The Bush administration constantly reminds us that the economic recovery is gathering strength. Well, now the White House has a chance to prove that it believes what it says. The World Trade Organization ruled Monday that steel tariffs imposed by Bush in March 2002 are illegal under global trade rules. If the president is genuinely confident about the recovery, he will lift the tariffs rather than provoke a senseless confrontation with some big U.S. trading partners, led by the European Union.
Good politics and good policy often diverge -- but not here. A strong economic recovery should shield the steel industry from large job losses even without tariffs, which now cover almost a third of steel imports (by value) and are as high as 24 percent. Of course, rescinding the tariffs would trigger loud protests from steelworkers, companies and their political allies. The president would be accused of reneging on his promise to provide protection until 2005. But if jobs survive, most protests would probably be forgotten by election time.
Now, consider what happens if Bush retains the tariffs and defies the WTO.
For starters, he incurs the wrath of many small industrial users of steel -- makers of auto parts, various steel components and machine tools. They've complained that tariffs have raised their costs and undermined their competitiveness against foreign rivals. Indeed, tariffs have probably cost more jobs among steel users than they've saved among producers. Gary Hufbauer and Ben Goodrich of the Institute for International Economics, a think tank, estimate that tariffs preserved 3,500 steel jobs; by contrast, they think that the tariffs might have cost steel users between 12,000 and 43,000 jobs.
Nor is that all. If Bush keeps the tariffs, the European Union will retaliate, as WTO rules permit. It would impose tariffs of 8 percent to 30 percent on $2.2 billion worth of U.S. exports, including steel, fruit, paper and pantyhose. Other countries, including Japan and China, might do likewise. The point: Keeping the tariffs would cost more jobs (and probably more Bush votes) than scrapping them.
The latest economic indicators -- highly upbeat -- ought to clinch the case against tariffs. In the third quarter, the economy (gross domestic product) rose at a startling 7.2 percent annual rate. Although no one thinks that pace will continue, the good news is that the GDP gain reflected more than strong consumer spending. Business investment rose at an 11 percent rate, the second straight quarterly increase. Exports were up at a 9 percent rate. And finally, there's good jobs news: In October payroll employment rose by 126,000; statistical revisions now show a gain of 160,000 for August and September together. Earlier in the year, monthly job losses had averaged 85,000 from February to July.
Now come a few observations on the steel industry's plight.
First, the widespread impression that steelmaking in America is vanishing is both true and untrue. It's true (as nightly news shows constantly remind us) that many Midwestern steel communities have suffered grievously from the shutdowns of vast mills that employed generations of workers from the same families. In 1974, industry employment exceeded 500,000; at the end of last year, it was 124,000. But it's untrue that the United States is leaving the steel business. In 1970 American mills shipped 91 million tons of steel, and imports supplied 14 percent of U.S. demand. Since 1996 U.S. mills have shipped an average of 103 million tons annually and imports have averaged 21 percent of demand. Bigger, more labor-intensive mills have gradually closed, to be replaced by smaller, more efficient mini-mills.
Second, Bush's tariffs have "worked" in that the industry has improved its competitiveness. The president urged the industry to "restructure" -- to consolidate, shut expensive plants and lower costs -- and this has occurred. Plants of bankrupt steel companies have been purchased at low prices by healthier firms, including the new International Steel Group (ISG).
For example, ISG bought the mills of bankrupt Bethlehem Steel. In 2002 these mills employed 12,100 people. ISG renegotiated the labor agreements. Job classifications dropped from 30 to five; by June 2003 the mills were run with roughly 30 percent fewer workers. Meanwhile the heavy pension costs of bankrupt firms -- Bethlehem and others -- have been mostly shifted to the federal Pension Benefit Guaranty Corp.
As steelmaking grows more capital-intensive -- depending more on machines than people -- America's steel prospects improve. Higher U.S. labor costs are partly offset by the transportation costs of foreign steel. The U.S. industry says it needs 18 more months of tariff protection to complete "restructuring." But if the United States flouts the WTO, it can't expect other countries to respond to American complaints that they're flouting WTO rules. A president who believes his own rhetoric about the recovery and healthy world trade won't pick a fight over steel.