Steel War

Domestic steel firms and the United Steelworkers of America (the steelworkers’ union) have called this a battle for the future of American steel.

It Is a battle that pits many competing domestic and foreign groups against one another: domestic versus foreign steel firms; U. S. Versus foreign governments; as well as steel- producing versus steel-consuming domestic firms. Recent Events In the U. S. Steel Market Exalt 1 and Exhibit 2 show domestic shipments and foreign Imports of steel In the U. S.

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Market, while Exhibit 3 shows U. S. Employment In the steel Industry.Exhibit 1 totes that steel imports spiked in mid-1998 as a result of worldwide overcapacity during the Asian economic crisis. Exhibits 2 and 3 indicate that steel employment has been falling steadily since the early 1 sass; however, domestic steel shipments have been slowly trending upward.

This dichotomy is explained by improving productivity in the Industry. Both domestic shipments and Imports fell In 2001 as a result of sluggish domestic demand during the 2001 recession; however, Imports as a share of total U. S. Apparent supply fell from 22. 3 percent in 2000 to 20. 2 percent in 2001.In mineral, the import share of new supply has remained fairly stable throughout the asses, and actually fell in 2001 relative to recent trend.

Thus, although steel production has been hurt by the fall in domestic demand, there has been no recent surge in Imports. U. S. Steel producers point to declines in employment In steel- producing Industries as the reason for the need for Import protection. Recent percent of American steel-producing capacity have filed 02004 by the Kellogg School of Management, Northwestern University. This case was prepared by Professors Anvil AY-Ninjas and Sandmen Baling and research assistant Chris Forman ’02.Cases are developed solely as the basis for class discussion.

Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected] Harvard.

Du. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means?electronic, mechanical, photocopying, recording, or otherwise?without the permission of the Kellogg School of Management.These behemoths use the rotational combination of blast furnaces, coke ovens, and oxygen furnaces to produce steel from iron ore, coal, and limestone. These firms are famous for large, bureaucratic organizations and highly unionized workforces. Exhibit 4 shows that the cost per ton of these companies remains much higher than their competitors’ costs. Moreover, the integrated producers are burdened with ruinous “legacy costs”?the future healthcare and pension benefits steel companies have promised their workforces.Their capacity has fallen to about 60 million tons of capacity from 145 million tons 20 years ago.

In contrast, the recent performance of the smaller, younger U. S. Mint-mills has been better. These mint-mills have grown rapidly since they were first introduced in the mid-asses, and in 1999 accounted for roughly 45 percent of U. S. Carbon-steel capacity. These plants are much more efficient than those of the integrated producers; production costs are a fraction of those of the integrated firms.

Their workforce is also much smaller than that of the integrated mills?they employ only about 30,000 workers, compared to the roughly 105,000 employed by the integrated producers. Moreover, because these firms produce new tell from used steel, they are relatively insulated from gyrations in the price of steel. Drops in the steel prices impact revenues, but lower steel costs as well. Section 201 Filing injured or threatened with serious injury by increased imports may petition the TIC for import relief.The TIC determines whether the product in question is being imported in sufficient quantities to be a “substantial cause” of serious injury to the domestic industry. If the commission agrees that the domestic industry is threatened by imports, it makes a recommendation to the president that would permit remedy of he injury and help aid industry adjustment to the import competition. Such recommendations may involve, for example, an increase in duties, imposition of a quota, imposition of a tariff-rate quota, or other trade adjustment assistance.

Section 201 does not require the finding of unfair trade practices against foreign firms. However, the commission does require a high standard to find in favor of domestic industry, because it requires that the injury be serious and also that imports be a “substantial cause” of the serious injury. 2 While it is rare for the JUST to initiate a Section 201 investigation, it is not unprecedented. The JUST made prior requests against apple Juice imports in 1985, stainless steel in 1982, and mushrooms in 1976. Section 201 investigations are not country-specific, and so affect all importers.The commission’s findings and remedy recommendations must be forwarded to the president within 180 days of receipt of the request from the JUST. 2 Robert Crandall, “Whistling Past Big Steel’s Graveyard,” opinion piece, Wall Street Journal, March 19, 1999.

