The U.S.-Canada Free Trade Agreement: Impact on the U.S. Steel Industry

Article excerpt

Introduction

The United States-Canada Free Trade Agreement (FTA) provides the basis for a significant expansion of U.S.-Canadian trade. Both countries should gain at the macro level of economic activity. However, specific industries within each nation will be affected differently. Some will gain directly and indirectly from the new opportunities created by trade diversion, trade creation, and the long run competitive forces set into motion by the trade liberalization program. Others will be hurt and gradually lose their protection-created competitive advantage. The U.S. steel industry is one of the industries most likely to be heavily affected by the trade liberalization forces set into motion by the FTA.

This paper estimates disaggregated price and income elasticities for U.S.-Canadian steel exports and imports which are then used to determine how changes brought about by the FTA will affect the U. S. steel industry. The Agreement, which took effect January 1, 1989, provides for phasing out most tariff barriers between the U. S. and Canada over the next ten years. About 70 percent of U.S.-Canada bilateral trade has been free of trade impediments for many years. Restrictions against the remaining 30 percent are being removed in three steps--immediately, over 5 years, or over 10 years. Carbon steel products are in the 10-year phase-out group. Hence, the empirical impact of the trade liberalization program on steel imports and exports will be minimal for several years.

The U.S. steel industry was selected for detailed study because it is a major basic industry that faces intensive international competition. Moreover, it accounts directly and indirectly for a significant part of U.S. GNP and employment. The U.S. steel industry is composed of three types of producers: integrated manufacturers, minimills, and alloy steel manufacturers. The integrated manufacturers, the core of the industry, have seen their worldwide leadership fall during recent decades. Many of the integrated firms have closed, merged, or dramatically cut back production and employment. The newer minimills are much smaller operations than the integrated mills and concentrate on lower end steel products--bars and structural shapes--manufactured from scrap. Alloy steel production is the smallest of the three steel market segments. These producers concentrate on making high value-added specialty steel products.

Foreign competition, coupled with dramatic gains by the minimills, has radically changed the face of the U.S. steel industry over the past decade. Since the late 60s the integrated U.S. manufacturers have successfully led the drive for import protection. In recent years the minimills have joined them in the call for government assistance. In response, two major U. S. programs were implemented to shield domestic producers from the outside competitors, the 1978-1981 Trigger Price Mechanism (TPM)(1) and the Voluntary Restraint Agreement (VRA)(2) program of 1985 to 1992. These programs slowed the growth rate for steel imports but did not stop foreign competitors from supplying a larger volume of steel to the domestic market, particularly in higher value-added steel products. Imports of steel mill products rose from 17.5 million tons in 1979 to nearly 21 million net tons in 1988 [American Iron and Steel Institute]. The FTA presents a unique opportunity for restructuring and rationalization of the North American steel industry according to the principles of free trade. Several studies predict gains from free trade for the aggregated industry [for example, Cox and Harris; Crandall]. However, the steel industry's products employ distinct production methods and thus require examination of industry prospects at the product level. Previous academic studies do not quantitatively assess the impact of free trade on industry segments.

Most of the econometric modeling of the Agreement has been done by Canadian researchers and concentrates largely on determining how the FTA will affect Canada. …