Lost Jobs, More Imports, The Unintended Consequences Of The Steel Tariffs

Steel Users Speak Out

TESTIMONY OF

Jon Jenson,
President of Consuming Industries Trade Action Coalition

House Small Business Committee

"Lost Jobs; More Imports The Unintended Consequences of Steel Tariffs"

September 25, 2002

Mr. Chairman. My name is Jon Jenson. I am President of Consuming Industries Trade Action Coalition (CITAC). CITAC is a growing coalition of companies and trade associations representing the interests of American consuming industries in the trade policymaking process. CITAC's mission is to promote trade policies in which U.S. consuming industries and their workers have access to global markets for raw materials and other imports that enhance the international competitiveness of U.S. firms.

CITAC's top priority is the repeal of the steel tariffs that are wreaking havoc in the steel market for downstream manufacturers. Skyrocketing prices, uncertain supply due to allocations and lengthening lead-times, broken contracts and growing quality problems are forcing steel users to the brink of disaster. We strongly urge the Bush Administration to review the economic impacts and unintended consequences of the Section 201 tariffs as soon as possible and act to end this tax on steel-using industries.

Mr. Chairman, thank you for your leadership and continued attention to this steel issue. Many of the witnesses at the Committee's July 23rd Hearing testified that, as a result of the steel tariffs, they were running out of steel, had become uncompetitive in the international market, were losing business to foreign manufacturers, and were uncertain as to how much longer their business would be able to survive. As you will hear from the witnesses today, the situation has not gotten any better-in fact, it has gotten much worse.

The exodus of business to offshore manufacturers who can obtain steel at globally competitive prices is accelerating. (Recent reports reveal that the price of hot-rolled sheet, for example, is 32 percent lower in Europe, and 34 percent lower in Asia, making the U.S. an island of high steel prices.) Particularly alarming are indications that more new product designs for parts and components for future products are being shipped overseas. Once this business leaves the country it is not likely to return.

Furthermore, the steel tariffs have had a ripple effect. As U.S. steel consuming industries suffer, so do the companies that supply those industries such as service centers, finishers, platers, and assemblers.

The list of well-documented reasons for ending the steel tariffs is growing in its clarity and urgency:

The tariffs are doing far more harm than good to our economy, at a time when we can ill-afford it.
They do not address the root cause of the steel industry's problem, which is the non-competitiveness of certain integrated producers due to relatively high costs and operating inefficiencies.
They threaten relationships with our trading partners.
They interrupt critical steel imports that are absolutely essential, since we must depend on imports to supply 20 to 25 percent of our domestic demand.
They restrict fairly as well as unfairly traded steel, for which AD/CVD laws exist.
They inhibit and delay realization of the goal for which they were imposed - the rationalization, restructuring and consolidation of non-competitive U.S. steel capacity.

One might reasonably ask: What good are the steel tariffs doing? They have made the U.S. an island of high steel prices, causing steel-using manufacturers to export their business opportunities, their growth potential and their workers' jobs to offshore manufacturers, while bringing windfall profits to competitive U.S. steel producers, sustaining non-competitive domestic steel capacity, and encouraging investors to re-open still more non-competitive capacity.

How much damage must be done, and how many U.S. jobs have to be lost before the Administration recognizes that the steel tariffs were a mistake and must be lifted?

Exclusions Have Not Solved The Problems Of Consuming Industries

The exclusion process is the only mechanism currently in place that offers any potential for relief to steel using manufacturers. The Administration has just completed round one of the exclusion process. This has been a very disappointing exercise.

While the exclusion process was presumably established to provide some relief to steel-using manufacturers from the steel tariffs, the needs of steel consumers have not appeared to be of paramount consideration. The process is a blunt instrument ill-suited for the micro-management of the international steel market. It is a flawed process - inadequate, ineffective, inherently unfair, and manipulated - to the disadvantage of the steel user. Exclusions clearly did not provide relief to all steel-using manufacturers that were deserving of relief or that truly needed it.

The steel companies would have you believe that the exclusion process gutted the Section 201 safeguard remedies. That is not the case. Steel tariffs still cover 75% of the products potentially subject to the tariffs. Furthermore, approximately 1.5 million tons, or half of the total volume of excluded products, was granted for the sole use of U.S. steel companies. These exclusions were for slabs and flat-rolled products to be further processed by U.S. steel companies into finished steel products. The remaining exclusions were for products for which there were no objections from the domestic industry and/or domestic producers could not meet the needs of the end-user. Many of these exclusions are subject to volume caps less than the amounts imported in 2001 - which make them less than fully effective for the steel user. Clearly the domestic steel industry has no basis to complain. The steel tariffs continue to cover roughly 9 million tons of steel a year. The exclusions clearly did not go far enough. The exclusion process clearly did not-and cannot-address the fundamental problems faced by the U.S. Steel consuming industry as a result of the steel tariffs.

