Let me get right to the point (for once). President Bush’s decision to impose punitive tariffs on foreign finished steel products was wrong! Period!
I believe the President to be an advocate of free trade, as was his father and virtually every living President; Secretary of Commerce, State, or Treasury; and Federal Reserve Chairman. In fact, during the 2000 campaign, his stance on “free” trade was in sharp contrast to Mr. Gore’s call for “fair” trade.
What happened is nothing more complicated than the fact that economics and politics got jumbled together in an unfortunate manner. Sadly, this happens all too frequently.
Steel industry executives and workers asked for the protection on the grounds that (1) foreign steel was being dumped in the US at low prices and (2) the industry and jobs could not be sustained without the tariffs. Combine these factors with a little weakness in the economy and a lot of demagoguing about whose fault it is, and you have the makings for a bad decision.
The notion of restricting imports to shield domestic industry from competition is certainly not new. In fact, it was quite popular in the 15th-17th Centuries. The doctrine was known as Mercantilism, and its disciples included the likes of Oliver Cromwell, Elizabeth I, and Ferdinand and Isabella. The notion is quite simple: the way to grow an economy is to export everything and import nothing.
This theory has a glaring flaw—in a global economy, there would be no buyers, only sellers. Academically, it was discredited by many scholars in the late 18th and early 19th Centuries, most notably Adam Smith, Robert Torrens and David Ricardo. Yet Mercantilism refuses to go quietly into the night. It is embraced in early developmental stages by virtually every country and can always be counted on to make an appearance wherever trade pacts are negotiated, international organizations meet, or an industry finds itself unable to compete in the world marketplace.
The bottom line is very simple. Artificially raising the price of finished steel in America will directly increase the cost of every product that uses steel as an input. The list of such products is long and includes many high-tech, high-growth sectors. We then become less competitive in these markets, lose domestic and export sales, and experience unnecessary inflation. In the long run, the pace at which steel is replaced by more cost-effective materials is accelerated, which will bring the industry back with hat-in-hand for more concessions a few years down the road (this is not the first time it has happened). These effects work their way through the entire economy, lowering production, job creation and maintenance, and economic well-being.
Even the problems mentioned above don’t account for the fact there will be retaliation from other countries on other items, thus further weakening our economy and reducing the efficiency of the entire world. There are established mechanisms to address legitimate trade issues in the international arena; imposing tariffs is simply not the answer.
Clearly, it is unfortunate that some domestic workers are displaced by lower-cost production techniques. The solution, however, is not to artificially insulate them from the forces of competition. If we had applied that logic throughout our history, we would still be graced with thousands of hand loom operators, musket-ball molders, and buggy-whip makers. There are two viable and productive alternatives. One is for the steel industry to invest in modernization; the other is for the workers to be retrained in emerging skills. As another historical note, this problem dates back to the post-World War II era when domestic steel producers chose to hide behind a veil of protectionism rather than to adapt the basic oxygen furnace when it was initially introduced.
In the end, Mr. Bush’s tariffs pleased no one. The industry and workers feel that the 30% tariff is not enough; they want to make sure they never have to face the rigors of the world market and could be guaranteed profits for inefficiency at the expense of consumers and the rest of the economy. To others (including all of our major trading partners, most economists, and producers in any sectors that directly or indirectly purchase steel), any additional tariffs are unjustified, and, in fact, we should be moving in the other direction. Free trade ultimately benefits all nations. This is a simple, incontrovertible idea that has been around for about two centuries. When will we ever learn?