The commission defines “substantial cause” to mean “important and not less than any other cause. ” KELLOGG SCHOOL OF MANAGEMENT Arguments Against Import Controls Perhaps the simplest argument against protecting the steel industry is that such policies undermine the global free trade system that the United States has tried to build.Europe is furious over the potential implications of a Section 201 finding. More than a third of its $4 billion in steel exports is at risk. Moreover, protection for U. S. Markets would undoubtedly cause Rupee’s market to be flooded with diverted steel. In addition to the Europeans, the Brazilian, Russians, Japanese, and many others have lined up to oppose the policy.

Many worry that the imposition of steel tariffs November 2001) round of global trade talks at risk. Domestic steel-consuming producers are also furious over the prospect of steel tariffs.Firms such as Emerson Electric, Caterpillar Inc. , and Illinois Tool Works Inc. Have strongly opposed a Section 201 remedy.

For firms such as Caterpillar, the concerns are twofold. Higher steel prices raise the cost of producing heavy equipment. Moreover, retaliatory tariff strikes from foreign governments may be directed at Caterpillar equipment. Steel importers and dealers would also be hurt by the imposition of tariffs or quotas. Domestic producers have sponsored a number of studies illustrating the potential costs of steel tariffs.One study that has received notable attention was sponsored by the Consuming Industries Trade Action Coalition (ACTA).

The ACTA study estimates that steel tariffs would lead to a loss of between 36,200 to 74,200 U. S. Jobs (depending on tariff size), or eight Jobs for every one steel Job protected. 3 Moreover, the ACTA study indicates steel tariffs would do little to save the domestic industry, calculating domestic steel prices would rise Just 0. 2 to 0. 4 percent while shipments rise 2.

9 to 5. 9 recent. The study estimates that proposed tariff remedies would decrease GAP by $0. Billion to $1.

4 billion per year. Other studies criticize steel industry complaints about foreign subsidies. A report by the American Institute for International Steel (ASS’S), a domestic trade group of international importers and exporters of steel, lists the subsidies enjoyed by domestic steel producers. One recent example of how American steel is subsidized comes from the Emergency Steel and Oil and Gas Guaranteed Loan Program Act of 1999, which establishes a program of loan guarantees for steel companies that is estimated to cost up to $1 billion.The Steel and Aluminum Energy Conservation and Technology Competitiveness Act of 1988 provided funding for research and development to increase the competitiveness of steel, at an estimated cost of $155.

4 million. Moreover, many U. S. States provide steel companies with generous incentives to operate in-state. For example, a 1994 Alabama incentive package to Trick Steel Co.

Was estimated to cost state taxpayers between $85 million and $112 million. 4 Many economists argue that the biggest danger to domestic integrated steel producers is not foreign steel, but rather U. S. Into-mill producers.As Exhibit 4 shows, U. S. Mint-mill producers are much more efficient than their integrated cousins. Brooking Institute economist Robert Crandall notes that inflation-adjusted steel prices have fallen 40 percent over the last 20 years.

He attributes much of this dramatic decline not to foreign steel, but rather to falling input prices and competition from mini-mills. 5 The dramatic declines in steel employment may also be the result 3 Joseph François and Laura Bagman, “Estimated Effects of Proposed Import Relief Remedies for Steel,” study prepared for the Consuming Industries Trade ActionCoalition by Trade Partnership Worldwide, LLC, 2001. 4 Robert Matthews, “U. S. Steel Industry Itself Gets Billions in Public Subsidies, Study Concludes,” Wall Street Journal, November 29, 1999. 5 Robert Crandall, “Whistling Past Big Steel’s Graveyard,” The Wall Street Journal, March 3 of mint-mill competition rather than as a result of import competition. For example, when steel quotas were in place from 1984 to 1992, imports as a percentage of new supply fell from 26. 2 percent in 1984 to 17.

2 percent in 1992, while employment in the steel industry over the same period fell by 78,300. Arguments in Favor of Import Controls One common argument for import controls is that foreign governments unfairly subsidize their steel producers, effectively lowering their costs of production. U. S. Steel producers argue that this puts American steel at a competitive disadvantage in the marketplace.

