Animal Farm Redux

Despite the title, this week’s column is not about agriculture; it’s about steel, an industry close to my heart throughout my professional career. I spent 17 years managing the Congressional Steel Caucus, first as staff for Senator John Heinz (R-PA) and then for Senator Jay Rockefeller (D-WV). Both of them tried valiantly to save jobs in the industry, and both had notable victories, but the long-term trend in the industry over 40 years has been declining jobs and increased productivity.

There were 398,829 people employed in the U.S. steel industry in 1980, versus 83,170 in 2020. In 1980, producing a ton of steel required 10.1 man-hours, but that number declined to 1.5 hours by 2017, and some highly efficient mills can now produce a ton of steel in 0.5 hours. In other words, since 1980, there has been an 85 percent decrease in the number of hours it takes to produce a ton of steel. 

Before simply concluding, however, that the industry’s job decline entirely stems from technology improvements, observers should take note of the equally long-term and serious trade challenges the steel industry has faced. I can’t think of another industry that has done a better job of demonstrating over more than 40 years that it has been the victim of dumped and subsidized steel imports. As of August 2021, there were 309 antidumping and countervailing duty orders in place on iron and steel.

The main trade culprit is China, which now has slightly more than half of the world’s steel capacity, illustrating the pernicious problem of non-market economies. When capital is allocated by the state rather than the market, over-investment resulting in over-capacity in favored sectors is inevitable. Companies that have produced far more than they can sell domestically dump it into foreign markets, depressing global prices and forcing other companies out of business. This has happened in steel, aluminum, and solar panels and will eventually be happening in low-end semiconductors.

The U.S. industry has fought back through effective application of our trade laws, but the Trump administration chose an additional path that has become embroiled in controversy—using Section 232 of the Trade Expansion Act of 1962 to impose tariffs on steel and aluminum imports on national security grounds.

Taking the 232 path was classic Trump strategy—shoot first and then negotiate. The theory was that the other countries hit by the tariffs would respond by imposing their own tariffs on China, thereby forcing it to eat the surplus it had created. Instead, some nations, primarily in Europe, chose to retaliate against us even as they were taking similar action against China. As a result, the United States is now enmeshed in a web of tariffs, some of our own making and others retaliatory, with none of them so far producing much change in Chinese behavior.

This has become a political issue in the United States, because just as there are iron and steelworkers who have benefited, there are other workers in steel-consuming industries that have been hurt, and the numbers are not equal. There are around 137,000 of the former and an estimated 6.5 million of the latter. Geography matters as well. Steel production is concentrated in Rust Belt states that were key to Biden’s election victory and will be important in next year’s congressional elections and in 2024.

It appears the tariffs have helped the industry increase its capacity utilization rate above the 80 percent goal of the Trump administration, and steel workers are lobbying hard for continuing them. Businesses in other sectors, in contrast, have had to deal with the double whammy of higher prices for key parts and components as well as retaliatory tariffs that make their products less competitive. This puts the Biden administration in the uncomfortable position of having to decide if one group of workers is more important than another.

The issue is coming to a head because the United States and the European Union have agreed to resolve their differences by November 1. The latest rumor is that the United States has proposed a tariff-rate quota scheme in which the Section 232 tariffs would be removed for up to a specified quantity of steel, but imports above that level would pay the higher tariff. Europe has agreed to market-limiting arrangements in the past, but I would be surprised if it does this time. World Trade Organization (WTO) rules make it harder to accomplish now; the European Union resents the implication that its exports constitute a security threat; and it doesn’t really solve the problem, which has more to do with China than the European Union.

There is a better way—a global safeguard agreement in which all the countries whose steel industries have been disrupted by Chinese imports agree to impose a common tariff on Chinese steel, push the excess production back into China, and abandon their tariffs on each other’s steel. The WTO permits safeguard actions under certain conditions, and participating countries would have to use their domestic procedures—in the United States’ case, Section 201—to justify their actions. (An even better alternative would have been for the Organization for Economic Cooperation and Development Steel Committee to negotiate production limits for each country, but it was clear China was not going to agree to that, so another route is necessary.)

In the absence of that kind of solution, we find ourselves in a modern version of George Orwell’s Animal Farm, where all workers are important, but some are more important than others.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. 

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