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Steel Doesn't Need Protecting

Posted on July 6th, 2017 in Industry News

During the 2016 presidential election, then-candidate Donald Trump promised to protect manufacturing jobs, including steel. After taking office, Trump issued an order premised on doing just that.

In April, the president directed the secretary of commerce to investigate the effects of steel imports on national security, pursuant to the 1962 Trade Expansion Act. If the secretary determines that steel "is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security," the president is authorized to take action to reduce imports and ensure that such imports don't threaten national security. Trump is reportedly in favor of that final step, much to the chagrin of most of his cabinet.

Unfortunately, using a national security rationale to protect the steel industry won't preserve jobs or revitalize the steel industry.

First, while steel is certainly useful in the weaponry upon which the U.S. has relied during recent wars in Iraq and Afghanistan, the U.S. military relies less on steel and a lot more on high-tech plastics and fabrics.

Second, the customer base for U.S. produced steel is not the U.S. military. Only 3 percentof U.S. produced steel goes to military services. The Trump administration even admits this fact. The industry journal American Metal Market reported that Earl Comstock, director of the Office of Policy and Strategic Planning at the Department of Commerce, noted, "People say, '[Trump's investigation into steel imports] should only be on defense.' But there is not enough demand from just defense to have anybody build a steel plant."

Finally, today's military is much more dependent on other inputs. For example, the U.S. military needs information and a secure digital cloud (which allows it to transmit intelligence, manage payrolls and manage operations and personnel across borders) much more than it needs steel. While the military will clearly need some steel capacity, it can rely on a combination of trustworthy domestic and foreign supply from Canada or Europe should domestic capacity shrink.

I know protectionism isn't the way forward. In 1981, I was a member of a team of investigators working for the General Accounting Office, tasked by Congress to examine how government could help the industry. We spent months traveling the country speaking with corporate and union officials, and found trade was part of the problem for steel. Other countries dumped and subsidized their steel exports to the U.S., symptoms of two larger problems that bedeviled the steel industry: There was simply too much supply and too little demand for steel. Moreover, manufacturers were substituting hard plastics and other material for steel where they could.

Protectionism, we found, was not the answer: It did little to encourage managers at many firms to modernize and invest in their employees. With imports at higher prices (through tariffs and quotas), steel industry executives used the breathing room from protectionism to increase returns to shareholders or to attract buyers for their firms. So protectionism was not only costly to consumers, it didn't preserve jobs or firms.

Hence GAO's recommendation that "Congress should enact legislation to define … industrywide, efficient capacity goals and a timeframe for their realization." Only with that clarity and time frame could Congress determine if government policy aid would be effective.

Despite GAO's recommendation, the industry continued to get protection. According to the Organization for Economic Cooperation and Development, global crude steelmaking capacity more than doubled from 2000 to 2014. Meanwhile, from 2009 to 2016, the U.S. Trade Representative filed 20 enforcement actions at the World Trade Organization, six of these related to the steel industry. Of the 332 duties in place providing protection to U.S. producers, almost half (149) covered foreign steel products. In other words, at the same time the industry was receiving protection, the overcapacity and declining demand problems got worse.

The Trump administration is right to say that longstanding efforts to protect the steel industry have not worked, but there is no national security rationale for protecting steel. The administration is simply using the guise of national security to protect a sector that is dependent on government help and simultaneously less essential to the U.S. economy.

If Trump really wants to help the steel industry, he should call a global conference of the world's steel producing nations. Policymakers could provide incentives to nations that gradually reduce capacity and help steel industry workers transition to other jobs.

Trump, though, has been critical of multilateral talks and has long stated he prefers to negotiate bilaterally. But history reveals that neither bilateral talks nor protectionism can solve the industry's problems of declining demand coupled with overcapacity.