Protectionism in the steel industry in the United States. Does trade protectionism lead to higher prices and massive job losses?

Table of Contents

Introduction

Literature Review
The history of the trade policies in the US
Steel industry and protectionism

Methodology
Research design
Research method(s)
Case study Justification
Potential drawbacks

Discussion
Protectionism is linked to price increases
Destruction of the American jobs

Conclusion

References

Appendix

Abstract

The economic nationalism in the United States has risen in the past couple of years, fueled by and fueling the election of President Donald Trump. With the increased call for nationalism of the economies comes the view that protectionism has achieved great success in the history of the United States. However, the calls for greater protectionism ignores the vast amounts of academic analysis and contemporary reporting that indicates that the trade protectionism in the United States has led to immense economic costs on the economy and the American consumers.

The central research question is linked to the implications of protectionism in the steel industry in the US. The hypothesis is that trade protectionism leads to higher prices and massive job losses. The case study design is employed as is allows for the in depth understanding and examination of the steel industry in the US and the implications of the trade policies on the jobs as well as prices. The research applied archival research method applying a mixed methodology.

The findings of the research indicate that the application of protectionism in the steel sector would harm not only the consumers but the industry being protected. It can be concluded that protectionisA single case study will be applied as the steel m has negative implications in terms of higher prices and loss of jobs.

The project was restricted by the research design as the use of a single case study limits the comparability and thus the generalizability of the results. The research focused only on the steel industry in the US thus restricting the applications of the findings in other sectors or industries in the US or even the steel industries in other countries.

My research implies that trade policies in the US should favor the use of market forces dictated by the principles of the WTO rather than focusing on the nationalism of the economies.

Introduction

The economic nationalism in the United States has risen in the past couple of years, fueled by and fueling the election of President Donald Trump. With the increased call for nationalism of the economies comes the view that protectionism has achieved great success in the history of the United States. Trump and many of his supporters hold the position that past acts of protectionism have led to a significant decrease in the imports to the US, led to industrial revival, opened the vast foreign markets, increased jobs and led to the general economic prosperity of the US. Pundits and politicians have used such assertions to offer a justification for the new round of proposals of protectionist measures (Lincicome, 2017). However, the calls for greater protectionism ignores the vast amounts of academic analysis and contemporary reporting that indicates that the trade protectionism in the United States has led to immense economic costs on the economy and the American consumers. The view that protectionism has led to massive successes is premised on the myth that protectionist experimentation is linked to economic development. In the paper, protectionism will be used to refer to the various strategies aimed at protecting the various industries and circumventing free trade between nations.

The central research question is linked to the implications of protectionism in the steel industry in the US. The hypothesis is that trade protectionism leads to higher prices and massive job losses. The case study design is employed as is allows for the in depth understanding and examination of the steel industry in the US and the implications of the trade policies on the jobs as well as prices. The research applied archival research method applying a mixed methodology. The findings of the research indicate that the application of protectionism in the steel sector would harm not only the consumers but the industry being protected. It can be concluded that protectionism has negative implications in terms of higher prices and loss of jobs.

Literature Review

The history of the trade policies in the US

Before the 1960s, the steel industry trade policies in the US focused primarily on fighting off the anti-trust issues as opposed to protectionism or trade relief from the government of the US. However, the dominant position of the industry led to permanent shift of the industry from being the dominant exporter in the world to become a net exporter of steel products due to a variety of factors such as subsidized and increasingly efficient Japanese and European operations, a strike that crippled the US steel industry that pushed the downstream users to seek for alternative non-domestic steel sources, strong dollar and discovery of massive iron ore deposits in other locations outside the US. Due to the pressure from the United Steel Workers Union (USW) and integrated steel producers, President Lyndon B. Johnson negotiated the first voluntary restraint agreement (VRA) with the European Community and Japan (Francois and Baughman, 2003).

