U.S./China Steel Policy
A look into the trade policies of the U.S. towards China
Mike Polefrone
Mario Halasa
Kyle Whittaker
11/29/2010
We looked at the trade policies between the U.S. and China steel industry with emphasis and due
diligence put on the Bush steel tariffs implemented during the years of 2002-2003. This paper will try to
provide insight on the effects that the tariffs had on both the United States economy and its citizens…
Table of Contents
I)
Introduction
II)
History of Trade Flows and Policy
III)
Current Trade Patterns and Partners (And Current Patterns by
Major Country)
IV)
Current Trade Policy
V)
Policy Evaluation
VI)
Recommendation
VII) Graphs
VIII) Works Cited
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Introduction:
For our trade policy brief we decided to analyze the steel industry of the United States
and how it has been impacted through the use of tariffs and quotas and various other trade
policies that led to the rise of foreign dependence on Chinese steel. We chose to look
specifically at the impact on the United States through the past 20 years or so while focusing on
the Bush steel tax reforms. By doing this we will be able to develop some further understanding
on how the Bush steel plan impacted U.S. imports of steel and how it drove the United States to
becoming an import driven steel economy.
Since WWII the United States has implemented various policies and can be considered
one of the “first movers” in setting up a system of world trade and world trading partners. They
did so by implementing tariffs and quotas to try to balance and give some protection to the
United States’ most precious industries. One of the top performers and profit drivers of U.S.
industry is the steel industry. By implementing antidumping and many tariff restrictions on
imports of foreign steel, it helped to protect the U.S. steel industry for a short period of time.
Eventually the tariffs and quotas would be rewritten to compliment new trends or technologies
which turned the steel industry into an unstable source of income for the U.S.
Recently China has the largest bilateral trade surplus with the United States. When
looking at the past years of trading numbers, China was only the eighth largest U.S. trading
partner and was the source of nearly 3.5% of U.S. imports in 1996. By 2003 China had a 9.4%
share in U.S. imports and was considered the third largest source of U.S. imports (cia.gov/china).
As for U.S. steel industry, it has been protected for decades; The Institute of International
Economics reports that from 1964 to 2001 U.S. steel consumption decreased by approximately
11%, while traditional steel production declined 54% (Liebman 2007). With respect to labor
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patterns, more than 12.8 million Americans are employed in industries that are downstream
consumers of steel, such as autos and appliances, yet only 170,000 workers are employed in the
U.S. steel industry, a ratio of 57 to 1. With these competing outcomes and imbalances, steel
firms are still the recipients of a high level of trade protection relative to other industries in the
U.S. (Liebman 2007).
Most recently in March of 2001-2002 President Bush announced measures to further
protect the domestic steel industry from import competition. Bush re-imposed a 40% tariff on
steel imports from foreign countries (Lee). This would lead to other nations cutting their steel
production while allowing the U.S. to maintain their efficient level of production. Being that
China today is the largest importer and 4th largest exporter of steel; the hypothetical tariffs and
policies towards Chinese imported steel have had drastic effects on the United States abilities to
produce at an efficient level coinciding with domestic consumer demands. Overall the intention
of the program was to revitalize the steel industry in the United States.
The effects of the first year of the program imposed 30% tariffs on imported steel from
the biggest competitors of the American steel mills. Some other steel products faced tariffs that
were in the range of 13-30% (Carbaugh 12th ed.). As a result of these protection clauses
President Bush tried to push it on the steel companies to reduce their labor costs and invest in
new technologies. The Bush steel tariffs did provide some relief to U.S. steel manufacturers but
they did anger numerous steel “using” companies, such as automobile manufacturers. Those
companies saw the effects of the tariffs by an increase in their costs and ultimately affected their
labor force.
Some tariffs are still in effect today other than the ones that were imposed by Bush in
2002-2003. Government trade regulators did vote however to revoke some of the restrictions on
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steel trade based off of the arguments made by the automobile companies that they would
become more profitable if there were a lower tariff on steel. With the elimination of some tariffs
it would make the automobile market for competitive by reducing the key raw material needed to
produce cars.
The steel tariffs have played an integral part in the formation and welfare of the economy
of the United States. It has affected not only price but production, imports, foreign policies, and
other aspects of the economy that have in some instances limited it to grow to its full potential.
