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Foreign Subsidization and Excess Capacity

The U.S. steel industry has long held that foreign subsidization and excess capacity has
led to its long-run demise, yet no one has formally examined this hypothesis. In this
paper, we incorporate foreign subsidization considerations into a model based on
Staiger and Wolak’s (1992) cyclical-dumping framework and illustrate testable
implications of both cyclical excess capacity and structural excess capacity stemming
from foreign subsidization. We then use detailed product- and foreign country-level data
on steel exports to the U.S. market from 1979 through 2002 to estimate these excess
capacity effects. The results provide strong evidence of both cyclical and structural
excess capacity effects for exports to the U.S. market. However, the effects are
confined to such a narrow range of country-product combinations that it is unlikely that
such effects were a significant factor in the fortunes of U.S. steel firms over the past

Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel Industry
Overview: On March 6, President Bush is expected to announce specific Section 201
measures to further protect the domestic steel industry from import competition. By any
relevant economic measure, the costs of protection will far exceed the benefits, and any
benefits accruing to steel firms from that protection will be fleeting. Section 201 relief for
steel producers could invite WTO-legal retaliation against other U.S. export sectors,
undermine prospects for trade agreements and related job growth, and saddle
downstream steel using industries with price hikes and supply shortages that will
handicap them vis-à-vis their international competitors. Protection will only prolong
crippling over capacity in the domestic steel market. The paper states that antidumping
duties unfairly punish foreign producers for engaging in practices that are routine and
legal for domestic producers. Under the current definition of dumping in U.S. law, every
U.S. steel company that is losing money is guilty of dumping here in its home market. A
Section 232 investigation by the Department of Commerce recently concluded that
domestic steel capacity far exceeds any potential needs of the U.S. military. The U.S.
steel industry, but more important, the country, will be best served if the president
resists the temptation to impose new trade restrictions.

UNITED STATES: Steel companies call for increased tariffs, subsidies

Wednesday, February 27, 2002 - 11:00

Capitalism's nagging overcapacity problem refuses to go away. Having long
plagued many key industries, the problem found new and sharp expressions in
the global steel industry in the wake of the 1997-98 economic crises in Asia,
Russia and Brazil, overwhelming the US with rising steel imports and prompting
then President Bill Clinton to impose prohibitive punitive tariffs.

Now, President George Bush is threatening to reimpose tariffs as high as 40%. Bush is
scheduled to make a formal decision on the matter in early March. He may not press
ahead with the tariff and import quota plan if other steel-producing countries make offers
to cut enough of their steel production capacity as Bush has asked them to.

Although the European Union (EU) on February 8 made an 11th-hour pledge to cut its
steel output by 24 million tonnes a year between 2003-05, the cut amounts to only
about 10% of the global excess steel production of more than 200 million tonnes a year.
Global steel excess capacity is 300 million tonnes a year, while annual consumption is
700 million tonnes.

In this context, it's hardly surprising that steel prices are now at their lowest in 20 years.
The US imported about 27 million tonnes of steel products in 2000, valued at US$10.7

Japan is still resisting cutting its output. Not only has it been "quiet" on its capacity
reduction projections, on January 30 it launched an action against the US at the World
Trade Organisation (WTO) for the US refusal to lift anti-dumping duties on steel imports
which were first imposed in 1993.

It remains questionable if the total cuts on offer will satisfy the Bush administration.

The failure of other steel-producing countries to actually make cuts in output prompted
Bush to call in September on the 39 major steel-producing countries to meet under the
auspices of the Organisation for Economic Cooperation and Development (OECD). A
meeting in Paris on December 17-18 failed to produce any meaningful action.

Driven by aggressive US steel producers, the Bush gang aims to have other nations cut
their steel-production capacity while allowing US steel companies to maintain theirs.
The rationale for this approach is that US corporations are allegedly far more efficient
than their foreign competitors and the aim should be to cut "the least efficient" capacity.

This attitude is clearly expressed in a US government report on the December

gathering, which says: "The United States has remained by far the largest net importer
of steel products, so it is not obvious that the US steel industry accounts for a
considerable portion of global 'excess capacity' that might exist, and by various
standards the US industry is amongst the most efficient in the world."

A December 7 report of the US Mission to the European Union says: "The United States
has mounted a diplomatic campaign that aims at reducing the global excess of steel
production and capacity. Officials from the Commerce Department, the Office of the US
Trade Representative and the Treasury Department have been travelling to countries
with the biggest steel producing industries, including Japan, China, Mexico, Brazil and
Russia, to persuade them to support significant cuts in output."

US protectionism

Under the OECD process, steel-producing countries were to conduct their own reviews
of the "efficiency" levels of their steel industries, identify the "inefficient" capacities and
"volunteer" to eliminate them.

