Protectionism: Steeling Jobs

Three years ago, Bill Sopko Sr. made the biggest gamble of his business career. With the economy booming, Sopko, the owner of an automotive-parts plant in Euclid, Ohio, invested $6 million in the latest gear to manufacture a critical brake component for heavy trucks. With a new 3,000-ton stamping press, he would reduce costs from $14 per unit to $9. Recouping his investment, he knew, could take as long as 10 years. But with plenty of orders in the pipeline, Sopko figured he had made a shrewd move. What he didn’t calculate was getting caught in a global steel war.

Late last year the U.S. International Trade Commission ruled that American steelmakers had suffered “serious injury” as a result of a surge in imports and, as a remedy, proposed trade restraints, including tariffs as high as 40% on foreign steel products. Big domestic steelmakers say they won’t survive without protection from what they call a deluge of foreign steel. President Bush faces a deadline of March 6 to rule on the itc’s proposed sanctions, which he is expected to approve. His decision will ripple through the global economy–affecting prices of everything from cars to office buildings, and jobs from Ohio to South Korea.

No one disputes that most of America’s old, integrated mills–the ones that make steel from iron ore in huge blast furnaces–are ailing badly. In 1998, amid a financial crisis that dampened Asia’s demand for steel, exports from that region flooded the U.S. and drove prices to 20-year lows. Thirty U.S. steelmakers have filed for bankruptcy protection in the past five years, including icons such as LTV and Bethlehem Steel. With a strong dollar still favoring imports and a global recession crimping demand, the U.S. firms staying afloat say their position is precarious. The most efficient and profitable American steelmakers–the so-called mini-mills that refine steel from scrap metal–stand to pick up market share from the dying dinosaurs. But even the mini-mills are now clamoring for trade protection.

That is not all the big steelmakers want. USX-U.S. Steel has asked Washington to waive antitrust law and let it merge with Bethlehem Steel, National Steel and other troubled companies. USX-U.S. Steel also wants the government to assume the unfunded pension and retiree-health-care obligations of its takeover targets–estimated at $13 billion over the actuarial lifetimes of retirees. At Bethlehem Steel–operating under Chapter 11 protection since October–13,000 workers now support benefits for 130,000 recipients. Much of the money, the steelmakers say, could come from revenues generated by tariffs on imported steel. “If we get tariff relief and legacy-cost relief, you’re taking money from importers who caused injury and sending it to retirees,” says Bethlehem’s recently installed CEO, Robert Miller, who helped Chrysler win a government bailout in 1979.

What’s good for big steel, though, is likely to spell trouble for the larger U.S. economy–and especially for workers, managers and shareholders of American companies that use steel. The metal is a major component in thousands of industrial and consumer products, from machine tools and office buildings to cars and cookware. Most of those products face tough competition from goods made in countries where steel is already cheaper than in the U.S.

Steel producers argue that job losses from higher U.S. steel prices would be minimal. But in a study commissioned by a steel users group, economists Laura Baughman and Joseph Francois concluded that if tariffs rose to 20.7% (a weighted-average figure), the resulting higher steel prices would cost 74,500 jobs in the wider U.S. economy. The number of steel-producing jobs that would be saved: 8,900–at a cost of $451,509 for each protected steelmaking job. Independent analysts agree that the net job loss could number in the tens of thousands. “No matter what Bush decides in terms of a trade remedy, he’ll impose more costs than benefits,” says Ben Goodrich, an economist with the Institute for International Economics in Washington.

It’s also likely that import restraints would spark a wider trade war. U.S. imports of key steel products, such as hot-rolled sheet, actually declined from the end of 1998 through 2001, and under World Trade Organization rules, America’s trading partners may be authorized to retaliate immediately if the U.S. imposes hefty tariffs or quotas. In a speech in London in December, Pascal Lamy, the European Union’s chief trade negotiator, vowed that the E.U. would lodge a WTO complaint if the U.S. blocked steel imports.

In the European Union, 65% of the steel is now produced by just five firms, while employment in the industry dropped 33% in the 1990s. Led by giants such as Germany’s ThyssenKrupp, the Dutch-Anglo venture Corus and the multinational conglomerate Arcelor, the E.U.’s mills are now among the world’s least polluting and most productive. “Should restrictive trade measures be adopted, it still doesn’t solve the problems of U.S. integrated producers,” says Gordon Moffat of the European Confederation of Iron and Steel Industries.

Other critics point out that U.S. steel producers have enjoyed varying degrees of import protection for decades. If tariffs and quotas were a formula for success, U.S. mills should already be world beaters. Instead of investing in new equipment and improving worker efficiency, too many U.S. mills and their unions have used artificially high steel prices as an invitation to pocket more in profits, pay and benefits than their competitors abroad–or their customers at home–have done. “Between 1972 and 1981, when import controls were severe, steel wages rose 179% while productivity declined,” Goodrich and Gary Hufbauer, also an economist with the Institute for International Economics, wrote in a policy brief last month.

At his Ohio factory, Bill Sopko anxiously awaits the President’s ruling. An independent who voted for Bush, he would love to buy American, and until recently he did, sourcing his steel from a mill just 12 miles away. But that mill, owned by LTV, shut down last year. No other U.S. mill made the high-strength, low-alloy grade of steel that Sopko’s client demanded. So Sopko started buying steel made in Europe by Arcelor and Corus.