The steel tariffs at one point drove the majority of steel production out of the United States and
turned the U.S. into a net importer of steel. These tariffs heavily impacted the economy and the
society of the United States in many ways and this paper will hopefully try to instill some further
knowledge of the steel industry with a general focus on the Bush steel tariffs.
History of Trade Flows and Policies:
United States trade policies have varied significantly through the different economic
periods of time. Whether it was the industrial period or simply impactful historical events, the
United States has never seemed to have a set trade policy with any nation. Since the United
States is a major developed nation, there is a heavy reliance on the importing of raw materials
and then turning those raw materials around and exporting them as finished goods. With the
primary view on U.S. trade being broadcasted in this manner, trade policies have always been a
major topic on the minds of the American consumer.
The United States is one of the significant countries in the world when it comes to
international trade. It has led the world in imports while continuously remaining one of the top
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three exporters for the past decade. Since the United States is a major epicenter of trade in the
world, it has the ability to leverage its trading activities and policies in ways that many other
countries cannot. One example is that the United States is considered the world’s leading
consumer; it also means that the country can be classified as the number one customer for
companies and countries around the world. A lot of businesses and countries compete for a
share of the United States market, and if they succeed those companies and or countries will
ultimately be successful in the long run. With the demand for a share in the U.S market and the
U.S. being a top export nation for nearly 60 trading countries, the United States is able to use
that leverage to impose economic sanctions across the world.
In the last decades, the steel industry has been plagued by various tariffs and quotas.
Either they were voluntary restraint agreements, antidumping regulations, or other import
restricting and relief measures such as the Reagan Trigger Price Mechanism. It seems the
problem will never be solved with simple reactive trade restrictions because those retaliatory
actions have been going on for decades and the United States is still considered the world’s net
importer of steel products. Since the tariffs and quotas have been enacted for long run periods of
time it has led to more investment into foreign steel mainly imported from China (see graph 1).
The United States government was said to reduce its interference in global steel trade
because import restrictions are not in the best interest of the economy or the people in the United
States. With that being said, it led to President Reagan not only putting import quotas on foreign
steel once during his term nut twice. Reagan contradicted his saying that “import restrictions are
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not in the best interest of the economy and the steel market should be in accordance with free
trade” and expanded the import quota on foreign steel to 18.5% in 1984 (ita.doc.gov).
After Reagan enacted the quota it led to President George H.W. Bush to extend the quota
in 1989 to last for two and a half more years, he called it the “Steel Trade Liberalization
Program” (Liebman 2007). President Bush’s extension was taken on much the same manner as
Reagan’s approach of that government intervention needs to be reduced in the global steel
trading market. Much to the public and steel Union’s demise however, the quotas were still
enacted and the U.S. government still maintains control of foreign steel imports.
Current Trading Patterns and Partners:
The global market for steel is dominated by a select few countries: China, The EU,
United States, Japan, and Russia, with other smaller market players being comprised mainly of
India, Germany, and South Korea. China comes in at number one, producing as of 2006, 420
million metric tons of raw steel, which accounted for 35 percent of the entire global market. 2006
was an important year for China as well in that it moved from being a net importer of steel to a
net exporter that year, accompanied by a 20.3% increase in its raw steel production. Currently,
China is approaching 50% of export volume in the world market. The United States is a net
importer of steel, and China recently became a net exporter, which has sounded alarms for the
domestic steel industry.
However, the United States does not necessarily get all of its steel from the world’s
largest producers; instead it opts to purchase large quantities from nearby trade partners, such as
Canada. This means that global share of steel exports do not imply share of U.S. imports. The
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following table from the census accounts shows total value in thousands of dollars of all steel
imports by country, over the years of 2008-2009.
Country
Total Import Value 2008
Total Import Value 2009
Canada
6,851,533
3,404,249
Mexico
3,201,439
1,341,677
EU
7,561,314
4,193,534
Japan
2,128,107
1,579,405
China
5,964,470
1,991,617
South Korea
2,206,453
1,103,528
Russia
942,422
348,381
India
1,735,143
820,858
One key trend that can be taken from this pattern is the marked decline of imports from the year
2008 to 2009. In some cases, imports are almost halved. This began in 2007 with the onset of the
recession, as imports and US domestic demand for steel plunged. In 2009, the real value of steel
imports decreased from the previous years, one of only six times in the past fifty years (Griswold
2010).
