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Estimated Economic Effects of Proposed Import Relief Remedies for Steel

Executive Summary
I. Introduction
II. How Did We Get Here?
III. Estimated Impacts of the Proposed Remedies
Appendixes
Technical Appendix

As noted, U.S. law requires the President to take into consideration the national economic interest before providing any relief to the U.S. steel industry.  A key question for the Administration and for other policy makers interested in this investigation therefore is what impact the proposed remedies will have on consumers, producers, employment, and economic output broadly.

Five of the ITC Commissioners recommended a range of tariffs and tariff-rate quotas; one Commissioner recommended quotas for most products and tariff rate quotas for the remainder.  Table 1 reports the volumes and value of imports affected and the range of tariffs proposed.  Again, weighting the proposed tariffs by value of imports potentially affected, the range runs from an average of 9.2 percent at the low end, to an average of 20.7 percent at the high end, excluding Canada and Mexico from the tariffs.  If the President includes imports from Canada and Mexico in the tariffs, the trade-weighted range of tariffs would be 12.2 percent to 27.9 percent.

Table 1

U.S. Imports, 2000, of Steel Products for Which the ITC Found Injury
(proposed tariff ranges in parentheses)

*  Landed, duty-paid value.
 NOTE:  According to the U.S. International Trade Commission, imports subject to the remedy recommendations account for 74 percent of total steel imports.
Source:  U.S. International Trade Commission

This chapter presents the results of our rigorous analysis of the likely impacts on the U.S. economy of the imposition of 9.2-20.7 percent tariffs on imports of the subject steel products in the first year of relief. [12]   To be conservative, we assumed that the President exempts imports from Canada and Mexico from the remedy, meaning that the resulting effects on the U.S. economy would be less than if imports from Mexico and Canada were affected. [13]   We also assumed a “soft” economy with unemployment, as described in the Technical Appendix (in essence, the economy is “in recession”).  The methodology and data used to conduct the analysis are described generally later in this chapter, and in detail in the Technical Appendix.

The results indicate that imposition of tariffs on steel imports would have a significant negative impact on the economy generally and steel-consuming industries specifically.  Simultaneously, they would provide very little benefit to U.S. producers.  Table 2 summarizes the results. 

Table 2

Summary of Results:  Estimated Impact of Imposition of Tariffs on U.S. Steel Imports

*  Total consumer costs minus benefits to U.S. producers and tariffs collected.
**  This includes jobs in agriculture, retailing, services, banking, transportation, the ports, etc., which lose out when income losses in steel-using sectors feed back through the rest of the economy (e.g., reduced spending on food, clothing and shelter from unemployed steel-using sector workers), and when steel-using industries use fewer service inputs. 
Source:  Trade Partnership Worldwide, LLC, Washington, DC.

In brief, we found:

The proposed remedies would drastically cut imports.  Under the low tariff scenario, import volumes would decline by 18.5 percent, and by 35.9 percent under the high-tariff scenario.  Import prices would increase by 9.1 percent to 20.6 percent, respectively.

Higher prices, reduced availability and other inefficiencies imposed by the proposed remedies would force consumers to pay between $1.9 billion and $4.0 billion a year, and decrease U.S. national income by $500 million to $1.4 billion a year at a time when policy makers are looking for every way possible to boost national income growth.

Steel consuming industries would face greater import competition from foreign manufacturers of their products as foreign manufacturers have access to more competitively-priced steel inputs that U.S. steel users can no longer purchase except with high tariffs.  The volume of fabricated metal products imported into the United States would increase by 0.5 percent (low tariff scenario) to 1.1 percent (high tariff scenario) and the volume of auto imports would increase by 0.2 percent to 0.4 percent, respectively.

Steel producers do not win much.  Despite the large drops in imports, the bulk of the impact affects volumes of domestic production, not price.  Under the low tariff scenario, domestic steel prices would rise just 0.2 percent as volume of output increases 2.9 percent; under the high-tariff scenario, domestic steel prices would increase 0.4 percent and volume of output, 5.9 percent.  Steel producers score between $242.2 million and $496.3 million in windfall gains from higher prices and volume.  As draconian as the remedy recommendations are, they would not restore the industry to profitability.

