Case Study

The US Steel Industry in 2004: Still in Need of Protection?

Presented by:Harman Singh

Section-C 40/10

SUMMARY:The case discusses the problems being faced by the US steel industry. It starts with the history of the US steel industry and explains how it went through several phases of growth and consolidation. The case also describes some of the technological innovations in steelmaking, and their impact on the structure and profitability of the industry. It also explains the measures taken by the US Government to protect the domestic steel industry.

History:The US steel industry has been in existence since the late 19th century. At that time, competition in the industry was intense and at times destructive. The production and prices of steel were decided by loosely knit agreements, but these agreements collapsed very frequently. Thus, the need for greater stability to control to control production and prices was felt. Steel producers came to realize that cooperation was more profitable than competition, and so in 1901, with the help of JP Morgan, they decided to form a giant steel company: the US Steel Corporation (US steel). The US steel controlled around 65% of the US’ Steel capacity. The company would forecast the price of steel and others would not undercut the price, fearing retaliation from US steel.In the early 1930s, the steel industry was severely affected by great depression, which led to fall in production and unemployment. This subsequently led to breakdown of the earlier stable structure of uniform delivered prices.After the Second World War, the US steel industry continued its leadership position globally because the steel firms in Germany and Japan were destroyed during the war. However, by the late 1950s, Japanese and European steel industries recovered from the war and started exporting to the US. This led to an increase in imports by 37000% between 1950 and the end of 20 th century. The dominance of US steel industry seemed to be over by 1970 and domestic steel consumers became increasingly dependent on cheap imports. The main reason for the increasing imports of steel into the US was the overcapacity in steel manufacturing in foreign countries. Due to falling demand of domestic steel, the domestic manufacturers were forced to pull back their steel production capacity. By the late 1900s, the US steel industry was severely undermined due to continuous rise in imports of low priced steel.The US steel industry responded to the crisis in two ways: one, it started consolidating and, two; it launched a political campaign to obtain government protection from foreign competition.

Evolution in Technology:In early 1900s Open Hearth Furnaces (OHF) were used. The process produced the high quality steel needed in automobiles and certain other applications. Following the Second World War, OHF was replaced by Basic Oxygen furnace (BOF) which took lesser time in production of steel. The more recent steel making approach involved Electric arc furnace (EAF). It made possible the construction of mini-mills. These mini-mills increased the efficiency of steelmaking by converting molten steel

directly into solid shapes ready for rolling and finishing. Mini-mills began to compete with integrated mills in the US in the 1970s.

Response of US steel industry to the steel crisis:Consolidation:In the early 2000s, US steel industry went through a phase of consolidation. Many acquisitions took place during this period and as a result around 38 million tons of capacity shifted from small independent firms to larger firms. According to industry sources, these acquisitions had taken place to take advantage of the resulting economies of scale, whereas, according to some analysts, it led to managerial and financial savings.

Government Protection:In the 1980s, the government imposed quotas limiting imports to 20% of the US market. The industry was also protected by voluntary restraint agreement on imports. In the late 1990s, the Clinton administration imposed a 12-point plain to protect the domestic industry from dumping of Japanese steel.

The President’s Steel Program:In June 2001, the president of the US, George W. Bush announced his steel program which consisted of 3 parts:

- Start negotiating with trading partners to eliminate inefficient excess capacity in the steel industry worldwide.

- Start negotiating with trading partners to eliminate the market distorting practices including subsidies that resulted in excess capacity.

- Start investigation under section 201 to determine whether the US industry was harmed by low-priced steel imports.

Eliminate Inefficient Excess Capacity:According to US government officials, there was an excess capacity of 200 million metric tons of steel worldwide in the late 1990s. In December 2002, senior government officials from 37 major steel manufacturing countries and European Commision participated in the OECD steel meeting in Paris where it was decided that ongoing intergovernmental peer review of steel capacity developments and restructuring of the steel industry in various countries would continue, and steps would be taken to ensure more accurate, complete and timely reporting. It was felt that excess capacity was one of the principal reason for the crisis that domestic and global steel manufacturers had faced for decades.

Eliminate the Market Distorting PracticesIn the December 2002 OECD meeting, it was agreed that the steel manufacturing countries would start working on an agreement to eliminate or reduce trade-distorting subsidies.

Section 201 Tariff Measures:The US International Trade Commission (USITC)’s investigation found that US steel industry was seriously injured because of imports. It recommended tariffs of up to 40% on imported steel. In march 2002, the president imposed tariff measures to help domestic producers compete with imported steel. The tariffs would range from 8% to 30% on various imported steel products and would be applicable for 3 years. Other measures announced to protect the domestic steel industry

were: creating an anti-surge monitoring mechanism; creating an important licensing system for steel products covered by a safeguard remedy.

Protectionism V/S Free Trade:President Bush's tariff measures to protect the domestic steel industry were hailed by supporters of protectionism but were vehemently criticized by proponents of free trade. Some analysts claimed that some trading partners had in the past resorted to unfair trade practices such as dumping and predatory pricing, so it made sense for the US steel industry to be protected. Because of the protection, the industry was able to regain its leadership position in quality and productivity. Another justification was legacy costs of the industry. The govt. could use the funds generated from higher tariffs to help the industry meet its health care and pension costs.Supporters of free trade argued that overproduction was mainly a result of govt. protection and as a result contributed to suffering of the steel industry. The govt.’s protectionist policy had adversely affected market efficiency and innovations in the industry. The analysts also felt that the new tariff measures were likely to violate WTO guidelines and that would lead to trade wars between the US and its trading partners.

Trade Wars:As expected, the imposition of tariff measures was vehemently opposed by trading partners of the US and they complained to the WTO Appellate body. The EU even threatened to impose tariffs upto 100% on US imports. In Nov. 2003, the WTO gave its ruling that the safeguard tariffs imposed by the US in 2002 were illegal.In Dec. 2003, the president lifted the tariffs, thus avoiding a trade war with the EU and Asian countries.

Future Outlook:The global attack against US trade laws continues. The China currency and trade deficit problem is harming steel’s customers. It was predicted that employment in the industry would continue to fall in the future and output of the industry would increase at a very slow rate and the importance of steel in the US economy would decline further.