Government Intervention in the Steel Industry 2002 Term Paper

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Government Intervention in the Steel Industry

The Bush administration announced the imposition of sweeping tariffs of up to 30% on steel imports to the United States for a period of 3 years in March 2002 purportedly to save the ailing steel industry from collapsing. Predictably, the action has invited particularly harsh criticism from the U.S. trade partners that have been directly affected by the tax, i.e., the European Union, Japan, and China. Domestically too, the proponents of a free market economy have been no less critical of the measure, although the U.S. steel industry, in general, has welcomed the move.

This research report will focus on various aspects of the U.S. government's imposition of steel tariffs. It will discuss the benefits and costs of tariffs in general, and include a history of government's support of the U.S. steel industry, details of the steel tariff 2002, why it was imposed, and its repercussions, both negative and positive. The paper will also describe the reaction of different countries including the European Union and the Asian countries to the imposition of the tariff, how they would be affected by the tariff, and what counter measures they have taken or can take in retaliation. The long and short-term economic and political impacts of the measure, both at the internationally and domestic levels, will also be explored. This includes the ramifications of such protective tariffs on international trade and on the campaign for globalization and free market economy led by the United States. The views of the World Trade Organization (WTO) on the U.S. move are also discussed.

What are Tariffs?

Tariff, in general, is a tax levied by a government on imports and exports. It is also known as custom duty and in many countries it is a major source of revenue for governments. At times, tariffs are also used as a political and economic policy for the protection of domestic economies and industries against foreign competition by making imported goods costlier than their domestic counterparts.

Reducing Trade Barriers

In the United States, tariffs (import duties) constituted the biggest source of federal revenue until 1913, but account for only a small proportion now. Trade barriers between countries have been reduced significantly after the World War II resulting in significant expansion in world trade. The General Agreement on Tariffs and Trade (GATT) and its successor organization, the World Trade Organization (WTO) as well as custom unions such as the European Union (EU) have been instrumental in reducing tariffs.

Benefits and Costs of Tariffs

Advantages of Low tariffs

The benefits of free trade (and conversely, the disadvantages of tariffs and trade barriers) were first demonstrated by Adam Smith in his monumental work The Wealth of Nations (1776). Smith showed how specialization works to the benefit of both the domestic as well as international trade. The theory is that if individuals (as well as countries) engage in trades and activities in which they are good at and exchange the goods and services thus produced, everyone will be better off.

This concept of increasing wealth by producing goods in which a country has a comparative advantage was later developed by nineteenth century economist, David Ricardo and the famous economist and philosophers John Stuart Mill. These theories have since been practiced by numerous societies and countries to their benefit. The United States, for example, was created to benefit from the mutual strengths of each state. It soon became the richest country in the world by free unrestricted trade between the states of the country. The same benefits of free trade apply when it is practiced among countries.

Decrease in Consumer Prices

Tariff is essentially a consumption tax. When imposed, it adds to the price a consumer pays for a product. Absence of such a tax is of direct benefit to the consumers as they get a commodity or service for the cheapest price produced in another country. This also compels the local industry to improve in order to compete. A pertinent example is the U.S. automobile industry that was forced to drastically improve quality and become more efficient when faced by intense competition from Japanese auto makers in the seventies. In turn the Japanese import their food requirements from cheaper sources like the U.S. In return for their automobiles and electronic goods. The result -- both economies benefit.

Economic Growth

Absence of tariffs (or low tariffs) give a wide choice of inputs to businesses which results in improved efficiency, greater innovation, and increased transfer of technology leading to higher growth. Recent real life examples of the dramatic benefits of free trade and reduced tariffs abound. Numerous studies have indicated a direct co-relation between free trade and the growth rates of countries. Economies of Asian 'tiger' countries such as Korea, Singapore, Taiwan, and Thailand that followed policies of low tariffs and few trade barriers in the 1990s experienced very high growth rates. Other economies such as India, and Cuba that put up high tariff regimes and protective barriers during the same period, stagnated. One particular statistical study of 70 countries indicates that a 10% increase in tariffs on capital goods would cause the gross domestic product (GDP) to grow by 0.2% less each year.

Other such studies have found a significant co-relation between increase in imports and exports of a country to an increase in its per capita income, which helps reduce poverty. This has been dramatically demonstrated in case of China whose imports and exports leapt up from $21 billion to $441 billion from the time it adopted free trade policies by reducing tariffs in 1978 to 1998. Its per capita income increased by 8% per year during the same period.

Environment

One of the main criticisms of increased trade stimulated by lower tariffs is that it degrades the environment. This could be true to an extent in the initial stages of development of a poor economy. However, experience has consistently shown that a decrease in poverty increases awareness about the environment, and the country or society begins to demand improvement in the quality of their environment. Since these societies (and countries) are now richer than before, they can now afford to improve their environment too. Poverty, more than increased trade, affects environment negatively.

Benefits of Increased Tariffs

Since there are always two sides of a story, there are many advocates of high tariffs and critics of decreased trade barriers. Some of these arguments about the benefits of high tariffs are discussed below:

Infant industries

One of the oldest arguments in favor of high tariffs for protection of domestic industries, is the infant industry argument. The theory contends that when foreign competition is reduced or eliminated by high tariff barriers, the local industry has a chance to develop. After the industry has developed sufficiently, the tariff barriers could be removed. In practice, however, it has been seen that such protected industries never develop sufficiently to be able to stand on their own.

Protecting Employment

It is argued that high tariff protection is necessary to protect employment, especially in periods of recession. This could have a beneficial effect but invites retaliatory measures from other countries. It has also been seen that low tariffs and free trade results in reduced jobs in certain specific areas of the economy, but this is usually compensated by an increased employment in other areas.

National Defense

Another argument in favor of tariff protection is that in times of war and emergencies, dependence on foreign supplies could be disrupted; hence such industries that may be defense oriented should be protected through high tariffs. The argument against this policy is that it is difficult to identify such defense-oriented industries.

Balance of Trade

The protectionist economists argue that free trade results in higher imports and a relatively slower increase in exports giving rise to deficit financing. They cite the trillion-dollar debt incurred by the U.S. during the last few decades of free trade policies and reduced tariffs.

The U.S. Steel Tariffs

When President Bush announced tariffs of 30% on most imports of steel into U.S. In March 2002, it was not the first time that the United States' government had interfered in the steel industry. Throughout the U.S. history, various administrations have granted benefits to the country's steel and iron industry through high tariffs and government-sponsored cartels to keep the steel prices above the fair competitive levels.

History of U.S. Steel Tariffs

The first U.S. steel tariff was imposed as far back as 1789 when a 15% duty was imposed on imported nails, 3 times the duty on most other imported goods. Other Tariffs that followed in 1828, 1832, and 1861 -- all had provisions for protecting iron and steel products. The influence of the U.S. Steel executives in the government grew after the American Civil War and they used that influence to keep the tariffs high and benefited through government sponsored cartels.

The Great Depression of the 1930s saw the next big push in tariff increase for the steel industry that rose up to 60% duties on…[continue]

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