As will be evident in the testimony today, not only did the exclusion process not solve the fundamental dislocations caused by the steel tariffs, but no amount of tinkering with the exclusion process could solve these problems. The steel tariffs have not only caused dislocations with respect to imported steel, they have also caused severe dislocations with respect to domestic steel. Obviously, the exclusion process does not address the latter situation.

The Exclusion Process Cannot Help Those Consuming Industries That Rely On Domestic Steel

As a number of witnesses in the July 23rd hearing testified, and as a number of witnesses today will testify, the negative consequences of the steel tariffs have been felt by those companies that rely on domestic steel, as well as those companies that rely on imported steel. American steel consumers must compete globally. Restraints on steel imports deal those steel-using manufacturers a serious blow, regardless of where they purchase their steel, through:

increased raw material costs (prices have risen between 40-75% over the last eight months);
delays (some steel users say that only 50 percent of deliveries are on time -- delays can force costly shutdown of operations and create critical uncertainties for small business owners);
shortages created by domestic steel mills putting users on allocation;
inability to pass price increases on to customers (steel users can't change their contracts with customers even if the steel mills have broken contracts with them to raise prices);
greater competition from abroad for the steel-containing products they make. Steel-using competitors abroad have access to world-priced steel, allowing them to export a less expensive end product to the U.S.; and
lack of choice in the market. Steel users choose their inputs based on processing characteristics, availability, price and other variables. With restrictions, they have no choice but to buy whatever they can get at whatever price it is offered.

The exclusion process does nothing to help those companies that purchase their steel domestically. The only means to address their problems is to lift the tariffs as soon as possible.

Problems With The Exclusion Process

Furthermore, even though the relief provided by the exclusion process was severely limited, there were many flaws even with that process.

Steel producers manipulated the product exclusion process

Steel producers manipulated the product exclusion process by representing that they were ready, willing, and able to supply the products that were the subject of product exclusion requests when that was not, in fact, the case.

The process was neither transparent nor fair

There was inadequate opportunity for those applying for exclusions to rebut objections raised. The Administration rejected unsolicited rebuttals to objections that were filed. Even when the Commerce Department did solicit a response in a particular case, the domestic steel producers' unwarranted claims for proprietary treatment of their objections made it extremely difficult for product exclusion requestors to fully address any objections that had been raised.

Tonnage limitations on exclusions are unfair.

In many cases, tonnage limitations on granted exclusions were simply inadequate. Part of this was due to the fact that the Administration actively discouraged companies from filing duplicative exclusion requests. Therefore, there was no information on the record as to what tonnage might be necessary to address shortages or unavailability of steel in the U.S. market as a whole. Also, because the benefit from any exclusion goes to those companies that import the product first, there is no guarantee that the companies that actually filed for the exclusions will receive the benefit from any exclusions granted.

Companies cannot wait until March 2003 to obtain further exclusions

Under the current scheme, companies that apply for exclusions in November will not be able to receive any relief until March 2003. Many small businesses may simply not be able to wait that period of time to obtain needed relief-they may go out of business first. The President already modified the March Proclamation to authorize exclusions after July. There is no reason that the President couldn't provide for the granting of exclusions on an on-going basis.

This is only a short summary of the litany of problems with the product exclusion process. The bottom line is that even if these problems are resolved, the product exclusion process cannot solve all of the dislocations caused by the steel tariffs because many companies that have suffered from the tariffs are not eligible for product exclusions. Indeed, as a number of the witnesses today will testify, although they rely on domestic steel, they have experienced significant shortage problems and pricing difficulties that jeopardize their very survival.

The Tariffs Should Be Rescinded As Soon As Possible

Thus, the only solution to the "unintended consequences" that the steel tariffs have inflicted on U.S. steel consumers is early review and repeal of these tariffs. This is CITAC's top priority and we hope it is the top priority of members of this Committee.

Efforts to reduce the world excess capacity of non-competitive steel production are laudable, but are proceeding at a snail's pace. Steel using manufacturers who are struggling now for their survival should not be held hostage to this process. The tariffs must be lifted now, regardless of the progress of the OECD steel negotiations.

Between 1995 and 2001, steel-using manufacturers added 1,255,000 new jobs to the economy, according to the Bureau of Labor Statistics (while jobs in the manufacturing sector as a whole actually declined by 829,000). Today steel-using manufacturing employ 13 million Americans compared to about 200,000 in steel-producing industries. Many are small businesses, which have been the engine of growth for the American economy. Steel-using industries provide good jobs and are invaluable contributors to their communities. It is indeed ironic that such an important generator of economic growth is being punished by our steel trade policy.

The U.S. steel industry has enjoyed 30 years of protectionism and import restrictions, yet certain producers still cannot compete globally. Continuous trade restrictions are hurting U.S. steel-consuming industries and threatening the U.S. economy. The tariffs need to be lifted as soon as possible.

Again, Mr. Chairman, thank you for the opportunity to testify here today.