel tariff succeeded only in angering our trading partners and injuring our credibility in the global market. The administration was blindsided by the reaction it received both at home and abroad. Our international trading partners were livid, while domestic companies that use imported steel demanded exemptions.

Almost immediately, the administration started doling those exemptions out. Countries that held trade agreements with the United States were completely exempt. Australia received an 85 percent exemption (without it, Australian exporters could have lost up to $450 million per year). Several other countries were granted exemptions and several American companies, such as Caterpillar, were given exemptions for the imported products they use.

Despite the administration’s attempts to mitigate the damage of the steel tariffs it had approved, a number of countries brought a case against the United States before the World Trade Organization (search) claiming that the steel tariffs violated WTO rules. Predictably, the WTO ruled against the United States in July. That decision paved the way for the European Union (search) to impose $2.2 billion in tariffs on American products.

If these retaliatory tariffs were implemented, they would harm American companies in politically important states. That’s bad news for President Bush’s re-election bid, and even worse news for the employees in these companies. Undoubtedly, these tariffs would force firms to reduce production. That means less work for existing employees, or job losses in the manufacturing sector. Thus one bad idea could hurt the economy twice.

Last year, Bush put politics above economics. For the sake of the American worker and our credibility with U.S. trading partners, Bush now should put economics above politics by repealing the tariffs he imposed on steel imports last year.

Sara Fitzgerald is a trade policy analyst in the Center for International Trade and Economics at  The Heritage Foundation. Aaron Schavey is an assistant professor of economics at Bethel College.