SMU Conference Debate Over AD/CVD Continues

As I listened to Zekelman’s remarks, I was struck by how forcefully he made the case that antidumping/countervailing duty (AD/CVD) measures are not working to address the challenges facing his industry.  Among others, he offered three points:

• The AD/CVD process is too expensive for firms petitioning for relief, costing millions of dollars;
• The process takes too long, allowing unfairly traded product to continue entering the country for months; and
• Once an AD/CVD order goes into effect, foreign producers and traders take steps to avoid the duties.  Thus, imports continue to enter and the effectiveness of the order quickly is undermined.

Based on that analysis, I’ll admit to being surprised that Zekelman’s policy recommendation was to keep doing more of the same.  My questions to him were grounded in the view that – if import restrictions were going to solve the problems of U.S. steel producers – they would have done so by now. 

The United States already has one of the world’s most highly protected steel sectors, which is reflected by the wide price premium for hot-rolled steel in this country, higher even than in Western Europe.  (Given the essential role that HRB plays in the production of welded tubulars, it’s not hard to understand why domestic pipe producers are feeling pressure from imports.)  Yet these prices apparently aren’t high enough to satisfy U.S. mills, which recently sent a letter to the president urging him to restrict imports further via Section 232.  How wide does the price spread have to be before U.S. steel mills see the situation as fair?

Although it may not be a wise approach to public policy, it’s true that governments often pick winners and losers. Policies intended to help one group of constituents usually hurt another. So, wouldn’t tighter import controls on steel just shift money from steel consumers to steel producers, while having a more-or-less neutral effect on the economy overall?

Unfortunately, no. The reason is that the steel-consuming sector is so much larger than the steel-producing sector.

Steel mills add $36 billion of value to the economy each year, accounting for 0.2 percent of GDP. They employ 140,000 workers. Taking a conservative approach and looking just at companies that buy steel as an input for further manufacturing, we find a broad industry producing economic value-added of just over $1 trillion — or 5.8 percent of GDP. Those firms employ 6.5 million workers. So downstream manufacturers are 29 times larger than steel mills in terms of GDP and 46 times larger in terms of employment.

Manufacturers are particularly vulnerable to artificially high steel costs because many of them compete directly with goods produced at lower costs in other countries. It is hard to be a successful producer of automobiles or air conditioners, for instance, if U.S. policies give overseas competitors a built-in cost advantage. Worth noting is that loss of only 2 percent of jobs at steel-using manufacturers would equal the size of the entire steel-mill workforce.

But manufacturers aren’t the only businesses hurt by high steel prices. Construction activities account for 42 percent of all U.S. steel consumption and employ 6.8 million workers. Raising the cost of steel will mean fewer construction projects started and fewer workers employed, not the best possible approach to rebuilding American infrastructure.

In other words, restricting steel imports has the effect of multiplying the unfairness caused by other countries’ steel policies and spreading it across the manufacturing sector.

Hence, my recommendation is for America to acknowledge that the policy status quo is not working well, either for many steel producers or for their customers.  The better approach would be to end U.S. import restrictions for steel, and for the government to consider providing enhanced adjustment assistance to firms and workers that might be negatively affected.