Current Patterns by Major Country:
China:
China is the subject of many trade sanctions and international disputes concerning the
steel industry lately, with everything from tariffs to anti-dumping measures being proposed by
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the US ITC. One such anti-dumping action, concerning steel oil well piping, is estimated to
reduce imports to the US by 2.8 billion dollars in an effort to protect stateside producers (Diana
2010). With the previously mentioned rise in Chinese supply to the world market, there is
concern that the US industry, which is currently failing to meet domestic demand, will be
supplanted by foreign competition. This tension has caused the mass lobbying for restrictive
trade measures to be enacted against China. Piping is the most crucially affected import, with
pipe exports falling by almost 50% from 2008 to 2009. Although Chinese exports are increasing,
so too is its demand, causing competition for international steel buyers and sellers, and
increasing price levels.
Canada:
Canada has historically been one of the largest, if not the main supplier of US steel
imports, and this trend continues in the present. Although the EU now supplies more steel total,
Canada far outstrips any single country in import levels. NAFTA is partially responsible for a
great deal of modern trade volume, as modern shipments of steel across US-Canadian borders
are done so duty free. Integration of the markets has also proved beneficial, as domestic firms
have partial ownership in Canadian firms, and vice versa, with many businesses having the same
suppliers of raw material. (Iron ore, etc.) However, the US ITC has found in recent years that
Canadian steel exports may be threatening domestic steel industry. No action has taken yet, but
this could potentially be a source of tension, as Canadian steel exports to the US accounted for
95% of total steel exports approximately during the last decade (("Canada-U.S. Steel Trade in an
Integrated Market").
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The EU:
The EU is the world’s second largest producer of steel, taking the aggregate output of its
member nations together, and in recent years realized a trade surplus in steel, as its imports fell
faster than exports. It maintains relatively low trade barriers with other nations, preferring to
apply quotas on non-WTO members rather than tariffs. However, it has been embattled with the
US in trade battles for most of this decade. President Bush imposed tariffs on EU steel imports in
2002, which were later ruled to be against WTO rules, leading to counter-tariff measures to be
threatened by the EU. The Bush tariffs were eventually dropped, but not before EU exports for a
year ("Industrial Goods: Steel"). Currently, the EU seems to be allying itself with the US against
China, as the EU has also applied tariffs against Chinese steel piping imports, and accused the
nation of dumping policies in appeals to the WTO. This seems to be strengthening the US
connection, and loss of European trade with China due to tariffs will likely aid the US (Time
Magazine).
Current Trade Policy:
The United States current trade policy is characterized most sharply by their involvement
in international trade agreements, dating back to the end of WWII, when the country was
instrumental in creation of the Bretton Woods institutions, such as GATT. This pattern of
involvement in regulating international trade policy continues today, as the US is a prominent
and founding member of the World Trade Organization, which was created out of the Uruguay
Round of GATT talks. Today, the US uses the WTO as a means of dispute settlement with other
nations, and generally applies tariffs per its rules. According to WTO data, the United States
maintains a tariff schedule as follows:
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Non-Agricultural Duty
rates
Duty
Free
0%5%
5%10%
10%15%
15%25%
25%50%
50%100%
% of total imports in 2008
per tariff rate
48.3
41.1
6.2
.8
3.0
.6
0
This reflects the degree of openness with which the US trades ("United States Trade Profile").
The US also currently has many trade disputes pending, especially with China, which as
previously mentioned has been massively increasing trade volume. In terms of overall trade
volume, China has increased its output by 13% in 2010 over the previous year, while the US has
experienced an increase of only 1%. This rate of increasing imbalance in the world economy is
responsible for a large deal of the tension and trade disputes concerning China ("Wall Street
Journal").
Another organization that is important to current US policy is NAFTA. Due to the
agreements set in place at NAFTA’s inception in 1994, the majority of trade between member
nations is duty free, or was set to be gradually reduced under a planned time horizon of 15 years
(2009 target date). This is partially responsible for the large amount of previously mentioned
steel trade between Canada and the United States, along with geographic proximity (Topulous,
Duke Law). NAFTA reached its peak for the steel market in 2004, when Mexican and US
producers increased supply, holding Canada constant. Member nations expressed concern when
China became a net steel exporter in 2006, anticipating legal battles due to unfair trade practices
and worries of trade displacement (North American Steel Trade Committee).