Upon the expiry of the VRA in 1974, there was a massive influx of steel imports in 1977 leading to renewed calls for countervailing duty (CVD), antidumping (AD) and quantitative restrictions. To avoid the occurrence of the situation experienced in 1977, President Jimmy Carter orchestrated the formation of the Trigger Price Mechanism (TPM) which entailed an agreement by the steel industry in the US to cease from filing CVD and AD petitions if the import prices of steel do not reduce to levels below the production costs of the Japanese plus a further 8% profit margin. The TPM was suspended in 1980 and the suspension led to the filing of several CVD and AD petitions against steel producers from the European Community. Previous literature on the impacts of protectionist policies on the steel industry have focused on the analysis of the impacts of only one particular trade policy for short time periods. Canto (1984) examined the effects of the VRAs applied in the US between 1969 and 1974. The research found that there was only a small impact on the rising prices of US imports for the steel firms in the US. Further, the research found that there was no discernible impact on the employment and rates of return. Crandall (1981) explored the impacts of the VRAs for a similar period as the research by Canto; returning similar results. Nieberding (1999) undertook a study that examined where the withdrawal of the US antidumping cases against imported steel had any impacts on the market power for the three steel producers. The finding of the research was mixed indicating that the positive impacts were not distributed equally amongst the three large steel companies. The common perception is that protectionism aids in the economic development. However, existing research points to the contrary, the research will thus explore the implications of protectionism in the United States by focusing on the steel industry.

To avoid the trade tensions, President Reagan adopted a negotiated VRA which cut across a wide variety of steel products with the European Community. The VRA restricted the imports from European markets to a maximum of 5.5% of the steel market in the US. However the strategy did not work as it led to an increase in incidences of import diversions that led to great import penetration. The steel industry reacted by filing large CVD and AD petition sets against the EC. Ultimately, the US steel producers filed a safeguard petition¹. The trade protections led to the negotiation of another comprehensive VRA for all the steel products that are finished. The VRA limited the imports into the US to 18.4% in the last few months of 1984. Moore (1996) noted that the cycle of CVD and AD petitions and the failure of such petitions indicated that the steel industry in the US had significant lost its political support; especially under President George H. W. Bush in 1993.

Throughout the rest of the 1990s, the producers of steel applied CVD and AD as means of securing relief on some specific products. The limited action by the producers was largely due to the modernization of the steel operations in the US and the strong economy (Ahlbrandt, Fruehan, Giarratani, 1996). However, some unexpected shocks occurred in 1998 leading to the rapid reversal of the new strength of the industry. The shocks included the currency crisis in Russia and Asia that led to surges in imports and the subsequent use of CVD and AD filings towards the close of the 1990s. By early 2000s, many industry players filed for bankruptcy. President George W. Bush implanted safeguards in terms of protectionist policies that introduced tariffs ranging from 8% up to 30% on many steel products. The safeguards implemented by President Bush in 2002 were terminated in 2004 following WTO rulings against the actions of the US.

Steel industry and protectionism

Protectionism has been implemented in the US for a number of decades by both Republican and Democrat governments. Lenway, Rehbein and Starks (1990) and a further research undertaken by Lenway, Morck and Yeung (1996) found explored the cases of abnormal returns for the steel producers in the US following the key trade policy announcements in the late 1970s and early 80s. The evidence of the researches suggested that the positive impact was as a result of the positive reaction of the stock market to the VRA announcements. However, the research evidence also suggested that the experience was varied across the various firms based on factors such as the lobbying activity of the firm, the size, type of steel producer i.e. integrated or mini-mill as well as the financial leverage. Chung (1998) research suggested that the CVD and AD duties implemented from 1982 through to 1993 led to only some modest impacts on the import penetration. On the other hand, Bown (2004) as well as Durling and Pursa (2006) found that antidumping and trade safeguards significantly reduce the trade in the products that are targeted.

