Southern Metal Finishing

Re: Difficult Choices in the Global Marketplace - A look at the U.S. steel industry shows

Found on CQ Weekly, November 12, 2007, By Clea Benson

The forces of globalization are buffeting McGregor Metalworking, an Ohio company that forms sheets of steel into everything from sprockets for gear shafts to seat frames for cars.

Among its products is a steel pulley that goes into lawn mowers. For each one, the company spends about $3 on materials plus $1.50 for labor and other costs. It sells the pulleys to equipment makers for roughly $5. But Chinese steel is currently $150 a ton cheaper than American steel, so Chinese manufacturers can sell the same finished pulley for less than McGregor pays for materials alone.

Jamie McGregor, sales director for the family business, says that’s why he opposes the import duties the Bush administration has imposed on steel from certain countries, including China. If McGregor Metalworking could buy cheaper metal overseas, it could keep its prices low and its workers employed.

But U.S. steel producers — which make metal sheets and tubes that compete with imports — have fought to retain those duties saying they, too, need protection from inexpensive imports. Otherwise, they say, steel millworkers will be the ones to lose their jobs.

This dispute illustrates the conundrum facing lawmakers and government officials who seek to protect U.S. manufacturing in an age of globalization. With worldwide competition pushing down the price of both raw materials and finished goods, trade rules designed to shelter one industry can harm another.

Right now, in disputes over import duties, producers hold all the cards. The U.S. Government considers the concerns only of the direct competitors — not the effect on third-party buyers — of a product such as hot-rolled steel when determining whether to impose or lift penalties. But steel users are pushing to change the rules so they get an official seat at the table in tariff fights. Their efforts could change the balance for a wide range of industries struggling to survive in the face of foreign competition. At stake is not just the price of goods, but whether it will be the American producers or consumers of materials whose jobs migrate abroad. Experts say that’s a fight that one side must ultimately lose.

“Economies grow and develop, and they become smarter and more expensive,” said Laura Baughman, an economist who runs a trade-consulting firm. “As you move up the value chain, you can’t cling to the lower wage jobs. It doesn’t do you any good.”

Some of McGregor’s customers, themselves squeezed by price competition from abroad, have already taken their business to China. Demand for the company’s pulleys has dropped by half in the past year. Fifteen people at the 400-worker company have lost their jobs. And there’s more trouble to come. A client called recently about some parts “and said if there’s nothing you can do about the prices of these, they’re in danger of being moved overseas,” said McGregor, 31, the third generation of his family to work at the company.

Meanwhile, steelmakers say they merely want U.S. and international regulators to enforce trade laws and agreements. They contend that China and other countries are violating agreements by keeping prices low artificially and dumping goods on the U.S. market. And they accuse steel consumers of just trying to get a cheap deal at the expense of American steelworkers.

“If you sell steel for anything you want, we’ll employ the steelworkers in Beijing or Moscow or New Delhi” rather than those in the United States, said Terry Straub, vice president of public affairs at U.S. Steel.

How We Got Here

This fight has been simmering for years, persisting throughout dramatic changes in the global market for metals.

In the 1990s, a worldwide glut of steel flooded the United States, leading to a wave of bankruptcies and consolidations among steel producers. In 2002, the Bush administration imposed a range of duties on imports in an attempt to counteract what producers claimed was the unfair dumping of below-cost steel.

Many of those duties have since been lifted. And with demand soaring in China and India, and high oil prices raising the cost of imports, domestic steel producers have been doing relatively well recently.

The latest round in this conflict erupted recently, when automakers and other steel users asked the U.S. International Trade Commission to remove the remaining anti-dumping duties, and producers argued that those duties were still needed. The ITC agreed to lift some penalties but not those that affected China — currently the biggest competitive threat to both producers and consumers of steel — or a few other countries.