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Aside from its membership in RTA’s and trade organizations, the US still holds trade
restrictions in steel products against many foreign countries. The table below lists specific types
of steel products imported, and the range of tariff rates applied to the exporting nations, as given
by the US International Trade Commission.
Types of Imported Products
Duty Applied
Piping
25% to 50% AV
Slabs
Free sometimes 8.04/kg Spec.
Hot Rolled
$.04/kg + 20% AV
Cold Rolled
$.04/kg + 20% AV
Galvanized
$.04/kg + 20% AV
Bars and Rods
5.5% to 20% AV
Policy Evaluation 1:
Starting on December 19, 2001, the U.S International Trade Commission (ITC) provided a
report to the president, then George Bush, on the investigation under section 202 of the Trade
Act of 1974 (Investigations, determinations, and recommendations by Commission), concerning
the import of certain steel products. The ITC “reached affirmative determinations” that the
following steel based products are being imported into the United States “in such increased
quantities as to be a substantial cause of serious injury, or threat of serious injury, to the domestic
industries producing like or directly competitive articles. These products include: tin mill steel,
flat steel products, hot and cold rolled finished bars, carbon and alloy fittings and flanges, tubular
welded products, stainless steel bars, rods, wire, rebar, and slab steel (Bush 2002.) See Graph 2.
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We chose to use the large nation model to demonstrate the effects of the tariffs on the
United States (see above). As shown above you have the U.S importing steel, 1.27 million tons,
from China at a world price of $325/ton. Once Bush slapped on the tariff the price of steel went
up to $340/ton and imports decreased by about half to .613 million tons. This can be explained
because for a large nation, a tariff on an imported product may be partially shifted to the
domestic consumer because of higher product price and partially absorbed by the foreign
exporter because of a lower export price (Carbaugh 2009). The upward sloping supply line
reflects that the foreign supply price is not a fixed constant. The price can fluctuate depending on
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the quantity purchased by the importing county, in the case the United States. Because of the
tariffs imposed by the U.S, steel prices increased for American consumers. This led to a decrease
to the quantity demanded from the United States.
Finally on March 5th 2002, George Bush came through on his word and imposed 8% to
30 % tariffs on various types of imported steel in an intervention aimed to help the ailing U.S.
industries. Briefly after a statement by Bush, issued by the white house stated “An integral part
of our commitment to free trade is our commitment to enforcing trade laws to make sure that
America's industries and workers compete on a level playing field.” In the past few year’s more
than 30 American steel makers have declared bankruptcy. Bush states that he takes these actions
to “give out domestic steel industry an opportunity to adjust to surges in foreign imports (Money
2002).”
Although leveling the playing field for the steel companies was going to have a direct
effect on the US consumers and on American steel using industries such as automobiles and
earth moving equipment. Thought the tariffs would temporarily save around 6,000 jobs, the cost
to steel-using firms and U.S. consumers of saving these jobs was between $800,000 and $1.1
million per job (Money 2002). Furthermore the steel tariffs put into place by Bush would cost the
steel-using industries 13 jobs for every one steel-manufacturing job protected (Carbaugh 2009).
However the Bush tariffs did provide some liberation to U.S steelmakers, from an import
perspective, thus causing producers to merge and labor contracts were negotiated.
Because of frequent lobbying trips to Washington, chief executors of these firms noticed
that the tariffs drove up their costs and endangered more jobs in the manufacturing field then
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they saved in the steel industry. Because of this, threats of trade wars from Japan and Europe,
and political reasons, Bush decided to lift he steep steel tariffs only after 20 months of being
implemented (Carbaugh 2009). Bush stated that the time the tariffs were in place, it had given
the U.S. industry a chance to strengthen and modernize and were no longer needed as a result of
"changed economic circumstances” (Bush 2002).
Recommendation:
Based off of the data we collected and researched we recommend that the government
should not intervene in the steel industry. It seemed that through all of the due diligence that was
performed a main theme was that the steel industry should be managed in a free floating market.
This would increase the competition of the steel industry and the incumbents that deal with steel
products. With steel becoming more competitive in the world markets it would lead to cheaper
prices and would most likely push the United States out of the steel production market entirely.
Another theme that was found to be relevant is that government would inform the citizens of
tariffs being removed or quotas being dissolved but in the end it would never happen. With
Reagan and George H.W. Bush making statements that “government should not intervene in the
steel industry” and “we must do all we can to avoid protectionism” (Bovard 2002), the future
administration of the United States needs to stick to their sayings.
