TWO BIG steel companies, the third and fourth largest in the country, want to merge. The two companies--Republic Steel and Jones and Laughlin --believe that their operations could fit together to make a much more efficient organization. Since the steel industry in this country is already highly concentrated, the traditional interpretation of antitrust law would probably forbid the merger. But that traditional interpretation is obsolete.

The market for steel is now inescapably worldwide, and the merger will not diminish the competition in it. But there's a corollary. If steel producers defend mergers by arguing that their market is inherently international, they are going to have to get out of the habit of demanding protection from imports. The two companies are quite right in saying that their merger will not affect the intensity of competition--as long as Nippon Steel is a genuine competitor. But import quotas, formal or otherwise, for Japanese steel fatally undercut the case for the merger.

The present system of quotas, understandings and so forth limiting imports of steel into this country is supposed to be temporary. Some of the steelmakers pleaded earlier that they needed time to adjust to the rising pressures from abroad. The consolidation of Republic with J&L is part of that process of adjustment. But it's crucial to drop that temporary protection before it becomes permanent.

There's been a lot of talk about industrial policy in recent months. The government's decision on this merger is industrial policy in the most serious sense. What, realistically, are the alternatives? The government could bail out companies one by one, Chrysler style, as they slide into deeper trouble. That's not a very appealing idea. Or it could set up a cartel, with protected market shares, to keep an essential industry in business. That's the European solution, and the results there don't invite imitation.

A better policy is to give the steelmakers a lot of latitude to get their prices down closer to world level as fast as they can. They have to do it anyway, if they want to hold their American customers. This country exports a lot of steel in the form of machinery and manufactured goods. American machinery producers can't afford to pay more for steel for the products they sell abroad than their foreign competitors do.

For this administration, the decision on the merger should not be a hard one. It falls in one of the areas to which the Reagan hands-off position is best suited. But above all, the administration owes the two companies a prompt decision. Their relations with their employees, their customers and the financial markets have been cast into vast uncertainty by the proposal. If a merger is to be carried out effectively, it needs to be accomplished without wasting a great deal of time.