In early March President Bush imposed tariffs of up to 30% on much of the steel imported into the U.S., meaning that foreign producers of steel must pay an import duty of 30% of the value of the steel as it enters the United States, raising the price of steel to American buyers. Without the import duty, foreign-made steel would sell for a lower price than domestically produced steel; with the duty, the price of foreign steel is higher. The intent, and the likely result, of the duty is that US buyers will purchase American-made steel instead of imported steel. The other, and less-discussed result, is that American consumers will pay higher prices for products made with steel.
In an article published by The Washington Post, Bush administration officials acknowledged that the purpose of the tariffs was to encourage U.S. companies to shift from buying foreign steel to U.S. steel, in the process raising prices in the U.S. market. Why? The issue is jobs and the steel industry. Foreign steel is produced at lower cost than American steel, and without import protection, American steel companies will find themselves without a market as customers, trying to keep their own costs down, switch to the foreign competition.
The two sides of this issue are pretty clearly summarized by the spokespeople for the affected interest groups. Supporting Bush’s decision, the president of the United Steelworkers of America heaved a sigh of relief. “I’m not sure it will do all that needs to be done to save the industry, but at least we have a ray of hope.” On the other side, the understandably disgruntled representative of the steel importers responded: “This remedy, like all the other attempts to protect the U.S. steel industry over the years, will not save fundamentally mismanaged companies.”
Is the accusation of mismanagement on target, or just sour grapes? The Post article continues, “. . . most industry executives acknowledge that while the tariff regime may keep several thousand steelworkers employed for a couple of years, it will not be able to save all of the old-line integrated steel mills that make steel from iron ore in coal-fired furnaces. These integrated mills are at a competitive disadvantage not only because of the older technology they use to produce steel but also because of the added costs of paying a unionized workforce and more than half a million retirees who get pensions and health benefits from the companies.”
The international response to the Bush announcement was immediate, as the Post article chronicles, “. . . [T]he tariff order was immediately criticized by leading steel-producing countries. European officials warned that the action could force them to impose similar tariffs, while Russia said it would have a serious impact on the atmosphere of relations between the two countries.” (For the complete article see: http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A44323-2002Mar5¬Found=true)
In another article published by CNN.com, the European Central Bank president criticized the U.S. move and predicted that the tariff will do Americans more harm than good. “Those who will suffer most are the American consumers who will have to pay more than they otherwise would have to do for certain products…I am thinking especially of the American car markers and their customers whose life will be more difficult than it otherwise would have been.” (For complete article see: www.cnn.com/2002/WORLD/europe/03/07/steel.wto/)
Student Assignment:
Historically, the imposition of the tariffs hasn’t been placidly accepted and the Bush tariff seems to be no exception. The European Union struck back in late March and the predicted trade-war has begun in earnest.
Read the article “EU agrees steel fightback” and answer the
discussion questions below.
http://news.bbc.co.uk/hi/english/business/newsid_1896000/1896532.stm
- In your opinion, what was the President’s goal in imposing the tariffs on steel?
- Who in the U.S. will be helped by the U.S. tariffs? Who in the U.S. will be hurt by the U.S. tariffs?
- Why was the EU response to American tariffs to impose its own? Was that a rational decision? Explain.
- Who will gain or be helped by the EU tariffs? Who will lose or be hurt by the EU tariffs?
- To you think that the gains from the U.S. and EU tariffs will be greater or less than the losses that result from the tariffs? Why?
- In your opinion, how likely is it that the tariffs will succeed in achieving the President’s goal(s) you identified in question 1? Explain your answer.
Teacher's Guide
Preparation of student handout:
The introductory reading directs students to the article:
“EU agrees steel fight back,” http://news.bbc.co.uk/hi/english/business/newsid_1896000/1896532.stm
As a teacher you may download and copy this article for
classroom use, however copyright laws prohibit the FTE from
posting the article on the our site. We suggest that you copy
the article and combine it with the introductory reading and
discussion questions to make a short handout.
Recommended sites for further information:
- re: the cost of tariffs to consumers www.dailysouthtown.com/southtown/dsbix/071bd4htm
- remarks of George Becker, former president of the United Steel Workers of America, before the Congressional steel caucus www.uswa.org/sra/srabecker032101.htm
Answers to discussion questions:
- In your opinion, what was the President’s goal in imposing
the tariffs on steel?
Answers will vary. However students should offer the insight that this is in large part to protect the U.S. steel industry and steel workers’ jobs. Also indicated in the articles is the possibility of political motivation by the President because of the influence of the states with large concentrations of steel industry jobs.
- Who in the U.S. will be helped by the U.S. tariffs? Who
in the U.S. will be hurt by the U.S. tariffs?
Steel producers will be helped by not having to compete with lower-priced imported steel. Steel workers will be helped by the higher demand for jobs in the steel industry. Communities where domestic steel plants are located will benefit because more business for the steel plants means both the producers and their employees will spend more money on supplies and consumer goods.
Those being hurt include all of the consumers and businesses that purchase products with steel in them as the higher priced steel will mean a slightly higher price for products made from steel; importers of foreign produced steel; exporters of products that contain steel because the exported products will not be as competitive with products made with less expensive foreign steel; those involved in the shipping industry that were handling the imported steel, etc. (As you can see the list can go on a very long time). In addition, as the article on the EU makes clear, there are many steel producers and workers in foreign economies that will be hurt by the tariffs and presumably will not want or be able to purchase as many U.S. made goods so workers in other U.S. industries will be hurt.
- Why was the EU response to American tariffs to impose
its own? Was that a rational decision? Explain.
The EU seems to have good reason to fear that there will be a glut of steel on the international market. This is particularly true of steel that has already been produced—producers will be willing to sell at low prices to avoid holding large unsold inventories of steel. Since they will no longer be competitive in the American market, they’ll turn to Europe, threatening the well-being of the EU steel industry. With the 30% tariffs in the U.S., selling at discounted price in the European market would look very attractive.
- Who will gain or be helped by the EU tariffs? Who will
lose or be hurt by the EU tariffs?
The answer to this question is much like the answer to question # 2. The EU producers of steel and steel workers and the cities they are located in will be helped, but many others in the EU will be hurt, including consumers and manufactures who use products containing steel.
- Do you think that the gains from the U.S. and EU tariffs
will be greater or less than the losses that result from
the tariffs? Why?
The answer here depends on whether we are considering the entire economy or specific segments of the economy. If the focus is on the entire economy then the losses will be greater than the gains from the tariffs. Trade creates wealth, and any policies or actions that inhibit trade inhibit or slow the wealth creation process. Tariffs are a barrier to trade and therefore a barrier to wealth creation for the people in the countries impacted by the tariffs. This is sometimes hard to see or even measure because the benefits of the tariffs are concentrated in one industry, but the costs are diffused over many industries and consumers.
If however the focus is only on the steel industry and not the total economy, there will be gains greater than losses for a period of time in those industries. However, eventually the higher prices will cause a decrease in the quantity of steel demanded as producers find substitute materials or locate production outside of the U.S. When the quantity of steel demanded falls, the steel industry and steel workers will likely find themselves in the same situation as they are now.
- In your opinion, how likely is it that the tariffs will
succeed in achieving the President’s goal(s) you identified
in question 1? Explain your answer.
Answers will vary, but students should note that the President’s actions cannot save the steel industry in the long run if it doesn’t modernize and get costs under control. On the other hand, the President’s political goals may very well be realized if the move succeeds in muting opposition from the traditionally heavily Democratic workers’ unions.