The US report presented a comparison of the labour productivity of eight selected steel-
producing countries, which shows the US (together with the EU and Japan) as among
"the most efficient". They employed far fewer worker-hours per unit of steel output than
the other producers, especially China and Russia.

The logic of the US argument is that China, Russia and other "less efficient" steel
producing countries should shut down a greater proportion of their industries than the
imperialist triad (US, EU and Japan) and thus rescue the triad from its overinvestment in
steel-producing capacity.

On the basis of their "efficiency" argument, in January 2001 North American steel
producers took issue with the German government for providing funding for Cuba to
expand its steel-producing capacity. They also sought to stop foreign funding to China's
steel industry.

On the other hand, even though Japan and the EU are hardly inferior to the US in steel-
producing productivity, Bush is still trying to get them to cut their capacity.

The US claim that its steel producers are the most efficient doesn't always hold true.
Steel companies which account for 29% of US steel output are currently in bankruptcy
and in the last 18 months nearly 15% of US steel capacity has become idle or will do so

Rather than recognising that these companies have simply lost out in the normal course
of "market-based" competition, the Bush administration has blamed their demise on
cheap steel imports. Often these exporting countries were accused of "dumping" (selling
below costs) and/or of having benefitted from government subsidies.

The basis of the dumping verdicts is dubious, and rarely open to public scrutiny. They
are based on US laws, allowed by the WTO.

As for government backing, this is a "crime" when provided by a competing government

but fully justified when delivered by Washington to US corporations. The US steel report
said: "The US government does not provide significant subsidies or similar assistance to
the US steel industry. The most visible federal program toward the steel industry, the
Emergency Steel Loan Guarantee Program, adopted in 1999, is limited in scope...
Although there has been assistance to certain steel producers at the state and local
level, such assistance by itself, is unlikely to result in the creation of new capacity."

That loan guarantee program has covered a US$110 million loan and approved six

Despite its "free-market" rhetoric, whenever major US corporations are "substantially

injured" by a surge of imports, the US government intervenes to protect these
corporations from foreign competitors.

This approach is enshrined in law by section 201 of the US Trade Act of 1974, which
authorises Washington to undertake "safeguard actions" to punish "aggressive"

The other prime items in Washington's protectionist arsenal are the antidumping and
countervailing duty laws. In 1993 and again in 1998, they, often with time-bounded
applications, were liberally lashed on steel exporters to the US, with great immediate

"Free trade" is upheld whenever the US rulers seek to break into, or strengthen their
hold on, a foreign market but can conveniently be ignored when "US interests" are
perceive to be threatened. This "free trade" double-speak has also been applied to
other imports such as clothing and textiles.

Government subsidies

The US capitalists switched to another logic when confronting their own workers. While
still campaigning against their foreign competitors receiving any government support,
US steel producers are asking Washington to provide subsidies to help them lower their
production costs, especially by subsidising their healthcare and pension obligations
toward retired steel workers ("legacy costs"), but also in meeting environmental

Crying poor, US steel producers said retirees, totaling 400,000, have outnumbered
active steel workers by more than four to one, inflicting, for healthcare alone, a bill of
US$8 billion. The US Mission to the EU report said the US steel industry has indicated
"it would be unable to adjust to import competition, independently of import remedies,
unless impediment to restructuring, such as labor agreements and pension, health care,
and environmental clean-up costs were removed".

US Steel Corporation, which is on course to take over five other major US steel
producers, even asked the Bush administration for US$12 billion to pay for hitherto
unfunded employee retirement benefits.
US steel producers have gone so far in their pleas for government hand-outs as to
demand ownership of the revenue coming from the planned import tariffs! Following a
new law passed by the US Congress last year, the income from anti-dumping duties
was already being distributed to US companies which are competing with foreign
exporters. This outraged many countries and at least 10 of them, including the EU,
Japan and Australia, lodged a complaint with the WTO over this practice.

The claim that the US isn't responsible for global steel overcapacity just doesn't square
with facts. Following the last wave of steel overcapacity in the early 1980s, US
producers invested tens of billions to "modernise" their plants, a move that exacerbated
global steel overcapacity.

The industry-sponsored American Iron and Steel Institute acknowledged in a 1998

report, "the [steel] crisis is global, long term and structural". Since then the problem has
got worse.

In congressional testimony in December 2000, when the steel oversupply worsened

again, Department of Commerce undersecretary Robert LaRussa said that "two
important factors may make this crisis even more serious than 1998". These were,
firstly, indications that domestic steel demand had declined, down for the first time since
1992, suggesting a "cyclical downturn", and secondly, "the industry no longer has
reserves to carry it through another downturn".

