Academic journal article Indian Journal of Economics and Business

Tariffs on Steel: Special Interests vs. Free Enterprise

Academic journal article Indian Journal of Economics and Business

Tariffs on Steel: Special Interests vs. Free Enterprise

Article excerpt

From March 2002 to December 2003, the US imposed tariffs of up to 30% on steel. We present the tariffs in their historical context, and examine their impact in light of Austrian economic theory. All businesses, not just steel consuming ones, were hurt in the short and long runs by the tariffs' imposition, and in the short run by their removal. The government has over-encouraged unnecessary risk-taking and added instability to the economy. International spillovers and retaliation are considered, as well as the political fallout in terms of the country's bargaining power in international trade disputes.

INTRODUCTION

From March 2002 to December 2003, President Bush enacted some of the highest tariffs on steel this country has ever imposed. Tariffs of up to 30% were levied on 16 broad categories of steel products. This paper will present these tariffs in their historical context, and examine the impact of the tariffs and their repeal in light of Austrian economic theory.

The 2000 presidential election proved to be one of the most controversial ever, being decided, not even by the narrowest of electoral victories, but in the Supreme Court. It was difficult for the administration to claim a clear mandate, and midterm elections were around the corner in November 2002. What ensued was, we argue, a blatant case of political chicanery. But these tariffs on steel were not historically unique. They follow in a long tradition of protection for the steel industry. And this has a lot to say about the effects of protectionism, the investigation of which is the purpose of this paper.

INTRODUCING THE STEEL TARIFFS

On March 5th 2001, a bipartisan group of 14 senators (1) wrote a letter asking President Bush for protection for the steel industry. Alleging that "a surge of foreign steel, much of it allegedly dumped illegally on our shores, is causing America's steel industry extreme financial hardship," Senators Arlen Specter of Pennsylvania, Chairman of the Senate Steel Caucus, and George Voinovich of Ohio, urged the president to take remedial measures (Specter, 2001).

According to the Bureau of Labor Statistics (2004), 46 per cent of all steelworkers are employed in Pennsylvania, Ohio, and Indiana. The leading states in the output of this metal are Pennsylvania, Ohio, Indiana, Illinois, and Michigan (Encarta, 2005). The largest industrial employer in West Virginia is a steel mill (Holman, 1999). Clearly, legislators from these states are sensitive to the demands of their constituents.

The US State Department stated, "The commissioners initiated the case under Section 201 of the U.S. trade law, under which domestic industries that believe that they were injured or threatened by a surge of imports may seek import relief. Section 201 concerns fairly traded goods, not dumping or other behavior covered by unfair-trade laws" (Bush, 2002).

Under Section 201 of the U.S. trade law, President Bush had until March 6, 2001 to impose the protectionist tariffs. On March 5, 2001 he did so. The stated reason for the tariffs was "a glut of cheap imports" that resulted in falling profits, 30 bankruptcies and a loss of 20,000 jobs (Bush, 2002).

Why were foreign imports so cheap? US trade representative Robert Zoellick argued that the EU and China had been heavily subsidizing their steel industries. The EU had been subsidizing its steel industry since the 1970s to a tune of $50 billion; in 2001 alone, China had $6 billion in steel subsidies. It was "unfair" for our un-subsidized steel manufacturers to be forced to compete with firms in those countries (Zoellick, 2002).

The USITC proposed tariffs of up to 20% on steel. The president responded with tariffs of 30%, to be scaled down over the course of three years. Details of the steel tariffs are shown in Table 1.

In an impressive abuse of logic, the president justified the tariffs on the grounds that they would increase free trade. …

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