Steel workers would not have much to look forward to, either.  The proposed remedies would protect between 4,375 steel jobs (low tariff scenario) to 8,900 steel jobs (high tariff scenario), at a cost to American consumers every year of $439,485 to $451,509 per steel job protected.  At employment levels in the steel industry of 218,519 in 2000, tariff remedies would preserve at most 2.0 percent of U.S. steel employment at great cost to the rest of the world.

But steel-consuming workers have every reason to be concerned.  Higher costs of steel inputs that they cannot pass on to their customers, [14] as well as greater competition from imports of steel-containing products resulting from the proposed remedies would result in a total loss (across all sectors in the United States) of between 36,200 jobs (low tariff scenario) to 74,500 jobs (high tariff scenario).  Losses of steel-consuming sector jobs would range from 15,300 to 30,600.  Under either scenario, eight jobs would be lost for every steel job protected.

Table 3

Job Effects of ITC Remedy Recommendations
(number of jobs; SIC category in parentheses)

*  Includes jobs in agriculture, retailing, services, banking, etc., which lose out when income losses in steel-using sectors feed back through the rest of the economy (e.g., reduced spending on food, clothing and shelter from unemployed steel-using sector workers).
Source:  Trade Partnership Worldwide, LLC, Washington, DC

Every state loses out under the proposed remedy recommendations.  Table 4 presents the job gain and loss estimates for each of the 50 states.  Some of the biggest net losers are states in the steel-belt themselves:  Illinois (job losses of up to 3,810, or five jobs lost for every steel job protected), Indiana (2,230 total jobs lost, or two jobs lost for every one steel job protected), Ohio (4,000 total jobs lost, or almost three jobs lost for every one steel job protected), and Pennsylvania (3,300 total jobs lost, or more than two jobs lost for every one steel job protected).

Table 4

Job Impact Estimates by State

Source:  Trade Partnership Worldwide, LLC, Washington, DC.

            Clearly, in a recessionary economy, import protection that will cause such significant damage to employment is not advisable.  Moreover, steel-consuming industries, many of them small-businesses, have been among a very few job-creating industries in the U.S. manufacturing sector, even in recent years.  Between 1997 and 2000, steel-consuming sectors added 848,000 jobs, compared to losses in the steel sector of 10,300 over the same period.   It makes little sense to hit hard one of the few manufacturing sectors of the economy – steel consuming industries – that are creating jobs to bail out an industry that is going through a much-needed adjustment process.  In an effort to protect a few thousand steel jobs, policy makers would further slow economic recovery by reducing national income, and force job losses in manufacturing in the very communities they seek to help. 

Trade Partnership Worldwide, LLC, employed a state-of-the-art computable general equilibrium (CGE) model to estimate the potential impacts of the proposed remedies on the U.S. economy generally, and the steel industry and steel-consuming industries specifically.  CGE models are the tools of choice for assessment of the economic impact of regional and multilateral trade agreements.  They allow for assessment of the effects on broad sectors of the economy of protecting one sector, including interactions between sectors that may result. 

The model we used reflects the interactions across the entire U.S. economy, rather than just within the protected industry (i.e. steel) and its immediate customers. [15]   The linkages between sectors are both direct (like the input of steel in the production of automobiles) and indirect (like the use of mining inputs into steel, which feed indirectly into automobiles, and the use of both energy services and steel in the production of automobiles).  The model contains 15 specific sectors:  food; other primary goods; mining; steel; non-ferrous metals; fabricated metals; chemicals, rubber and plastics; refineries; automobiles and parts; other transport equipment; electrical equipment; non-electrical equipment; other manufactures; construction; and services.  The Trade Partnership benchmarked the model’s data for national income, trade flows and related data to the year 2000. [16]   In modeling the impact of the proposed remedies, we take into account the current economic climate.  Hence, the model includes job creation and destruction (i.e. unemployment) as potential gaps are created between labor earnings and the value of labor output across sectors. [17]   Throughout, we assume that Canada and Mexico are left off of the remedy list.  Total effects across states are based on detailed BLS data on state level employment, combined with estimated effects at the national level.