I
am going to look at the “infant industry” theory which states that a country
can protect a fledgling domestic industry by implementing tariffs and quotas into
a free trade market and thus improve marginal cost to become more competitive
in the global market. The question I will address in this paper is whether the
use of trade restrictions, like tariffs and quotas, has worked in the United States
steel industry and the overall effect on the United States economy.
Steel
is an intermediate good which is used in the production of manufactured consumer
goods i.e. the auto industry, appliances, etc. This of course means that tariffs and quotas
on steel not only effect the steel industry, but a wide number of industries. Steel has a secondary affect on U.S. consumers
and businesses, in that as steel prices increase so do the prices of various
consumer and business goods. What I will
be looking at is if the cost to industries like automobiles and the cost to
consumers are a reasonable cost to be absorbed in order to help protect the
U.S. Steel industry from foreign competition.
For
most of the 1950’s the U.S. had little need to implement market trade
restrictions on foreign steel as the percent of imported steel was less than 2%
of the U.S. market, but in 1958 this changed. In the late 1950’s the U.S had
lost its technical advantage over its foreign competitors. In addition the wage
price was also higher domestically, which lead to import prices consistently 10
to 20 percent below the U.S. price. As a
result of the technology and wage factors, imported steel went up to almost
17%.[1] Because
of this increased competition, the U. S. implemented quotas on imported steel
in 1968 in an attempt to prevent further market penetration by foreign
competitors. As general economic theory
has shown, the effect of a quota is to raise the domestic market price to a
level where the domestic industry is competitive in the domestic market.
The
U.S. in 1968 is now treating its steel industry as a pseudo infant industry, with
its protectionist practices. With the quotas, the U.S. government limited the
competition that U.S steel faced in the domestic market. The hope of the U.S. government was that the
U.S. steel industry would be able to lower its marginal cost during the five
year quota period. The U.S. government
believed that if they didn’t intervene there would be further market
penetration to the point U.S. steel could not recover. This is the same theory that
Japan used to help its auto industry develop into a competitive world producer
of automobiles. By not allowing imports
of cars into Japan, they were able to capture the whole Japanese market and
wait until their marginal cost fell to a level which would be competitive on
the world market.
Did the quotas work? In Effects
of Trade Restrictions on Imports of Steel (ETRIS) a study in 1980 which
looked at the U.S. steel industry from 1969 to 1973, it was found that the
quotas the U.S. had in place did prevent imported steel from capturing more of
the U.S market. “In the first year of our period of study, imports would have
displaced less than 2 percent of domestic shipments. This percentage
displacement would have increased gradually to about 8 percent four years
later.”[2] The quotas also saved U.S. steel jobs as
illustrated in the following table.
Year
|
Predicted Employment with Trade Restrictions
|
Predicted Employment with Free Trade
|
Effect of Trade Restrictions as a Percent of
Column
|
1969
|
659.8
|
643.6
|
2.5
|
1970
|
628.4
|
589.4
|
6.2
|
1971
|
578.1
|
544.5
|
5.8
|
1972
|
584.4
|
494.6
|
15.4
|
1973
|
628.4
|
518.8
|
17.4
|
This study provides evidence that the quotas did protect U.S steel. Even though the Japanese auto protections were more restrictive and in turn more effective in propping up the specific industry, the U.S. quotas did help prevent excessive foreign penetration into the U.S market. In fact, tonnage of imported steel in 1973 without the quota is estimated to be 27.5 million tons over 10 tons higher than the actual imports of 17.3 million tons.[1] In addition, saving union jobs was something the politicians in the U.S were intent on. For many the quotas implemented in 1969 were a success. As shown in the figure below, predicted import share with free trade is much high than the actual import share with trade restictions.
APPARENT CONSUMPTION = SHIPMENTS + IMPORTS –
EXPORTSThe
quotas might have slowed market penetration and helped prevent massive layoffs
in the U.S. steel industry; however, by the end of the 5 year quota, import
penetration was still increasing and the stable equilibrium that the U.S.
government was hoping for had not been achieved. Also, because steel is an intermediate good,
the trade restriction caused the price of manufactured goods that used steel, to
increase, which harmed consumers and businesses. ETRIS says “Removal of import barriers would
have generated gains to purchasers of imported steel. These gains, in the form of
lower prices would have accrued both to industries using steel and to consumers
of steel-using products. We estimate that these gains would have more than
offset the total losses to steel workers and the domestic industry.”[1] As
we can see, the trade restrictions had unintended consequences. In 2003, President George W. Bush imposed
tariffs of nearly 30% on certain imported steel for a 3-year period. The World Trade Organization (WTO) acted
quickly saying that these tariffs were illegal and did not meet the standard of
fair trade that the members of the WTO are required to meet.[2] The
goals of these tariffs were again designed to give the struggling U.S. steel
industry time to lower marginal cost to become competitive by the end of the 3-year
tariff period. One of the side effects
of tariffs is the potential retaliation from trading partners. For instance, the European
Union imposed more than $2 billion in sanctions on imports from the United
States as a result of the U.S. steel tariffs.[3]
Even more pressure for the repeal of the tariffs came from the U.S automakers
who claimed that their cost had gone up greatly due to the tariffs.[4]
The tariffs would be short lived when in December of 2003 they were repealed. President
Bush said of the tariffs, "I took action to
give the industry a chance to adjust to the surge in foreign imports and to
give relief to the workers and communities that depend on steel for their jobs
and livelihoods. These safeguard measures have now achieved their purpose, and
as a result of changed economic circumstances it is time to lift them."
According to the White House, by the time the tariffs were eliminated, foreign
imports of steel were at their lowest point in years.[5] In fact, exports of U.S steel had increased from 5,450,000 in
2002 to 7,460,000 in 2003,[6] so the goal of a competitive U.S. steel industry had
apparently been achieved by implementing trade restriction.[1] James M Jondrow p.2
[2] U.S. Tariffs on steel are Illegal,
World Trade Organization says, Elizabeth Becker, the Washington Post
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