US steel capacity utilisation at the time was already below 74%. It's become much
worse since.

From Green Left Weekly, February 27, 2002.

Visit the Green Left Weekly home page.

Steel quotas will harm U.S.

by Brink Lindsey and Daniel T. Griswold

Brink Lindsey is a senior fellow at the Cato Institute and director of the Center for Trade
Policy Studies.

May 11, 1999

The Senate will soon consider whether to impose further restrictions on the ability of
Americans to import steel -- restrictions that will come at the expense of thousands of
companies, millions of workers and tens of millions of consumers.

Since last summer, the major steel mills and the big steel unions have been beating
their steel drums for intervention against what was, at least temporarily, a rising tide of

In response to a series of anti-dumping petitions, the Commerce Department has

already slapped heavy duties or quotas on imported hot-rolled steel from Japan, Brazil
and Russia -- reducing imports from those countries by 97% since November.

Not content, the steel lobby now wants comprehensive quota restrictions to place a
three-year lid on steel imports. The House passed a quota bill in March by a 289-141
vote, and the Senate is expected to consider the measure any day now.

Imposing such quotas would punish the huge swath of American industry that uses
steel, from automobiles and machine tool makers to construction, while driving up final
prices for a range of consumer goods. Quotas would flout our commitments under
international trade law and invite retaliation against American exports.

The steel industry claims it is facing a life-or-death crisis caused by rising imports, but
that argument, never convincing, has melted away in recent months. The steel industry
shipped 102 million tons in 1998, its second-best year in two decades. Although imports
did rise last year by 33%, U.S. producers still supplied two-thirds of domestic demand.
And as steel industries around the world slumped, America's share of global steel
production actually rose in 1998 compared to 1997.

Meanwhile, steel imports have receded from the high tide of last autumn. Between
November 1998 and March, steel imports fell by 30%. According to the latest numbers,
steel imports in the first quarter of 1999 were below their level in the second quarter of
1997, before the East Asian economic turmoil hit.

The steel lobby argues that import quotas are needed to stem the loss of steelworker

According to the Bureau of Labor Statistics, about 10,000 fewer workers are employed
in the steel industry today than at the beginning of 1998.

But such job losses in the steel industry have been routine for two decades. Since 1980
the number of employed steelworkers has dropped by 60%, from 400,000 to 160,000.
The reason has not been import competition, but rising productivity. The industry
required about 10 man-hours to produce a ton of steel in 1980; today it requires an
average of less than four.

In an economy of limited resources, jobs can be artificially prolonged at a steel mill only
by cutting off jobs before they can be created in more dynamic sectors of the economy.


This relentless drive for greater productivity has been fired by the spread of mini-mills,
which turn scrap metal into a wide range of semifinished and finished steel products.
From a 15% market share in 1980, mini-mills today account for almost half of America's
steelmaking capacity. If Bethlehem, Weirton and other integrated steel companies want
to blame somebody for their relative decline, they should point the finger at domestic
competition, not foreign producers.

The federal government tried the quota route in the 1980s, imposing quantitative
restrictions on steel imports from 1984 to 1992. Import penetration did fall, but so did
steel industry employment. In fact, during those eight years the number of employed
steelworkers fell by 78,300, an average annual decline of just under 10,000 workers --
sound familiar?

Steel employment will continue to decline as productivity increases, regardless of

imports. Protectionism may slow the process somewhat but cannot stop it, and will
jeopardize jobs in the much larger sectors of the U.S. economy that use steel.

In manufacturing alone, workers in the major steel-using industries -- transportation

equipment, fabricated metal products and industrial machinery and equipment --
outnumber steelworkers 20 to 1.

Adding workers from the construction industry, another major consumer of steel, brings
the total number of steel-using workers to 8 million, outnumbering steelworkers by more
than 40 to 1.

Higher steel prices will drive up costs for consumers at home and abroad. If the steel
lobby succeeds, Americans will pay more for cars, houses and washing machines.

Those higher costs will find their way into American exports, making them less
competitive while making foreign-produced goods that contain steel more competitive in
our domestic market.

In a recent speech in Dallas, Federal Reserve Chairman Alan Greenspan warned that
protectionism will "slow the inevitable transition of the work force to more productive
endeavors. To be sure, an added few years may enable some workers to reach
retirement with dignity, but it will also keep frozen in place younger workers whose
better job opportunities decline with time."

In an economy of limited resources, jobs can be artificially prolonged at a steel mill only
by cutting off jobs before they can be created in more dynamic sectors of the economy.
Raising barriers to steel imports today will mean less opportunity tomorrow for our
children and their children.

This article originally appeared in the Journal of Commerce.