There Is No Steel 'Crisis'

by Daniel T. Griswold

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute.

March 15, 1999

It is a sad comment on the state of U.S. trade policy that the only "fast track" legislation in sight is a steel import quota bill steaming toward a vote in the House this week. Fueling the drive for protection is the belief that rising imports have plunged the U.S. steel industry into "crisis."

American steel mills have certainly faced adverse market conditions in recent months, but claims of a crisis that threatens the viability of the industry are wildly overblown. An examination of the broader historical record shows that overall industry performance in 1998 was negative only in comparison with that of the string of immediately preceding banner years.

While domestic steel shipments dropped slightly in 1998 compared with the record-setting 1997, they were still at their second highest level ever. Shipments in 1998 were 20 percent higher than in 1989, at the peak of the last expansion, and a whopping 66 percent higher than during the trough of the 1982 recession, according to the American Iron and Steel Institute. This is hardly the picture of an industry at death's door.

Not only is the U.S. steel industry strong by the standard of its own past performance, it is strong in comparison with other industries around the world. The impression given by the steel lobby is that the output of American mills is being displaced by relentlessly expanding foreign production. In fact, many steel industries around the world are suffering far worse at present than our own. The Japanese steel industry, for example, sank to its lowest production levels in 30 years last year. With world steel output falling, U.S. producers actually increased their share of world steel output last year, to 12.6 percent from 12.3 percent in 1997.

Although earnings fell from the previous year, most domestic steel companies continued to operate profitably in 1998. Of the 13 domestic steel makers with annual sales of more than $1 billion, 11 posted operating profits in fiscal 1998. Even in the fourth quarter of 1998, in the depth of the supposed crisis, 9 of the 13 -- including antidumping USX Steel Group -- posted net profits. Major American steel producers enjoyed combined profits of more than $1 billion in 1998

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American steel mills have certainly faced adverse market conditions in recent months, but claims of a crisis that threatens the viability of the industry are wildly overblown.

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The steel companies and their unions point again and again to the 10,000 jobs lost in the past year as proof that emergency action is needed. First, although statistics do show a decline in steel-sector employment of roughly 10,000 workers from January 1998 to January 1999, there is no evidence to indicate how much of this total is due to normal attrition (i.e., retirements not offset by new hires) rather than layoffs, or the percentage of layoffs due to rising imports rather than other factors. Furthermore, declining employment has been the norm in the steel industry for the past two decades. A continuation of this secular trend is hardly evidence of a crisis.

The figure of 10,000 job losses, even if taken at face value, is hardly alarming when compared to the 2.5 million net new jobs created in the whole U.S. economy in 1998. In other words, total jobs eliminated in the steel industry over the course of the past year come to little more than a single business day's worth of net job creation in other sectors of the economy.

Meanwhile, the 1998 import surge shows every sign of being a passing phenomenon. According to Commerce Department figures, imports of steel mill products peaked in the third quarter of 1998 and have been declining sharply since then. Normal marketplace reactions to falling prices and rising inventories, compounded by the threat of retroactive antidumping duties, caused steel imports to plunge by 29 percent in December compared with the previous month and another 7 percent in January.

Hot-rolled steel imports from Japan, Brazil and Russia -- the products targeted by the antidumping petitions -- have dried up, falling to only 4 percent of their November 1998 levels. The AISI reports that total steel imports in January 1999 fell to 2,669,000 tons, less than the monthly average of 2,729,000 tons imported during the last "pre-crisis" quarter of April-June 1997.

Another factor also contributed to the steel industry's difficulties during 1998. The General Motors labor dispute in June 1998 sharply cut domestic demand for steel in the second quarter. The sudden fall in demand left domestic steel mills with significant overcapacity and rising inventories, driving down prices further. That temporary disruption of the steel market ended with the resolution of the strike.

Despite recent problems, prospects for the U.S. steel industry look positive. Domestic demand is expected to remain strong, especially in the automotive sector, and exports could pick up in 1999 as demand in East Asia begins to recover. After bottoming out in the fourth quarter of 1998, steel prices are expected to rise in 1999; indeed, numerous U.S. mills have announced price hikes in the past few weeks.

American steel makers admittedly have experienced a tough couple of quarters. These challenging times, though, do not constitute a "crisis." They do not threaten the future of the industry. And they certainly do not justify resort to ill-conceived protectionist policies that would injure downstream U.S. industries and flout our international obligations.