The American Iron and Steel Institute (ASSAI) argues that more than $100 billion in subsidies had been given to foreign steel makers between 1980 and 1992. The ASSAI maintains that the European Union (ELI) has approved or acknowledged more than $11 billion in governmental assistance to European producers.Pro-steel economists argue that more than 325,000 U. S.

Jobs are at risk if the steel industry is not protected. 7 Experts for the steel industry also dispute the credibility of studies that estimate the impact of higher steel prices on downstream industry producers. Noted MIT economist Jerry Houseman has argued that the ACTA study does not reliably estimate the effects of steel tariffs on the U.

S. Economy, arguing that a steel price increase of 0. 2 to 0.

4 percent of the sort assumed in the ACTA study would have little effect on the costs of steel-consuming industries.He argues that if, for example, steel’s share of input costs is 20 percent and steel prices rise by 0. Percent, then (assuming no change in input mix) costs for the steel-consuming firm would increase by 0. 06 percent. Professor Houseman notes, “This minor price increase would have almost no effect on demand, especially since demand price elasticity for most goods that use steel are not particularly high. ” In sum, Professor Houseman notes that a steel price increase of 0.

2 percent to 0. 4 percent “would have almost no effect on U.S. Jobs or economic output. “8 The ASSAI goes further, saying, “The ACTA and Crandall studies are totally lacking in credibility. They should not be taken seriously by anyone.

9 Ironically, many in the Bush administration argue that protecting American steel will benefit free trade. This is primarily for political reasons. One motive for supporting requires that Congress vote on a trade package without making amendments, allowing the administration to put a trade deal before Congress without it being picked apart line by line.Fast-track authority is considered essential for the administration to negotiate trade deals at the Doth round of international trade talks. The ASSAI argues that loss of the steel industry would have many other negative effects on the U.

S. Economy. It contends that failure of the U. S.

Steel industry would have a direct impact on America’s national security. It further argues that if the United States were to lose its domestic steel industry, downstream steel-using industries would be harmed, held hostage to the policies and practices of foreign producers who are “practiced in the art of cartel behavior. The ASSAI Brink Lindsey, Daniel Griswold, and Aaron Lukas, “The Steel ‘Crisis’ and the Costs of Protectionism,” Coat Institute Trade briefing paper, April 16, 1999. 7 Robert Blacker, “Jobs at Risk: The Necessity of Effective Relief for the American Steel Industry,” position paper, American University, Washington, D. C. 8 Jerry Houseman, “Critique of ACTA Study,” position paper, January 31, 2002.

9 “The Latest ACTA and Crandall Studies on the Costs and Benefits of Steel Trade Relief: Flawed Models, Biased Conclusions? Again! ” position paper, American Iron and Steel Institute, January 24, 2002. 4 goes on to say that loss of domestic steel would cause America’s technological leadership to suffer, damage the world environment, and hurt worldwide welfare. Potential Remedies There are several potential remedies the TIC could recommend to protect U.

S. Steel. Tariffs and tariff rate quotas (TRY) would protect the steel industry by imposing duties on imported products. Tariffs are simply taxes, reducing imports indirectly by increasing a product’s price. You have heard from reliable sources that if the TIC commissioners decide to take action, they are considering tariffs in the range of 20 to 40 percent.Trust are tariffs that use a nonlinear taxation scheme to induce imports to remain below a certain level. Under a TRY, imports below some preset level enter the country at a lower tariff level while imports above the target threshold enter at a Quotas reduce imports by setting hard limits on the quantity of imported steel that can enter the country. One proposal has been to limit monthly steel imports from all nations to 1997 levels.

These quotas would remain in effect for a period of three years. The imposition of quotas such as these would probably constitute a violation of the U. S. International trading commitments to the World Trade Organization (WTFO). Another possibility would be to negotiate voluntary export restraints, or Ever, with other countries.

Under this approach, U. S. Negotiators attempt to persuade foreign overspent to reduce exports to the United States. Of course, EVER are generally not voluntary and also constitute another violation of WTFO rules. As part of its investigation, the TIC has called for opinions on remedy options from domestic and foreign producers. Exhibit 5 provides a summary of some of the recommendations for flat steel products.

Discussion Questions What is your assessment of what the TIC should do? What factors should the TIC consider when making its decision? Do you believe that remedies are called for? If so, what sort of remedies would you impose: tariffs, quotas, or some other mechanism? To help you with your analysis, you are invited to work through the problems below. 1 . U. S.