Liebman (2006) on the other hand found very limited evidence that the various safeguards implemented between 2002 and 2003 significantly affected the steel prices in the US. Research undertaken by De Long (13) found that the protectionist measures implemented by the US in the 19th century and 20th century led to the transfer of Western farmers wealth to the eastern industrialists as the higher prices of imported steel led to increased cost of steel needed for the infrastructure development in the country. Further, the majority of the studies undertaken in the 1980s as well as early 1990s indicated that the use of protectionism led to higher economic costs in totality and that such costs were higher than the benefits. The findings indicate the failure of the protectionist policies to achieve the objectives that were intended.

A study undertaken in 1983 by Weidenbaum and Munger (1983) noted that U. S protectionism in various sectors led to massive direct costs on the consumers. The researchers noted that the dynamic costs were not accounted for in the research for instance the reduce capacity of the economy, productivity reduction and the reduction of innovation (Weidenbaum et al., 1983). Appendix 1 indicates the costs of the trade protection to the consumers in the US in terms of the estimates of the annual costs to consumers versus the jobs protected. Hufbauer and Elliot (1994) undertook a research where they calculated the potential consumer benefits when all the import restrictions by the US are eliminated. The results indicated that the total benefits would be $70 billion (approximately 1.3% of the GDP of the US in 1990). Further, important protection does not aid in industrial revival (Golding, 1982; Kaplan, 1986; Lawrence, and DeMasi, 1986) with results indicating that out of all the industries that received protection, only the bicycle industry expanded following the protection. Protectionism also leads to job losses as over 200,000 Americans lost their jobs in the manufacturing sectors and other sectors that rely on steel due to the higher prices of steel in the market. The job losses represented nearly $4 billion in wages that were lost in the period between February 2002 and November of the same year (Francois and Baughman, 2003). Francois and Baughman, (2003), further noted that one-fourth, or approximately 50,000 of the jobs that were lost occurred in the machinery, equipment, metal manufacturing, transportation parts and equipment. The jobs losses associated with the increase in the steel prices as a result of the protectionist policies increased significantly following the passage of the tariffs. Further, research indicates that the jobs lost in the steel industry were higher than the jobs that were created by the industry during the same period. Further, all the states of the United States experienced losses of jobs from higher costs of steel with the majority of job losses occurring in California, Texas, Ohio, Michigan and Illinois (Francois and Baughman, 2003).

Given the wide-range of methodologies used, the study periods, and the contrary results, it is extremely difficult to get a comparable and complete evaluation of the impacts of the protectionist policies on the performance and imports into the US. Further, there is little research on the impacts of the protectionist policies implemented under President Bush and President Obama. The research will therefore explore the impacts of such protectionist policies.

Methodology

The section below will focus on the research design, research method(s) and justification of the case study and the potential drawbacks as well as future improvement to the research.

Research design

The overall strategy that will be employed to investigate the impacts of protectionism in the United States is the Single Case Study research design. Case study is a research design strategy that entails the empirical investigation of a contemporary phenomenon within the context in real life through the use of various evidence sources (Robson, 2002). Yin (2003) further added that context is important for any case study as it allows for the proper demarcation of the issue under study. Case study method is selected for the research as it would not be possible to use experimentation as the context cannot be easily controlled. Survey strategy is not selected as survey is limited in terms of the ability to understand and explore the context due to the limitation in the variables for which information can be collected. Case study is selected as it allows for the rich understanding of the research context and the processes enacted by the context (Morris and Wood, 1991). The case study also had the ability to generate the answers to a variety of questions such as the “what”, “how” and the “why” thus it can be used in both exploratory and explanatory research.

A single case study will be applied as the steel industry is a critical case due to the number of protectionism measures and the power of the players to influence trade policies in the United States. The important element of the single case study is the definition of the case. Even though the use of multiple cases can be used to establish whether the occurrences in one case are also found in the other cases. However, due to the varied dynamics of the various industries such as the lobbying power, the market leverage differences between the industry players and the other economic differences can hinder the comparison of the impacts of protectionism on the different sectors.

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¹ Safeguard petition is also known as Section 201 Escape Clause Action in the United States.