Meddling With Metal

President George W. Bush took some time off from looking for terrorists in caves to cave into steel production interests in the United States. He imposed tariffs on imported steel of up to 30%, phasing out over three years to give the U.S. steel industry time to modernize.

It should be noted that 30-plus years of various forms of protection have not yet led to modernization. Indeed it could be argued that by allowing inefficient plants to stay in business, tariffs actually retard the industry’s revitalization.

It is easy to lose sight of the insignificance of this decision. The tariff phase-out over three years does mitigate their damage, and less than a half of 1% of U.S. imports are in steel anyway. Substantial exemptions also exist for developing countries, so damage to their economies is minimized.

What is upsetting is the precedent taken and that the President felt it necessary to engage in this kind of base politics. To start with, the policy, though professed to save jobs, almost certainly will cost jobs. It is really very simple. Although the United States does manufacture steel, it also manufactures many products that use steel. So raising the cost of steel through the tariff serves to make all these other industries less competitive.

After all, foreign producers of everything from filing cabinets to washing machines to cars can still buy cheaper steel on the free market. So U.S. producers of anything using steel will find it harder to export and will face tougher competition from imports in the domestic market. The production of these products is generally more labor intensive than the production of steel itself, so the tariff is going to cost jobs.

Especially galling is that government is using its powers to protect a group of workers who already earn almost double what the average wage is in private industry. So, at best, the policy will result in lots of lower paid people losing their jobs so a few higher paid folks can hang onto theirs.

And besides, the domestic steel industry is not as distressed as its leaders would have us believe. Yes, 21 U.S. steel companies have filed for bankruptcy protection since the 2000 Presidential election, but even in the recession year of 2001, the U.S. produced 100 million tons of finished steel. This is more than in any year from 1980 to 1995.

Beyond the economics, of course, the whole issue makes the President and the country look bad. How can the United States be such a hypocrite as to urge others to open their borders to trade — while we protect steel manufacturers? And how can the United States rally the world to fight terrorism if the President of the United States is seen as just another crass politico?

But such is how it is in the United States — and I think it is worth mentioning because a food is probably the number one target for protectionists all around the world.

Partly this is because of sentimental reasons — praise to the yeoman farmer! Partly this is a concern for the security of not being dependent on others for food during a time of war. In large measure, such inclinations reflect the disproportionate weight many political systems — including the Japanese parliament and the U.S. Senate — give to rural interests.

Inevitably, in a democratic system, these broad interests and sentiments are buttressed by specific lobbying efforts. And these can be ignored at a politician’s peril.

This is the great dilemma of democratic government today. Policies that are, in aggregate, bad for the country are politically advisable because the aggregate doesn’t get motivated — so my filing cabinet costs 2 cents more because of steel tariffs. But the beneficiaries of these policies are motivated indeed. In politico-speak, it is the dilemma of concentrated benefits and diffused costs.

The answer may be to find ways to speed up the deliberations of the World Trade Organization. The Bush people know that this is bad policy, but they consider it necessary politics. It is possible to believe that the administration actually hopes the WTO will rule against the U.S. when some other country brings a challenge — then Bush could say, “We tried but the WTO won’t let us.”

It is a bit cowardly, but our systems can’t demand that all politicians will always take the brave route and put principle above politics. All over the world, politicians need to respond to their voters, but sometimes they need a mechanism that can take certain things — like protectionism — off limits.

Today the battle is over steel, but tomorrow it might be over oranges or snack foods. We must find ways to create institutional pressures that make it easier for politicians to do the right thing. Only then will we have the kind of trade environment that helps spread prosperity around the globe.