With the steel industry being associated with a free floating market we think it would
greatly benefit all in the steel industry. The biggest effect would be the price of steel would most
likely drop and although the labor force will coincide with that drop, the labor could be made up
in other industries. If steel were to be cheaper, it would lead to a rise in steel “using” industries
such as autos and heavy machinery, and the lost steel jobs could be expanded and replaced in the
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more efficient steel “using” industries. Once again the steel industry should be associated in a
free market economy and we think that the effects it will have on the world’s production of steel
will be very beneficial.
Graphs:
Graph 1:
-U.S. steel imports from China (1990-2005) (ita.doc.gov)
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Graph 2:
35
Affected Steel Products by Tariffs
Percent Increased by Tariff
30
25
20
15
10
5
0
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Works Cited
Bovard, James. "The Future of Freedom Foundation. "Protectionist Welfare for Steel (2002): n.
pag. Web. 28 Nov 2010. <http://www.fff.org/freedom/fd0209d.asp>.
Carbaugh, Robert. International Economics 12th Edition. South-Western 2009.
Cenrdrowicz, Leo. "Steel Wars: Europe and the U.S. Accuse China of Dumping." Time
Magazine Saturday, Apr. 25, 2009: n. pag. Web. 1 Dec 2010.
<http://www.time.com/time/world/article/0,8599,1893784,00.html>.
Diana, Initials. (2010, January 7). The effects of trade sanctions on china's steel mills. Retrieved
from <http://www.chinasourcingblog.org/2010/01/the-effects-of-trade-sanctions.html>.
European Union. Industrial Goods: Steel. , 18 December 2009. Web. 1 Dec 2010.
<http://ec.europa.eu/trade/creating-opportunities/economic-sectors/industrialgoods/steel/>.
Government of Canada. Canada-U.S. Steel Trade in an Integrated Market. , November 2001.
Web. 1 Dec 2010. <http://www.canadianembassy.org/trade/steel-en.asp>.
George Bush, Initials. International Trade Commission , (2002). To facilitate positive adjustment
to competition from im- (10553). Federal Register : Retrieved from:
<http://dataweb.usitc.gov/scripts/STEEL_MONTHLY/FR_7529_March_2002.pdf.>
Griswold, Initials. (2010, September 7). Are rising imports a boom or bane to the economy.
Retrieved from <http://www.aiis.org/downloads/Newsletters/2010/AIIS_>.
Lee, Hiro. "Tariff Rate Quotas on U.S. Steel Imports: The Implications on Global Trade and
Relative Competitiveness of Industries. "International Centre for the Study of East Asian
Development and Graduate School of Social System Studies n. pag. Web. 28 Nov 2010.
<https://www.gtap.agecon.purdue.edu/resources/download /1529.pdf>.
Liebman, Benjamin. "Steel safeguards and the welfare of U.S. steel firms and downstream
consumers of steel: a shareholder wealth perspective." Canadian Journal of
Economics/Revue canadienne d'économique 40.3 (2007):812-836. Web. 28 Nov 2010.
<Canadian Journal of Economics/Revue canadienne d'économique>.
Money. (2002, march 5). Retrieved from:
<http://www.usatoday.com/money/general/2002/03/05/bush-steel.htm>.
North American Steel Trade Committee, . "The “NAFTA Steel Industry Pulse”." NAFTA Pulse
#3 (May 20, 2995): n. pag. Web. 1 Dec 2010. <www.steelnet.org/new/20050500.a.pdf>.
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"The U.S. Steel Import Crisis." International Trade Association, n.d. Web. 28 Nov 2010.
<http://www.ita.doc.gov/media/ch2.pdf>.
Topulos, Katherine. "NAFTA." Duke Law November 2009. n. pag. Goodson Law Library. Web.
1 Dec 2010. <http://www.law.duke.edu/lib/researchguides/nafta>.
"WTO: World Trade Growth Slowed Sharply In 3Q." Wall Street Journal December 1, 2010: n.
pag. Web. 1 Dec 2010. <http://online.wsj.com/article/BT-CO-20101201-710039.html>.
"World Trade Organization." United States Trade Profile. N.p., 2010. Web. 1 Dec 2010.
<http://stat.wto.org/TariffProfile/WSDBTariffPFView.aspx?Language=E&Country=US>
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