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Another Bush raises taxes

By W. James Antle III
web posted March 11, 2002

While President George W. Bush's unwise decision to impose "temporary" tariffs of 8 to 30 percent on steel will be described as "protection" for the steel industry, in fact it is a tax increase on all Americans for the benefit of one industry.

It is true that the steel industry (buoyed by helpful bureaucrats at the US International Trade Commission) had been clamoring for a 40 percent tariff at a cost of $283 for the average family of four, but the White House did not merely meet them half way - it gave them 75 percent of what they wanted. This is a bad precedent for an administration that purports to promote free trade throughout the world to set. It is also a policy that will prevent the steel industry from addressing the structural problems responsible for its woes and tempt it and other even less deserving industries to continue to lobby for further protectionist measures.

A combination of bad management practices and strong labor unions have burdened the industry with costs significantly out of line with productivity. Some $1 billion in steel profits goes to pay benefits to retired workers each year based on difficult to sustain health and pension plans. In fact, these benefit plans were so difficult to sustain that steelworkers have made approximately 29 percent of the claims to the federal Pension Benefit Guarantee Corporation since 1975. Additionally, average total compensation for steel workers is currently 56 percent higher than average compensation in the manufacturing sector.

Heritage Foundation policy analyst Aaron Schavey, who has mulled the question of steel tariffs over quite carefully, points out the distinction between "integrated" steel mills, which are dominated by the unions, and so-called "mini-mills." The mini-mills have increased their market share from 10 percent in the late 1970s to 50 percent today. The effect of trade has been much less. Imports have risen only 10 percent during the same period.

Raising tariffs also does not address one of the key factors driving down steel prices and imperiling US steel producers: Substantial overproduction. Production simply has outstripped demand. According to The Wall Street Journal, global steel production exceeded the demand for steel by about 40 million tons in 2000.

Nor has protectionism proven especially effective at saving steel jobs in the past. This is largely because trade is not the primary problem US steel producers face. The Institute for International Economics reports that 80 percent of steel imports already are subject to tariffs under American anti-dumping laws. Despite this, employment in the US steel industry has fallen from 450,000 to about 150,000 over the past two decades. Layoffs and firm closures continue even though imports are now declining. From August 1998 to November 2001, steel imports fell 36 percent to 2.6 million tons. A study by the Congressional Research Service found foreign steel producers' market share declining from 28 percent in 1998 to 21 percent in 2001.

Defenders of the president's decision are eager to cast this as part of the war on terrorism, justifying steel protection on national security grounds. Yet a study by the Commerce Department shows that domestic steel producers are capable of producing three times the amount of steel we would need for national security purposes. Military needs account for only 0.1 percent of domestic steel production capacity.

Others, such as US Trade Representative Bob Zoellick, view this as a temporary concession that will actually advance free trade in the long run. Their logic is that these tariffs will help foreign countries see the need to reach free-trade agreements with the United States while buying a few steel protectionist votes in Congress for Trade Promotion Authority legislation. Given the fierce international reaction to the steel tariffs, we should be less expecting of free-trade agreements than trade retaliation. The likelier domestic political result is that advocates of other protectionism on behalf of other industries will be emboldened.

Perhaps President Bush is approaching the Reagan model for trade policy. Ronald Reagan made a general commitment to free trade, which he manifest in various tariff-cutting agreements and free trade with Canada, coupled with selective protectionism. These protectionist deviations included protection for automobile manufacturers, semiconductor manufacturers, Harley Davidson and, lo, the steel industry. Yet Reagan's steel tariffs were among his worst policies as president. They ended up saving fewer jobs in the steel industry than they destroyed in steel-using industries.

This is what economists Joseph Francois and Laura Baughman predict will happen again in their recent study. They estimate that a low tariff will result in $2 billion in additional costs to consumers, possibly saving 4,375 jobs. However, higher steel prices would cost 36,164 jobs in other industries. This would result in a net job loss of 31,789 and end up costing the economy $439,485 for every steel job saved. If Bush had gone with the 40 percent tariff as House Minority Leader Dick Gephardt (D-MO) argues, 8,902 steel jobs would have been saved at a cost of 74,502 jobs in other industries. The economic cost would have been $451,509 for every steel industry job saved.

It should be noted that this study was commissioned by the Consuming Industries Trade Action Coalition, a steel consumers' group, and such steel producers' groups as the American Iron and Steel Institute have savaged its results. Bruce Bartlett of the National Center for Policy Analysis has dismissed their criticism as "little more than an ad homenim attack." Bartlett wrote in National Review On-Line: "The results of the Francois/Baughman study are well within the range of estimates one would expect from standard international trade models, such as those used by the U.S. International Trade Commission."

Syndicated columnist and Reason magazine contributor Jacob Sullum argues that the competing economic statistics aren't even the point: "Although the theft of your wallet has no measurable impact on GDP, that doesn't mean we should condone pocket picking, which is what steel producers are doing by seeking to improve their bottom lines at the expense of other companies and consumers."

Economics doesn't seem to have been the point for the Bush administration either. Ohio was a key state in electing Bush in 2000. Bush was the first non-incumbent Republican to carry West Virginia since 1928, largely on the steel tariffs issue. Al Gore carried Pennsylvania by 5 points but the state remains a key part of the Republican reelection strategy in 2004. The White House hopes these new tariffs will cultivate "Bush Democrats" among the steelworkers in each of these states.

This does not constitute either a broken political promise or economic disaster on the same level as his father's 1990 tax-rate increase, nor should it overshadow his own tax-rate cut. But George W. Bush, by approving what is actually a tax increase on homes, automobiles and appliances, has opened the lid of a Pandora's box of special interests seeking government intervention in the free market on their behalf.

Will he be able to contain them?

W. James Antle III is a senior writer for Enter Stage Right.

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