THE UNINTENDED CONSEQUENCES OF INCREASED STEEL TARIFFS
ON AMERICAN MANUFACTURERS

Submitted to the
House Committee on Small Business

My name is Wes Smith, and I am the President and owner of E&E Manufacturing Co. I appreciate the opportunity to submit this testimony to bring attention to the fact that the Steel 201 tariffs have had a dramatic impact on the price and availability of steel in the market, and have resulted in a significant and negative impact on our company.

E&E is located in Plymouth, Michigan, and is a world-class leader in metal joining technology. It meets the needs of its world-class automotive customers by manufacturing heavy gauge stamped metal fasteners, progressive die metal stampings, and high value added assemblies. E&E was founded in 1963, and provides meaningful employment to over 250 dedicated employees. Steel comprises 40 percent of our total cost of producing these products.

For our raw steel needs, we generally have relied upon six-month or yearly contracts with steel warehouses that obtain their supply from domestic mills, with 75 percent of our requirements met by one major supplier. Our relationship with this supplier has been positive and constructive, but the day after the Steel 201 tariffs were imposed last March, this supplier broke its contract with E&E and imposed a hefty increase on our pricing. I have prepared a spreadsheet, which is appended to my testimony, that tracks the significant and sudden price increases we have been experiencing in our raw material purchases since the imposition of the steel tariffs. This analysis illustrates the significant effect these additional tariffs have had on the pricing and availability of steel, as well as a drop in our revenue. Since February of 2002, our steel costs have increased by 42.4 percent, which amounts to $350,000.00.

Aside from pricing, a continued reliable supply of steel is of great concern to us. The lack of available steel has brought us close to shutting down our OEM and Tier One customers. Because of late deliveries due to capacity limitations that the steel mills have had since the imposition of steel tariffs, we have had to pay expedited freight costs in order to get our shipments in time so that we can deliver the final product to our customers in time. In addition, E&E have had to spot buy material at a significantly higher cost because our suppliers have failed to deliver steel we have ordered.

The consequences of the Steel 201 tariffs have already impacted E&E in a dramatic way. Nearly half of our fastener product is supplied to an OEM, which has bought its requirements from E&E since the 1970's. This account comprises a third of our sales. It involves a proprietary product that is now subject to a reverse auction process, whereby the contract is auctioned off on a yearly basis. In February, 2002, E&E had to negotiate a significant price decrease to keep this business, because our customer has made it clear that it has the increasing option of purchasing its requirements from off-shore sources, such as China.

Immediately after making this concession - at a loss of a half-million dollars in revenue - the Steel 201 tariffs were imposed, and the price spikes I described earlier hit us. At this point, it is absolutely out of the question for E&E to approach this customer to renegotiate this deal in a way that would cover the increased costs of our raw materials. The customer has made it abundantly clear that it will exercise its option to take its business off-shore for this product.

I fear that this illustrates the flaw in the reasoning underlying the Steel 201 tariffs. The assumption was that the small businesses, the steel-consuming industries in this country, wouldn't get hurt by the Steel 201 tariffs. We should be able to pass this cost on to our customers, who would pass the cost on to their ultimate consumers or absorb the cost themselves. But this doesn't work in reality, as my example proves. If a components manufacturer like E&E tries to pass these significant increases on to its customers, those customers will procure their products from off-shore sources, where cost of production is cheaper for a lot of reasons, including a raw material cost unfettered by significant additional tariffs. Our customers tell us that in this economy, we need to compete globally. We cannot, however, compete under the best of circumstances when our raw material costs are artificially inflated as a result of the Steel 201 tariffs.

As you can see, the price increases and supply constraint resulting from the Steel 201 tariffs have had a significant impact on our company. Unintended or not, the consequences of the increase steel tariffs have been significantly detrimental to us.