Then the recession hit. Sopko says his orders plummeted 60% and he has had to lay off a third of his 140 employees. Today, he says, his shop is operating at break-even. Sopko has applied for an exemption from whatever tariffs or quotas Bush may impose, but he’s not confident of winning it. More than 1,000 other businesses have applied for exemptions for highly specialized steel products not made in the U.S. The Administration hasn’t yet determined the standard under which it might grant those requests, and the steel industry will have a say. Says Bethlehem’s Miller: “If we exempt everyone, we might as well not bother with the remedy.” According to Sopko, his clients aren’t waiting around to find out. “They’re already looking overseas to source brake components in anticipation of higher domestic costs,” he says. “Our factory is in jeopardy.”

This sort of unintended consequence is one of the classic arguments against trade protection. Consider that if the U.S. blocks steel imports from Brazil, that country could retaliate with duties on its imports of U.S. coal, throwing West Virginia miners out of work. Higher domestic steel prices could also push users to move their factories overseas; finished goods would then be exported to the U.S., circumventing tariffs on raw steel products. “My company will be at a competitive disadvantage,” says Gary Hill, president of National Metalwares in Aurora, Ill. Hill’s firm, small and privately held, makes school furniture and finished tubular steel components for the lawn-and-garden industry.

Other small firms are worried that their exports will evaporate. At the Boiler Tube Co. of America, based in Lyman, S.C., steel accounts for about 60% of the cost of its parts for industrial boilers. The company buys most of its steel–including stainless steel and specialized pressure tubing–from overseas suppliers such as Germany’s Bentler, and for some alloys the cost is 40% less than for domestically produced steel. Higher steel costs could erode Boiler Tube’s exports, which account for about 10% of its $40 million to $50 million in annual revenues, and may encourage foreign suppliers using cheaper steel to enter the U.S. market.

The steelmakers, for their part, appear confident of winning at least some trade protection. President Bush campaigned hard in steel-friendly Pennsylvania, Ohio and West Virginia (winning the latter two), and each state could eventually be pivotal to his re-election. Analysts also suspect that Bush made some promises to Republicans from steel states to win their votes for Trade Promotion Authority–basically, enhanced negotiating power for the President–which passed the House by only one vote last December and has yet to reach the Senate floor.

On the other side, steel users groups are lobbying hard and have placed ads in the Wall Street Journal, Washington Post and other publications, urging Bush not to “bend to Big Steel.” Says General Motors CEO Richard Wagoner: “We’re not going to say, ‘Sorry, everybody. You have to pay more for your car because the price of steel went up.'”

If there’s a bright spot in this picture, it can be found at America’s mini-mills, which are investing in new technologies, keeping costs low, rewarding workers for productivity, boosting quality and moving into new lines of business. They now account for nearly half of U.S. steel output, up from 15% in 1970. Led by Nucor, based in Charlotte, N.C., and Steel Dynamics, based in Fort Wayne, Ind., the minis run mostly nonunion shops and forge steel with less energy and labor than their integrated counterparts.

How efficient are they? With its pioneering continuous-slab casting process, Steel Dynamics produces flat-rolled sheet coils for $50 to $100 less per ton than its integrated competitors. Last year output per employee was $1.1 million, vs. about $254,000 at Bethlehem. “A lot of high-tech companies don’t have our revenues per employee,” says Fred Warner, investor-relations manager at Steel Dynamics. And analysts say the minis’ market share would probably rise even faster if imports were curtailed. “The minis will expand again with higher prices,” says Robert Crandall, an economist at the Brookings Institution. “Over time they will take over most product lines.”

Already, as more integrated mills shutter their furnaces, the minis keep expanding. Steel Dynamics broke ground on a $315 million structural-steel and rail mill in Columbia City, Ind., last May. And just outside Mobile, Ala., a $35 million heavy-plate and coil mill went online last year, built by the Canadian firm IPSCO. Why did IPSCO invest in Alabama? A $500 million package of tax breaks and subsidies, including money for roads, rail service and docks along the Mobile River, helped attract the company, said a spokesman. So did the weakness of unions in Alabama.

Another bright spot is U.S. investment in steel plants abroad. In November 2000, USX-U.S. Steel purchased a financially troubled mill in the Slovak Republic and committed itself to a 10-year, $700 million capital-improvement plan. The Slovak company had squandered millions on dubious investments, including a travel agency, a soccer team and lavish holiday homes for executives. But the plant was relatively modern, with 100% continuous casting and three blast furnaces. U.S. Steel stamped out corrupt purchasing practices and shifted production to more profitable products. Result: while USX-U.S. Steel’s American business recorded a $177 million operating loss for the fourth quarter of 2001, USSK, its Slovak subsidiary, earned income of $2 million.

How does USSK do it? With the same model that its parent company says is killing its American business. The average yearly wage at the Slovak plant is just $5,500, a tenth of what a typical American steelworker earns. The Slovak government helps pay USSK’s retiree health and pension costs. Unions are virtually non-existent. And the firm may have gained market share illegally. USSK is being investigated by the European Commission for allegedly dumping hot-rolled coil at prices 30% below the domestic Slovak price in the first seven months of last year. “What we see in Europe is caused by what is happening in the United States,” John Goodish, USSK’s chief, recently told a Slovak business weekly. “I think it’s retaliation against U.S. Steel.”

To be sure, it’s in the interest of the U.S. economy to maintain a healthy steel industry. And on a variable-cost basis (for raw materials, energy and so forth), integrated steelmakers could well be globally competitive. But a bailout for their legacy costs and years of poor planning, coupled with trade protection, would set a bad precedent, critics charge. While many countries subsidize their steelmakers, the trend in recent years is for trade barriers to fall. Should the U.S. spark a steel war, that trend could be at risk.

–With reporting by Alice Jackson Baughn/Mobile, Jan Stojaspal/Prague and Joe Szczesny/Detroit