Daniel Diermeier, a political economist and
the IBM Professor of Regulation and Competitive Practice,
says that he, along with many other economists, sees “hardly
any economic justification” for the tariffs.
“That suggests we should look for the
political motivations behind the decision,” he says.
Diermeier lists three such possible motivations:
the importance of steel-producing states to the presidential
elections of 2000 and 2004; the impending midterm congressional
elections, six to 10 of which Diermeier estimates may hinge
on the steel issue; and the president’s desire to push
his trade promotion authority through Congress, a necessity
to negotiate future agreements to liberalize world trade.
The last of the three is clearly in jeopardy,
as Bush’s political opponents in the Senate seek concessions
on labor and environmental issues in exchange for the fast-track
negotiating power Bush desires. And with nations around the
world threatening or enacting tariffs on products from politically
sensitive states — such as grapefruit from Florida and
apples from Washington — the hopes for electoral gains
may be in danger as well.
“Basically, it’s brinkmanship,”
Diermeier says. “You’re always catering to domestic
interests, up to the point that you can avoid a trade war.
Because once you’re in a trade war, the conse- quence
for the world economy will be dire.”
Rebelo notes that the United States had built
a reputation over many years as being much less protectionist
than Europe or Asia. America has been able to leverage this
reputation to persuade other nations to dismantle their trade
barriers, a move that has significantly benefited the world
economy. That reputation, he says, has been tarnished.
“Countries like Brazil built an efficient
steel industry under the assumption that they would be able
to export to the U.S.,” Rebelo says. “Now that
these expectations are frustrated, it is only natural that
Brazilians will be tempted to retaliate with tariffs on U.S.
exports. And these types of trade squabbles end up being very
expensive for the countries involved and for the world economy.”
Bush approved the tariffs March 5, after considerable
lobbying by the steel industry and a controversial presidential
election in which several steel-producing states proved pivotal
to his eventual victory.
“I take this action to give our domestic
steel industry an opportunity to adjust to surges in foreign
imports, recognizing the harm from 50 years of foreign government
intervention in the global steel market,” Bush said
upon approving the measure.
The tariffs were actually lower than those
sought by steel industry, which had lobbied for levies of
40 percent. The administration also denied the industry a
$10 billion bailout in pension and health care costs for hundreds
of thousands of steelworker retirees. Those benefits were
promised in union contracts, but companies now argue they
cannot afford the cost.
The European Commission immediately registered
its outrage, threatening to impose retaliatory tariffs of
100 percent on everything from rice, grapefruit, shoes, and
nuts to bib overalls, billiard tables and ballpoint pens.
Japan, Brazil, South Korea and China soon followed with their
own retaliatory threats. “Mr. Bush really has unified
the world, at least on this issue,” one pundit wrote.
Domestically, Bush’s move was far from
unanimously embraced. Opponents have predicted that the higher
tariffs would raise prices on all sorts of items used by consumers,
including cars, houses and appliances.
Few would argue that the U.S. steel industry
doesn’t need some sort of help. More than 30 steel makers
have declared bankruptcy since 1998, when the Asian financial
crisis resulted in a surge of cheap steel into the United
States and sent steel prices plummeting to 20-year lows.
The question of how to aid the industry without
harming the economy could be a pivotal issue in November’s
congressional races, and could even be a factor in Bush’s
re-election bid in 2004.
Yet any attempt to protect steel workers’
jobs against the global market is bound to be expensive for
one constituent or another, notes Diermeier. “The cost
of protecting even one extra job in the steel industry is
tremendous,” he says.
Protectionist overtures also invite appeals
from other troubled businesses: “Any industry could
knock at the door and say, ‘We’re going bankrupt
too, why don’t you help us?’”
The solution both Rebelo and Diermeier see
may strike some as harsh, but others as ultimately the most
humane: to let capitalism take its course while cushioning
the blow to individual workers.
“The unions are saying they’re
being hurt by unfair competition, but the truth is, the integrated
steel companies are not competitive,” Diermeier says.
“They have outdated technology and expensive labor.
Economic analysis would say the right way to solve the problem
is to let them go bankrupt. If you’re concerned about
the individual worker, the federal government can help them,
for example, with their pensions and health care benefits.”
The government could do much to help smooth
the transition of labor and capital from steel plants into
other industries, Rebelo says. “Providing more generous
unemployment benefits to steel workers would be a way to at
least partially compensate some of the losers while allowing
the overall economy to capture the gains from free trade,”
But by propping up an ailing industry with
protectionist measure, “you’re prolonging the
inevitable — but in a very inefficient way,” Diermeier
says. “It makes it more expensive for the consumer,
and for everyone else.”