Trump’s Steel-Trapped Minds

A new Trump steel tariff would crush his ‘forgotten’ workers.

 
 

Two Alton Steel, Inc. workers use torches to keep the ends of a molten bar of steel hot in Alton, Ill.

 
Two Alton Steel, Inc. workers use torches to keep the ends of a molten bar of steel hot in Alton, Ill. PHOTO: ASSOCIATED PRESS

Donald Trump has ordered a “national security” review of steel imports with a goal of justifying a broad-based tariff. If his advisers look honestly at the evidence, they can’t possibly find enough to justify such a job-killing, economically harmful policy.

Start with the fact that U.S. steel prices are already higher than in the rest of the world, and the gap has significantly widened over the past five years amid increased import duties. In 2012 the average price of cold-rolled coil produced in the U.S. was 11.5% and 12.1% higher than the Chinese and Southern European equivalent. This year U.S.-made steel is 34% and 27% more expensive, respectively.

American steel makers cry “dumping,” but is every foreign company in every country dumping? The Commerce Department has already imposed 152 antidumping or countervailing-duty orders on imports from 32 countries, and many more cases are pending. Commerce charged South Korea and Turkey with dumping welded line pipe in 2015 and last year slapped duties on imported cut-to-length steel plate from China, Brazil and Turkey. Antidumping duties contributed to a 25% decline in foreign imports between 2015 and 2016.

 
 

Domestic steel makers have exploited these protectionist measures to raise prices and boost their bottom lines. Last year Nucor posted an 11.9% profit before taxes, depreciation and amortization. AK Steel ’s margins have doubled in two years to 8.5% while Steel Dynamics ’s has increased by half to about 15%.

Commerce Secretary Wilbur Ross nonetheless says that antidumping duties are “not able to resolve the broader structural economic harm to the U.S. steel industry caused by massive global overcapacity and unfair foreign competition.” His beef is that China, which accounted for nearly half of the world’s output last year, has driven down global prices and increased pressure on U.S. steel companies.

The reality is that foreign competition forced the U.S. steel industry to become more efficient—or at least it did before the tariff walls began going up. Over the past four decades, production has shifted from unionized integrated mills that use blast furnaces and iron ore to lower-cost mini-mills that employ electric arc furnaces, scrap metal and non-unionized labor. Steel from integrated mills makes up a third of domestic production, down from about three-quarters in 1980.

Domestic manufacturers that were slow to adapt like Bethlehem Steel have gone out of business while leaner steel makers that have embraced new technologies are prospering. In April U.S. Steel slashed its annual profit forecast to invest in retrofitting decades-old mills. Improvements in technology and workflow are the main reasons the U.S. steel workforce has shrunk—and survived an onslaught of competition.

Yet U.S. foundries are still running at only 71% capacity while imports make up a quarter of the U.S. market. One reason is that most advances in high-strength steel have occurred overseas. Many downstream consumers say domestic steel doesn’t meet industry quality or safety standards. Mini-mills produce lower-grade metal that’s suitable for roads and buildings, but not as much for automotive sheet or appliances.

This excess capacity should moot natural security concerns. Defense consumes less than 3% of domestic steel, and U.S. foundries would have plenty of spare capacity to ramp up production in wartime. Canada, South Korea and Mexico accounted for 40% of imports last year, while China and Russia together provided 7%.

The greatest harm from broad-based steel tariffs would be to the thousands of American businesses and workers that use steel. These would include the higher cost of American steel for construction (42% of steel shipments), automotive (27%) and machinery (9%). Public works and homes would cost more to build.

Many U.S. companies that compete globally would risk losing business to overseas competitors. Some would turn to substitute materials such as plastic or aluminum, tweak their supply chains or move production overseas. Auto makers would likely utilize more high-strength aluminum and shift more production to Mexico and Canada. American steel workers could even be harmed if demand for steel drops as users adapt to higher prices.

There are 16 times more workers employed today in U.S. steel-consuming industries than the 150,000 or so American steelworkers. A study by economists Joseph Francois and Laura Baughman found that more American workers lost jobs (200,000) after George W. Bush imposed steel tariffs in 2002 than were employed in the entire steel industry at the time (187,500). The result was $4 billion in lost wages.

The case against steel tariffs is so overwhelming that it’s hard to believe even Mr. Ross can find a way to justify it. The motivation could only be to assist the politically clamorous owners of a handful of steel companies that would exploit government favoritism to raise prices. The losers would be millions of the so-called forgotten men and women the President vowed to help during his campaign.

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