AIIS Letter to the Editor: Steel Protectionism Costly

SEATTLE (Scrap Monster): There is no single word for the economic fallacy of assuming that those who are adversely affected by a measure will respond as hoped, rather than as should be expected. But one example of this misguided, nearly magical, thinking is protectionism.

In the Jan. 17 New York Times (“[Trump’s Chance to Save American Steel]”), Alliance for American Manufacturing President Scott Paul recommends that President Donald Trump implement tariffs or quotas to shield domestically manufactured steel from imports because of the supposed threat that such imports pose to national security. It is tempting to say that this is a solution in search of a problem, but it is actually a “solution” that would create the very problem it is supposed to address.

Mr. Paul, in discussing the Department of Commerce’s recently completed Section 232 investigation of steel imports, writes that, “Steel undergirds our military power.” In this, he is correct. Planes, ships, tanks, weapons systems and much more are, of course, constructed of steel. And it might be a cause for concern if the bulk of that steel could not be supplied domestically and the United States had to rely on suppliers in potentially hostile countries. Neither of these conditions is the case, though.

Data from the American Iron and Steel Institute (AISI) shows that national defense and homeland security accounts for only about 3 percent of the total U.S. consumption of domestically produced steel, so shifting some production to defense in a crisis would not be unfeasible. Actually, though, such a shift would almost certainly not be necessary, since the vast majority of steel imports come from friendly countries that are unlikely to cut off supplies at the most inopportune time. Just 8 percent of imports come from Russia, while China is the source of barely 2 percent.

But, one may counter, even imports from allies can threaten to put domestic mills out of business, which would make the United States reliant on foreign suppliers. This, however, is an unrealistic worst-case scenario. Domestic steel companies are doing just fine, with 2017 year-to-date shipments through November up 5.3 percent over 2016, according to AISI.

Tariffs and quotas, then, are being sought to secure a steel supply that is neither fragile nor threatened and to protect an industry that is not in distress. Even worse, though, these limits on trade could, themselves, imperil the nation’s security.

Americans consume imported steel because of the significant savings that result from buying on the world market. Reducing or eliminating competition would increase costs for everyone, from the businesses that drive economic growth to the federal agencies that send troops downrange. Mr. Paul sneers that imported steel is purchased “in a quest for savings,” as if economically rational thrift – and responsible use of taxpayer money – is something to be derided. But when the price of defense materiel increases, consumption of it decreases – not even Congress can repeal the law of supply and demand – leaving troops with fewer vehicles, guns and body armor plates.

Mr. Paul assures us that, “Mr. Trump has broad license to apply tariffs, quotas or both to steel imports. And he can do it safely: While there has been speculation about potential retaliation against the United States if it raises import restrictions, an exception in the General Agreement on Tariffs and Trade permits them for security purposes.” GATT complaints and retaliation, however, are not the same thing. Perhaps tariffs and quotas resulting from the Section 232 investigation would not violate international agreements – though that is far from certain – but, even if they did not, other nations could still impose restrictions on U.S. goods, perhaps even under the guise of their own “national security,” possibly instigating a trade war.

Very few pieces of trade legislation are widely known, but the names “Smoot” and “Hawley” at least sound familiar to many people. The reason we remember these two lawmakers from nearly a century ago is because their eponymous tariff bill in 1930 provided an unfortunate case study regarding the unintended consequences of protectionism. In short, imports and exports to and from the United States plummeted, as did global trade, in general, plunging the world deeper into the Great Depression. The second and third-order effects of protectionism are of even greater concern, especially to national security, since, as was illustrated later in the 1930s – and many other times throughout history – economic troubles are often a contributing factor to violent conflict.

If the Trump administration restricts steel imports, it will have nothing to do with national security and everything to do with blocking competition for a favored industry that already has 75 percent of market share. This could be dismissed as “politics as usual,” if not for the pernicious effects it would have on the nation’s defense readiness and economic well-being, as well as global stability and prosperity. Mr. Paul closes his column by urging President Trump to remember that, “Steel is our strength.” It is no slight against the steel industry to suggest that the commander-in-chief also recall that competition makes us stronger and more secure.

Courtesy: AIIS