Anti-dumping law allows domestic producers to petition against imports sold below “fair market value. ” Fair value is defined as the price in the home market or the cost of production plus some reasonable profit.The critical question is: what does this cost include? To help understand this point, consider the following simple costs for steel. The demand in Country I, when I run supply is: Is = O S’ = 60 for Pi < 20 for Pi = 20 for Pi > 20 = 100 – Pi and the short- That is, minimum PVC is 20 for all producers in each country, and capacity is fixed at 0. Assume that 40 is the minimum price necessary for firms to cover all fixed and variable costs.

A. What is the competitive equilibrium in each market, assuming no trade is possible? B. Now suppose that demand in Country 1 falls to ODL = 70- Pl .

Assuming no trade, what is the short and long run equilibrium in Country 1? C. What would the result be if demand falls as in (b), but trade was now permitted between the two countries? What is the new world market price, quantity sold, and imports and exports in each country? 2. Exhibit 6 and Exhibit 7 include data on quantity, revenue, demand, and supply elasticity for certain flat steel products. The TIC has recommended a tariff that would increase the average domestic price of plate steel by $5 per ton on plate steel, from $401. 36 to $406. 36 per ton.The data in Exhibit 7 show that 6,023,568 tons were shipped by domestic producers at the world price, while 6,974,335 tons were consumed.

Use the data in Exhibits 6 and 7 to calculate the change in consumer and producer surplus on plate steel as a result of this policy. For simplicity sake, assume that domestic and foreign steel are perfect substitutes, and that all purchases of steel represent final demand. You may further assume that the demand and supply curves are linear. For demand and supply elasticity, use the midpoint of the ranges provided in Exhibit 6. 3.MIT economist Jerry Houseman said, “This minor price increase [of 0. 2 percent to 0.

4 percent] would have almost no effect on demand, especially since demand price elasticity for most goods that use steel are not particularly high. ” This question will show why an inelastic demand curve implies that changes in steel prices have little impact on the quantity demanded in steel- consuming industries. Consider a supply curve Q = P and the demand curve Q = 100 6 a. What are the domestic price, supply, and demand assuming a closed market under which steel trade is not allowed? B.Now assume the world price is 30. What is the new domestic supply and demand at this price? What are total imports? What is the elasticity of demand at the world price? C. Suppose the U.

S. Government imposes a tariff of 33. 33 percent on foreign imports. What are the domestic price, supply, and demand at the new price? What are total imports under this policy? How much does demand change under this policy and what is the dead weight loss? D. Now suppose demand is equal to Q = 75 – P/6. Calculate domestic demand under he free trade and tariff policies.

What is the elasticity of demand at the world price?How does the change in demand from a free trade to tariff environment compare to that in part (c)? What is the deadweight loss as a result of this policy, and how does it compare to part (c)? Can you explain the reason for the difference in answers in parts (c) and (d)? 4. A common argument made by U. S. Steel companies is that U. S. Steel producers are as efficient as foreign firms; however, foreign subsidies are creating an “unfair playing field” in the steel market. This question illustrates the effects that subsidies an have on the steel market, and how they can drive efficient producers out of the market over the long run.

Again, consider two countries that face symmetrical demands and costs for steel. The demand in Country I, when I = 1,2, is Did = 1000 – pip. All firms in both countries use identical production technologies; firms in both markets have cost functions C(Q) = 400 + Q, C(O) = 400, with MAC = Q.

A. Find the long-run equilibrium in both markets under free trade. What are the long- run price, total quantity, and equilibrium number of firms in both markets? B.

Now suppose Country 2 decides to subsidize its steel industry.It initiates a policy of paying domestic steel producers 10 for each unit produced, effectively lowering the marginal cost of production by 10. Assuming no world trade, what is the equilibrium price and quantity in each market? Excluding the effects of subsidies, what is the highest marginal cost of production found among firms in Country 1 and Country 2? C.

If Country 2 follows the subsidy policy described in (b), what is the short-run equilibrium in the world market if free trade is permitted? Excluding the effects of subsidies, what is the highest marginal cost of production for firms in Country 2?