06-30-2001
ECONOMICS: Forging an Iffy Policy?
Industrial policy has long been absent from the Washington policy
discourse. Reaganauts thought they had buried for good the concept of the
federal government's picking winners and losers. And the phrase, because
it was an inconvenient reminder of the Democratic Party's liberal roots,
was extirpated from the Clinton Administration's lexicon. But make no
mistake about it: The Bush Administration is in the process of defining
its own industrial policy through its involvement with the domestic steel
industry.
The White House has endorsed the industry's plea for protection from
imports. Such relief could buy the industry breathing room. But the test
of the Administration's commitment to the industry will be how that time
is used. The Bushies say they want to negotiate a reduction in global
steelmaking capacity. The domestic industry also wants help getting its
finances in order. What gets done will provide a template for other
industries seeking Washington's help during the economic slowdown.
The steel industry's woes stem from the Asian financial crisis of 1997-98,
when falling global demand led foreign steelmakers to target the U.S.
market. Offering cut-rate prices, foreign mills were soon supplying 30
percent of America's steel. But what was good for consumers was bad for
domestic producers and their workers. Undercut in the market, 18 U.S.
steelmakers have since filed for bankruptcy. Some 23,000 steel workers
have been laid off.
Although the industry has won a number of trade cases limiting imports, it
wants more-comprehensive import relief, and the Bush Administration has
agreed with the need to provide it. The U.S. International Trade
Commission is now investigating the industry's plight. That probe could
take as long as six months. Assuming the ITC finds protection justified,
the President could reject its recommendations or impose tariffs and
quotas to provide relief for one or more steel products. The protection
would last for at least three years.
But other nations would undoubtedly challenge import limitations at the
World Trade Organization. And the WTO has voided every recent import
relief action brought before it. So the protection may be short-lived.
That prospect adds additional impetus to Administration efforts to
negotiate cuts in global overcapacity that the American steel industry
blames for its problems. That won't be easy. The European Union disclaims
responsibility for the glut, but fails to explain why it needs a much
greater steelmaking capacity than the United States despite having a
smaller economy. Other major global producers-Japan, China, Russia-have
similarly evidenced no interest in negotiations.
If talks do begin, the parties undoubtedly would disagree on whose
capacity is in excess. U.S. producers could point to recent Wall Street
studies showing American steel mills to be the third-most productive in
the world on a man-hours per ton basis. "The most competitive product
is meant to win," said Sen. John D. Rockefeller IV, D-W.Va., echoing
the U.S. case. Foreigners could argue that those same studies show
American production to be among the most costly per ton, thanks to the
strong dollar. And those high costs suggest that U.S. capacity should be
cut.
In the late 1980s and early 1990s, the first Bush Administration attempted
to negotiate its own multilateral steel agreement, intended to curb
capacity by eliminating market-distorting subsidies. But the talks
foundered on foreign demands that some subsidies be exempt and on the U.S.
refusal to give up its right to take action against foreigners selling
below the cost of production. Those disagreements have yet to be
resolved.
Failing creation of a free market, some pundits have suggested that the
Administration might settle for the creation of a market-sharing
arrangement modeled on the global aluminum cartel highly touted by
Treasury Secretary Treasury Paul H. O'Neill, the former head of Alcoa Inc.
But such a steel fix would involve far more countries and would
necessitate market sharing in the United States, a potential anti-trust
violation.
Domestically, steelmakers have trouble obtaining loans, even with the
current government loan-guarantee program. And they have retiree health
care liabilities-estimated to be $1 billion a year-that drive up their
costs.
Congress is currently considering legislation to sweeten the
loan-guarantee program and to pick up most of the industry's retiree
health care expenses through a surcharge on all steel sales. Passage is
doubtful without major Administration support, because the industry itself
is divided over the legislation.
Rep. Phil English, R-Pa., who represents a steelmaking district, has also
proposed changes in the tax code to help the industry. But offering Big
Steel tax benefits would open the floodgates to similar pleadings by other
industries.
Finally, steel's plight will only intensify pressure on the Administration
to weaken the dollar. Much American demand for imports would evaporate if
the dollar were to fall to its mid-1990s value. But fiddling with the
dollar is a no-no on Wall Street.
In the end, the Administration is likely to find that offering the steel
industry import relief has opened a Pandora's box. The White House can
only help steelmakers by developing a comprehensive plan that will, in
effect, be an industrial policy. Economic and political realities may
demand such action. But the Administration and the Congress should be
honest with the public about where they are headed.
Bruce Stokes
National Journal
