Companies Steel Themselves Against Competition

For the past several months
U.S. steel companies, their unions and Democrats on Capitol Hill have
been whining that steel manufacturers from Brazil, Japan, Russia and other
countries are “dumping” steel in the United States. These critics
charge that companies from these nations are unfairly selling steel at
a price that is simply too low for American firms to compete. As a letter
from 13 U.S. governors to President Bill Clinton summed up the case, “Our
businesses cannot compete with unfairly priced, dumped and subsidized
products from desperate foreign markets. Each day of lost market share
equals real job losses and serious financial consequences for a vital
American industry.”

Although the Clinton administration
initially resisted calls to take action against the “dumping”
of steel, the Commerce Department ruled in late March that Belgium, Canada,
Italy, South Africa, South Korea and Taiwan all illegally dumped stainless
steel into the U.S. market. Stainless steel from those nations could face
tariffs as high as 60 percent if the U.S. International Trade Commission
decides the “dumping” hurt domestic steel makers. Although stainless
steel makes up only a small percentage of the steel market, this decision
makes it all the more likely that the Commerce Department will rule that
Japan, Russia and Brazil illegally dumped hot-rolled carbon steel into
U.S. markets.

As with most “anti-dumping”
appeals, however, the real problem is not with the foreign producers but
with the domestic steel industry; special protectionist measures now will
only reinforce and exacerbate those problems.

As a September 1998 article
in The Economist noted, long-running protectionist legislation
on behalf of the steel industry has encouraged firms to avoid taking measures
to reduce their costs or improve their operating procedures. Whereas in
other countries consolidation of firms has followed relatively flat steel
prices, The Economist notes “in the hour or so it takes to
get from Gary, Indiana, to Chicago you will pass nearly half a dozen full-scale
integrated steel plants, each with its own supplier networks, inventory,
production schedules, marketing and sales force.” ThatÂ’s an extremely
expensive method of business for a rather undifferentiated commodity such
as steel.

In fact it is so inefficient
that the traditional steel industry faces serous domestic challenges from
small-scale competitors once derisively referred to by the big steel companies
as “mini-mills.” Unlike the traditional steel companies, which
use ion ore and huge blast furnaces, the mini-mills use scrap metal and
electric-arc furnaces. Dismissed only a few years ago as insignificant
players, mini-mill companies such as Nucor now produce almost 40 percent
of U.S. steel and Nucor recently passed U.S. Steel as the number one domestic
producer of steel.

The more traditional steel
companies have tried to run their own mini-mills with little success.
An Alabama plant, Trico, financed by a group of traditional steel producers,
lost nearly $40 million last year. The large steel companies with their
bureaucratic, old style production methods have been unable to replicate
the set of management processes and coordination necessary to make mini-mills
succeed.

The large steel companies
are using the current surge in steel imports, caused in part by the huge
boom in the U.S. economy, to seek quotas to protect them from their own
inefficient production methods. House Republicans and Democrats joined
together in late March to approve the Steel Recovery Act which would limit
the amount of steel imported into the U.S. to the average of level of
steel imports from July 1995 to July 1997.

This bill would be a disaster.
According to the Precision Metalforming Association, limiting steel imports
to this average would have left American industry 4 million tons of steel
short of what it needed. The result would be a dramatic rise in the price
of steel in the U.S., which would result in increased cost to consumers
— a special tax on consumers to benefit the steel giants. In addition
without an opportunity to sell its steel in the world’s largest market,
foreign nations won’t have access to the dollars they need to help recover
from the ongoing Asian economic crisis. Setting up protectionist barriers
in America now would be like throwing gasoline on a raging fire.

The regimen of protectionist
barriers on foreign goods such as Japanese cars already harms American
consumers (almost $1,000 per car in the case of the automobile quota);
the last thing Congress should be doing in the midst of AmericaÂ’s economic
boom is imposing even more burdens on business and consumers.

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