In a decision largely driven by his political advisers, President Bush set aside his free-trade principles last year and imposed heavy tariffs on imported steel to help out struggling mills in Pennsylvania and West Virginia, two states crucial for his reelection.
Eighteen months later, key administration officials have concluded that Bush's order has turned into a debacle. Some economists say the tariffs may have cost more jobs than they saved, by driving up costs for automakers and other steel users. Politically, the strategy failed to produce union endorsements and appears to have hurt Bush with workers in Michigan and Tennessee -- also states at the heart of his 2004 strategy.
"They tried to play politics, and it looked like it was working for a while," said Bruce Bartlett, a conservative economist with ties to the administration. "But now it's fallen apart."
The issue is being brought to a boil by the scheduled release today of voluminous progress reports by the U.S. International Trade Commission. The ITC's mid-session assessment of the three-year tariff program's impact will examine not only the tariffs' effects on the steel industry but also on the hard-pressed manufacturers that shape steel into products.
White House officials said Bush will not make a decision until he has digested the ITC reports. But his top economic advisers have united to recommend that the tariffs be lifted or substantially rolled back this fall, and several administration officials said it is likely he will go along. The retreat would roil the political and economic landscape of the Rust Belt, where both parties expect the presidential election to be won and lost.
It also could produce a tidal wave of negative publicity in West Virginia, a traditionally Democratic state that Bush won by 6 percentage points, and Pennsylvania, which Bush lost by 5 percentage points and had targeted as one of his most promising possible pickups for 2004.
"The only reason they won't do it is if they're unwilling to admit they made a mistake," said a Republican strategist who works closely with the White House.
Administration officials said the office of Bush's top political adviser, Karl Rove, was a vocal and energetic advocate of tariffs during the debate last winter. Rove became so identified with the duties that a Wall Street Journal editorial calling for their repeal was headlined, "Steel Thyself, Karl Rove."
Republican lawmakers from steel states said Bush is considering compromises that would increase the number of exclusions from the tariffs, easing prices for steel buyers.
Administration officials are careful to say they see both sides of the argument. "A healthy steel industry is important to this country," said Grant Aldonas, undersecretary of commerce for international trade, in an interview. "But the small- and medium-sized guys who bend metal for a living have a real complaint about the steel tariffs. There's no doubt about that. We can't hide from it."
Even as they express their sympathies, however, they make no apologies for the tariffs -- or trade "safeguards," as the administration prefers to call them. "It's important to recognize these safeguards have had an adverse impact on [steel] consumers -- that's why safeguards are used sparingly," a senior U.S. trade official said. "But the president thought that on balance the benefits would outweigh the costs, and the story of the last 18 months has borne that out."
That conclusion is subject to fierce debate. A study backed by steel-using companies concluded that by the end of last year, higher steel prices had cost the country about 200,000 manufacturing jobs, many of which went to China. Small machine-tool and metal stamping shops say they have been decimated by steel costs that rose in some cases by as much as 30 percent.
Steel producers have their own job numbers. Investments that flooded into the protected steel industry over the past 18 months brought idled steel mills back on line and kept teetering mills from shutting down, said Peter Morici, a University of Maryland business professor hired by the steel producers. That resurrected 16,000 steel jobs, and more than 30,000 jobs when steel suppliers are included.
Gary Hufbauer, a critic of the tariffs at the Institute for International Economics, said that both sides are exaggerating their numbers. The steel industry has added some jobs in the past 18 months, but not because of the steel tariffs. Steel consumers have shed jobs because of the tariffs, but he said the number was probably 15,000 to 20,000.
But in this case, the facts may be less important than the perception in key states where the tariffs have been debilitating. The tariffs failed to give Bush the allegiance of the United Steelworkers of America, the industry's largest union and one the White House had hoped to win over. In August, the union endorsed Rep. Richard A. Gephardt (Mo.) for president and issued a statement saying any of the Democratic candidates would offer better than "the reactionary policies of the current administration."
Perhaps worse for Bush, the tariffs alienated thousands of small businessmen who run steel-consuming companies. "He didn't win the steelworkers over, and he sure as hell didn't win the users over, and there are a hell of lot more of us," said Jim Zawacki, chief executive of G.R. Spring & Stamping, Inc., a small manufacturer in Grand Rapids, Mich. "A lot of people feel burned," said Mike Lynch, vice president of government affairs at Illinois Tool Works, a large machine tool company outside Chicago.
Political divisions over the tariffs remain fierce, even within the GOP. Sen. Arlen Specter (Pa.), who talked to Bush about the issue this week, contends the tariffs "are saving thousand of jobs in the steel industry, and you had a steel industry headed for more bankruptcies."
Sen. Lamar Alexander (Tenn.), however, insists the tariffs have "shifted more steel-consuming jobs overseas than exist in the steel-producing industry in the United States," causing thousands of layoffs and closing the doors of hundreds of small businesses that supply automakers in Tennessee, a state that Bush won by just 4 percentage points and is counting on for his reelection.
But among Bush's economic team, opposition to the tariffs has hardened substantially. Administration officials said Commerce Secretary Donald L. Evans, one of Bush's closest friends, thinks the tariffs should be lifted as a way of showing that the administration has heard the pain of manufacturers, who account for 2.5 million of the more than 2.7 million jobs lost during Bush's presidency. Treasury Secretary John W. Snow, chief economic adviser Stephen Friedman and N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, are said to agree.
That marks a significant change from 18 months ago, when R. Glenn Hubbard, then chairman of Bush's Council of Economic Advisers, drafted detailed analyses against the tariffs, including state-by-state job losses that he forecast for manufacturing.
But the economic team was fractured. Evans was torn between the steel industries and the steel users. He ultimately decided against the tariffs, but with caveats that the White House political team took as a sign of weakness, former administration economic officials say. Likewise, then-Treasury Secretary Paul H. O'Neill expressed philosophical opposition to tariffs, but he was more interested in opening talks with allies on limiting steel production capacity abroad.
At a crucial meeting of the economic team, tariff opponents said they were abandoned. O'Neill sent his undersecretary for international affairs, John Taylor. Then-Budget Director Mitchell E. Daniels Jr. told Hubbard, who also has since left the administration, that he would back him, but left the meeting before Hubbard's presentation. And Lawrence Lindsey, the famously opinionated chairman of the White House National Economic Council, decided his role was to facilitate the discussion, not express an opinion.
Perhaps most importantly, former Bush economic advisers said, Robert B. Zoellick, the U.S. trade representative, supported the tariffs, figuring that backing them would win congressional votes to give Bush "fast track" trade negotiation powers. Indeed, Congress did hand the president that win. Zoellick also calculated that the lucrative subsidies backed by Bush that year in the massive farm bill would help the cause of free trade, by giving the United States a chip to bargain with at the World Trade Organization's upcoming round of talks to eliminate farm subsidies.
But, trade experts say, Zoellick's calculations have had mixed results. "Fast track" trade powers have allowed Bush to conclude free trade agreements with Chile and Singapore, but those have yet to show results in terms of jobs. And last week, WTO trade talks in Mexico fell apart after poor countries concluded the United States and other Western nations were not serious about cutting farm subsidies.
The strategizing was "too clever by half," Bartlett, the economist, said. "It presupposed that nobody was watching what we were doing, and it presupposed that our credibility was of no importance."