US steel tariffs: A case study in protectionism, economic losses on net, and ‘legal plunder’

From Mark Perry.

"Background: In 2014, global steel production reached an all-time high of 1.66 billion tons (before falling slightly last year to 1.63 billion tons) and that record supply contributed to a 35% plunge in world steel prices to under $400 per ton in 2015. US steel-using manufacturers took advantage of the low prices for foreign steel, and a surge in global purchases pushed U.S. steel imports to near-record levels in 2014 (see chart above-I put it below-CM).



Calls for Protectionism: What was the response of US steel producers to record world steel supply, falling steel prices and near-record US steel imports? As might be expected, those market conditions sparked the highest number of trade complaints filed by American steelmakers in more than a decade (38 in 2013) and ignited calls for new tariffs on imported steel, as the Wall Street Journal reported in May 2014.

The domestic steel producers were successful in their lobbying rent-seeking efforts and earlier this year were able to persuade their government enablers to grant them protection against more efficient, lower-cost foreign steel producers. According to this March 1, 2016 Wall Street Journal article, the “Department of Commerce imposed duties on imports of cold-rolled steel, used to make auto parts, appliances and shipping containers, from seven countries including China, whose steelmakers were slapped with a massive 266% tariff.” Well, actually, as I pointed out here on CD, it was American steel-using manufacturers, not Chinese steelmakers, who were slapped with the massive tariff. And even if they avoid buying Chinese steel, US manufacturers will still face much higher steel prices as American steelmakers, protected from foreign competition and lower-priced foreign steel, gain US market share with their higher-priced steel.

Not too surprisingly, the Wall Street Journal reported yesterday in a front-page article titled “U.S. Steel Tariffs Create a Double-Edged Sword” that “the duties on steel products from China, Brazil, India, Japan and other countries have contributed to the U.S. benchmark hot-rolled coil index rising more than 60% this year to $615 per ton [from less than $385].”

What can we expect from steel tariffs and higher steel prices? The WSJ article’s sub-title summarizes the situation very well: “American producers [will ] capitalize on tighter supplies and higher prices, but costs [will] rise for manufacturers.”

In greater detail, let’s summarize the outcomes from protectionist trade policy in the form of steel tariffs: 1) Domestic steelmakers will win with higher steel prices, higher profits and share prices (U.S. Steel’s stock has nearly doubled since January 1), and greater market share, but 2) Domestic steel-using manufacturers will lose because of higher input prices, lower profits, and possibly reduced sales and market share) and 3) Millions of American consumers and businesses will lose when they now pay higher prices for everything that contains steel, including cars, appliances, tractors, tools, construction materials, wind turbines, forklifts, pipelines, and airplanes.

Yesterday’s WSJ article highlights some of the negative effects of the steel tariffs and the 60% increase in steel prices:

Steel tariffs, which come during an election season rife with promises to protect American workers, have given U.S. steel mills more pricing power and have curtailed imports of some steel products that are made more cheaply abroad. That is helping American producers. But it is creating problems for some steel buyers.
Brookville Equipment Corp., which makes mining equipment, requires 10 tons of steel to make one mining locomotive, says Marion Van Fasson, president of the Brookville, Pa.-based company. The price increases reduced profit margin on one of those machines by a few thousand dollars. “… I’d love to have lower-priced steel,” said Mr. Van Fasson.
“There’s grumbling that the U.S. mills are taking advantage of a tight market, and the price hikes are too much, too fast,” says Lisa Goldenberg, president of Delaware Steel Co., a steel trading and processing company.
Some manufacturers are pushing back. In a letter to the Department of Commerce requesting an exemption, Steelcase Inc. Chief Executive James Keane said a tariff on a special kind of Japanese steel could cost one of his subsidiaries $4 million to $5 million a year.
The subsidiary, Polyvision, makes whiteboards for schools at a plant in Oklahoma, where it employs about 50 people. “If nothing changes, we would have to close our Oklahoma plant,” he wrote. “Schools can’t afford to pay more for these whiteboards, so if we raise prices to our customers they will use lower quality substitutes that are likely not made in the U.S.”
Car companies have been lobbying against steel tariffs. In a May 17 brief filed to the International Trade Commission, lawyers for Ford Motor Co. expressed concern about tariffs. “Innovation and product quality are best served by a cutting-edge, competitive U.S. steel industry; not one walled off from competition,” they wrote. “Availability of fairly-traded imports is important even for industrial consumers such as Ford, which has a long-demonstrated history of de facto preference for U.S.-produced” steel.

Bottom Line: The title of yesterday’s WSJ article correctly characterizes the recently-imposed US steel tariffs as a “double-edged sword.” In fact, all protectionist trade policies are double-edged swords that create both winners (domestic producers who are made better off by being protected from lower-cost, foreign competition) and losers (domestic producers and consumers who are made worse off from reduced competition and by being forced to pay artificially high prices).

Q: How do the gains to the winners from trade protection compare to the losses to the losers? If the gains from protectionism were greater than the losses, then we’d obviously be better off because of the steel tariffs. Unfortunately, it’s always exactly the opposite – the gains to the domestic producers (steelmakers in this case) are always less than the losses to the domestic consumers (domestic steel-using producers and domestic consumers buying steel-containing products), making us worse off on net as a country.

How do we know? To understand why protectionism makes us worse off on net you can review my 2011 CD post “ECON 101: Protectionism for Dummies” where I explain basic international trade theory and the economic consequences of protectionism. Simply put, going from: a) free trade and a world commodity price (no steel tariffs in the case above) to b) steel tariffs and domestic steel prices above the world price results in unavoidable “societal losses” or “dead-weight losses” from the reduction in trade following the imposition of artificially higher prices. In economic terms, there is a loss in consumer surplus as a direct result of the tariffs and higher domestic prices that is not offset by a gain in producer surplus, resulting in a “dead-weight loss” or net loss in economic well-being.

As I concluded in that 2011 CD post:

The dead-weight losses from protectionism mean that the economy is worse off on net, or that there has been a reduction in total economic welfare, the total number of jobs, wealth, prosperity, and/or national income. You could argue about the size of the dead-weight losses, but you can’t argue that they don’t exist. Protectionism has to make a country worse off, on net, and that proposition is supported by 200 years of economic theory and hundreds of empirical studies.

Therefore, we would have to conclude the recently imposed steel tariffs will make the United States poorer, not richer, as a country. American steelmakers will be enriched through their successful pursuit of “legal plunder,” but the rest of Americans will be impoverished to an even greater degree, making us worse off on net.

I’ll end this post by invoking French economist Frederic Bastiat’s test for “legal plunder” and see if it applies to steel tariffs:

How is legal plunder identified? See if the law [steel tariffs] takes from some persons what belongs to them [American steel-using industries and the Americans who buy their products], and gives it to other persons to whom it does not belong [domestic steel producers]. See if the law benefits one group of citizens [owners of American steelmakers] at the expense of others by doing what citizens themselves cannot do without committing a crime [picking the pockets of American manufacturers and consumers]."