Lessons From the Sorry History of Steel Protectionism

Even the Trump team seems to recognize that tariffs or quotas would start a global trade war.

 
 

PHOTO: ISTOCK/GETTY IMAGES
 

So far the Trump administration’s process for evaluating how to help the U.S. steel industry has been remarkably responsible. On the campaign trail, Donald Trump promised a smorgasbord of protectionist measures. This year, in part because of the administration’s deregulatory efforts, the economy has grown faster, jobs have been created quicker, and the stock market has reached record highs. Yes, ending America’s participation in the Trans-Pacific Partnership was a lost opportunity, but until recently the renegotiation of the North American Free Trade Agreement has been handled constructively. Aside from new tariffs on Canadian lumber, the protectionist extravaganza many expected—including me—hasn’t materialized.

Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer deserve credit particularly for how they’ve handled steel. They clearly don’t want to wreck the economy by starting a trade war, but at the same time they recognize Mr. Trump still wants big tariffs on steel imports. It isn’t the first balancing act performed on an I-beam during the past 50 years, as the steel industry has insisted its unique circumstances demand “special” protections far beyond what other industries are allowed.

During the late 1960s and early ’70s, steel imports from the European Economic Community (now the European Union) and Japan were restricted via voluntary restraint agreements—a nice way of saying import quotas. To persuade other countries to not retaliate, the U.S. in effect exempted them from its trade laws and rewarded them with a guaranteed share of a restricted American steel market. That was a way to share the premium generated from the protectionism. Everyone won except taxpayers, consumers, and—especially—America’s steel-using manufacturers. 

This approach gave way in the late 1970s to a notion called trigger price mechanisms. The idea was that if importers didn’t charge enough for steel, trade cases would be expedited. At least with the trigger the remedy was antidumping, so that countervailing duties went to the U.S. Treasury, not foreign producers

But the trigger didn’t provide enough protection, so quotas were revisited, this time on a grandiose scale. In 1984 the U.S. imposed binding steel quotas—still called “voluntary”—on 19 countries and the EEC. Canada was the only major steel-producing country with the political clout to resist. The measure was supposed to last five years. From the steel industry’s point of view, it worked. There were shortages, which increased prices. The steel industry became more profitable—more so, in fact, than many of its customers. Some of the windfall was used to improve the quality and efficiency of domestic mills, but much of it was diverted to foreign steelmakers to keep them complicit.

By the late 1980s, high steel prices and quota-induced shortages were undermining factory efficiency as just-in-time processes gave way to just-in-case workarounds. Unconcerned, the steel industry demanded five more years of even tighter quotas.

That launched a political fight sometimes called the Steel Wars. A robust coalition of American steel users—led by Caterpillar , where I worked—was formed to push for an end to the quotas. Big companies provided much of the political access, but what carried the day was the hundreds of small metal-bending concerns represented by the Precision Metalforming Association. Congress quickly learned that 30 times as many people worked in factories using steel than in mills making it—and they were mad. Most of them seemed to be located in the same congressional districts as steelworkers.

After a feisty policy debate, President George H.W. Bush and Congress agreed it was time for a new steel policy. The quotas were relaxed, then phased out completely in 1992. Steel producers started to rely on the same trade rules everyone else did. In 1998 the industry asked the Clinton administration for comprehensive import relief via the World Trade Organization’s safeguard provision. It was a strong case, but Bill Clinton said no. Four years later, when the steel industry had a weaker case, George W. Bush imposed 30% tariffs. Steel users again pushed back. Eventually the Bush steel tariffs were challenged in the WTO and rejected. So they were ended early.

Given this history, will the Trump administration impose new steel import restrictions? Today, steel prices in the U.S. are at a three-year high, and there is growing demand in China. The Commerce Department and trade representative are looking at options, including aggressive enforcement of existing trade laws and new quota-like remedies. Fortunately everyone seems to realize that a misstep, such as a flagrant imposition of tariffs or quotas, would certainly trigger foreign retaliation against American farmers, ranchers and manufacturers.

The strong economy may provide political space for another option. Instead of pitting American steel producers against their American customers, Mr. Trump could focus on improving competitiveness for all. The administration could provide lower taxes, possibly including tax credits, to help modernize steel mills and factories alike. Safety and training programs could be enhanced to help all workers. And a robust infrastructure program would both increase steel demand and improve efficiency for all. What are the chances this will happen? Slim, but better than I imagined six months ago.

Mr. Lane is a retired director of global governmental affairs at Caterpillar Inc. He was also a leader of the Coalition of American Steel Using Manufacturers.

Appeared in the October 11, 2017, print edition.

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