Steel-consuming businesses are now pushing for official standing in complaints filed at the ITC. Joe Knollenberg, R-Mich., has introduced a House bill to require the agency to consider the impact of duties on the users of imported products. The measure, which would drastically change the way these cases are argued and decided, isn’t expected to gain traction soon, but steel users say they’ll persist.

“We’re not guaranteed an opportunity to testify, nor does the ITC believe that it needs to listen to what we say,” said William Gaskin, president of the Ohio-based Precision Metalforming Association. “Their current view is that trade cases are about importers and exporters.”

Straub, of U.S. Steel, says users should simply go through established channels and file trade complaints when they perceive finished products such as pulleys are being dumped on the U.S. market. “If the maker of the steel widget is facing competition from unfairly traded goods, they ought to bring a trade case and prosecute,” he said. “But that’s not what this fight is about. This is about steel buyers in this country trying to buy the cheapest ton of steel irrespective of whether it’s fairly traded.”

Gaskin countered it can be quite difficult to press trade complaints on individual products, which are imported in much smaller amounts than raw materials. The financial loss for one product may be less than the cost of bringing a complaint, he said.

The Bigger Picture

Producers and users also come down on opposite sides in a coming battle over a practice known as zeroing, in which the Commerce Department calculates dumping penalties without taking into account the volume and price of similar goods that aren’t deemed to be dumped. That often increases the magnitude of the penalties and the price of foreign-made steel; so producers support zeroing, and users oppose it. Though the practice was suspended after a World Trade Organization ruling that it violates trade agreements, proposals to reinstate it are now floating around Capitol Hill.

Steel isn’t the only industry in which tensions exist between the producers of raw materials and the makers of finished products. The Commerce Department sparked a controversy last year with a study showing that high U.S. sugar prices, propped up by import quotas and farm subsidies, were driving candymakers abroad — and that nearly three candymaking jobs were lost for each sugar-harvesting job saved. The U.S. textile industry has faced a similar situation.

In a 2003 study for a coalition of steel parts makers, Baughman found higher prices that resulted from duties had caused the loss of almost 200,000 U.S. jobs, more than the roughly 188,000 people employed at the time in American steel mills. In her view, U.S. policy should use tax incentives and other remedies — not duties — to aid struggling industries. “The classic economist policy recommendation is to let the market work,” she said. “My personal bias is that trade barriers always going to entail greater costs than benefits.”

Others say the loss of jobs across a range of industries can be halted only if the United States uses trade agreements to insist on a fair playing field with countries that artificially manipulate their currencies and close their markets to American products.

“The issue isn’t whether we’re going to have globalization,” said Peter Morici, a University of Maryland professor who was director of economics at the ITC during the Clinton administration. “The real problem is when jobs leave the United States because we are denied market access abroad.”

Global price pressures aside, McGregor Metalworking hopes to stay in business by using research and development to become more productive. “We’re finding that the engineering expertise we have, whether it be taking costs out or coming up with a faster way to do it, is what’s keeping us in the game,” said McGregor, who recently came to Washington on a lobbying trip with other young executives from metal-forming companies.

McGregor said he believes U.S. Manufacturers have a future. But ironically, companies such as his face a separate long-term problem: finding enough workers with the technical skills to do the jobs they can offer.

Scared off by stories about plant closings, fewer young people are seeking careers that require vocational skills. Training programs tend to shut down whenever the steel industry is whipsawed by swings in global supply and demand. But new products and new methods demand new skills.

The answer, said Charles Freeman, a trade expert at the Center for Strategic and International Studies, may lie in an approach to training workers that doesn’t just focus on the threat posed by foreign trade. “I don’t think there is a magic bullet that we can rely on,” Freeman said. “I think the United States has not yet begun to really look at the broader issues of American competitiveness and look at the way we employ people in industries like steel.”

For Further Reading: The Knollenberg bill is HR 1127; trade and jobs, p. 2360; textile manufacturing and China, 2005 CQ Weekly, p. 2632.