TRADE PARTNERSHIP WORLDWIDE, LLC

Responses to Comments on CITAC STF Study

The steel industry's campaign to discredit our recent study for the Consuming Industries Trade Action Coalition (CITAC) Steel Task Force is simply without foundation. For the most part, the accusations leveled by the domestic steel producers do not even address the substance of the study. Other complaints result from erroneous interpretation of the study. The CITAC study is built on solid data and analysis. It shows that thousand of jobs in the United States were lost in steel consuming industries due to price increases caused partly by the imposition of tariffs, and partly by other factors like restructuring within the steel industry.

We respond here to the few comments made to date that address the substance of the study. First, steel industry representatives charge that our data show actual steel-consuming jobs increasing from January 2002 to December 2002. The flaw with that interpretation is that, as we note in the study, the employment data cited are not adjusted for seasonal variations (but important note: seasonal variations are taken into account in the regression equations). Thus, it is quite improper to compare January 2002 employment data to December 2002 employment data, as the domestic steel industry critics did. Instead, one must compare year on year data, such as December 2001 data to December 2002 data. This comparison shows clearly that in fact employment in steel-consuming industries declined in the year ending in December 2002.

The Labor Department released February 10 its latest updated employment data. According to final data for November and December 2002, actual employment in steel consuming industries declined from December 2001 to December 2002 by 370,600 jobs. Our conclusion remains that as many as 200,000 people were added to the unemployment rolls over this period as a result of higher steel costs.

The domestic steel lobby also claims that Dr. Gary Hufbauer, of the Institute for International Economics, believes our findings are "way out of bounds," citing a Financial Times story. After further review of the CITAC study, Dr. Hufbauer and his colleague Ben Goodrich issued a statement clarifying their views and authorized its placement on the CITAC web site¹. Dr. Hufbauer and Mr. Goodrich note that the job loss estimate attributed to Dr. Hufbauer by the Financial Times "is not our central estimate."² They further offer that it is likely that steel tariffs alone caused the loss of 26,000 jobs in the narrowly-defined steel-consuming sector (we estimated that increased steel costs - resulting from tariffs as well as other factors — forced 50,000 of these workers onto unemployment rolls). When Dr. Hufbauer and Mr. Goodrich convert our estimate for the impact of total steel costs (50,000) to an estimate of costs for steel tariffs alone based on research they recently completed³, the result is 19,500 jobs⁴ — so our results are all reasonably consistent with each other. Thus, Dr. Hufbauer's comments to the Financial Times, focused as they were on the impact of tariffs alone on the narrowly-defined steel-consuming group, do not undermine the central conclusion of the study. Rather, they follow from a confusion of overall price effects with tariff-based price effects, and from different definitions of steel consuming industries. To reiterate, when one combines the recent IIE research results steel tariff impacts with the CITAC study's estimates for the narrower definition of steel consumers, the result is a job estimate lower than Dr. Hufbauer's own estimate, i.e. 19,500 (of our total estimate of 50,000) are directly attributable to tariffs in our narrowly-defined steel sector. The same approach with our broader-based estimates implies that 78,000 job losses of our total estimate of 200,000 job losses are directly attributable to tariffs. In our view, there is a rough consistency across the various estimates.

Other unfounded claims from steel industry representatives include the accusation that the study ignored exchange rate changes and international steel prices. Actually, our variable for the general manufacturing economy should pick up the impact of both factors on steel consuming industry employment. The study includes extensive discussion of the adverse effects of international steel prices on steel consuming industries. An objective reading of the report indicates that the study "obfuscates" nothing.

Our critics also charge that it was improper for us to use December 2001 as a base month because it was a month of low steel prices. On the contrary, we chose that month as the base specifically because it was the closest month to the beginning of the disruption of steel costs in 2002. In other words, that is the most recent month in which employment was not affected by the factors that gave rise to the higher steel costs. As we show in the study, the effects of the tariffs and steel shortages caused by domestic plant shutdowns began to force up steel prices in the early months of 2002, well before the President imposed the steel tariffs in March. Objective readers of the study will also note this point.

Critics claim that steel consumers obviously bore no ill effects from higher steel costs because the prices of their end products continued to decline as steel costs increased. This makes no sense, since rising input costs and declining prices by definition imply a squeeze on profits. As we carefully explain in the study, steel consumers, most of whom are small businesses with little market power over the price of the products they sell, had only a few choices once steel costs started to escalate and their customers refused to accept higher end-product prices. First, steel-consuming manufacturers could absorb higher steel costs out of profits. Second, manufacturers could cut costs by reducing payrolls through layoffs. Third, they could move production outside the United States, where they could get steel at world competitive prices, but reduce employment in the United States. Or fourth, they could cease U.S. operations and lay off workers. A fifth choice, that of increasing productivity, could not be implemented effectively by most businesses in the short run. Declining prices and employment for steel-containing products demonstrate that manufacturers chose to eat -into profits, cut costs and cease operations and lay off workers.

Domestic steel industry representatives have presented no meaningful technical criticisms of the study's regression-based approach. They cannot really challenge this approach because they themselves have used studies based on such techniques during the debate preceding the President's tariff decision.⁵

Instead, they charge that we used a "bad structural model" that found a relationship between prices and unemployment. In response, we simply note that the steel industry apparently believes that steel costs can soar with no ill effects. This simply defies logic: someone has to pay. In this case, steel consuming industries and their workers paid for the pain of price increases. Real people sat on unemployment rolls in 2002 as a result. Additionally, our estimates are consistent with other estimates of likely effects⁶. A recent article published by the Wharton Business School in Knowledge@Wharton cites several professors who confirm the cost-price squeeze facing steel consumers and the resulting "traditional pattern of tariff regimes:" one sector gains, another certainly pays.

Finally, steel industry representatives have not presented any counter estimates that they think are better than those now circulating: If they believe that some other number of steel consuming industry workers (however the sector is defined) are unemployed because of higher steel costs (including the effect of tariffs), then what is a better number? Nor have domestic steel producers given any support to their apparent claim that no job losses result (the "free lunch" theory of trade protection). Without a credible alternative, the CITAC Foundation study remains as the only analysis that estimates the employment effects of the steel price increases in 2002. We welcome the opportunity to discuss alternatives, when and if they become available.