Statement of Greg Mastel, Vice President and Director of Studies
Economic Strategy Institute

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on Steel Trade Issues

My name is Greg Mastel and I am currently vice president and director of studies at the Economic Strategy Institute (ESI).

For a number of years, I have been interested in the operation of U.S. trade laws and the international economic problems that make them necessary. I authored a book a year ago on the operation of U.S. antidumping laws, which impose duties on imported products sold at less than their cost of production or less than their price in the home market. When the steel industry's problems with dumped imports became apparent some months ago, ESI undertook a rigorous analysis of the global steel industry, dumping as a commercial tactic in the steel industry, and the application of U.S. antidumping laws as a remedy. This study was supported by a grant from the Kearny Foundation, a non-profit foundation whose purpose is to assess problems and opportunities of trade and business with Asia.

With your permission, Mr. Chairman, I would like to include the executive summary of this study, titled Leveling the Playing Field: Antidumping and the U.S. Steel Industry, with my testimony in the hearing record.

In the limited time I have, I would like to briefly summarize two important conclusions from the study.

First, the world steel market is deeply distorted by various subsidies, trade barriers, cartels, and numerous government industrial policies. The global steel market is the most distorted industrial market in the world economy. Many countries, notably Japan and Korea, have built domestic steel industries with industrial policies that rely heavily upon closed home markets, which ensure high domestic prices. Over the years, the formal government trade barriers that were once the backbone of this strategy have been replaced by the operation of cartels. Countries from Brazil to Sweden have followed their own versions of the "Japan strategy" over the years and domestic steel industries have proliferated.

Recently, the steel industry has been further complicated by the emergence of two partly reformed non-market economies, Russia and China, as respectively, the world's largest exporter and the world's largest manufacturer of steel.

In most of the world's steel market, the key decisions are made by the government, not by the market. As the OECD has documented, the cumulative result is the world has a great excess production capacity in steel.

For the United States, the world's only truly open major market for steel, dumping is the common result. Backed by subsidies or profits from closed home markets, steel companies from many countries dump steel on the world market to dispose of overproduction. Through dumping, these companies export steel and their home governments keep their steel workers employed and, effectively, export unemployment to open market countries. As the world's major open market, the United States absorbs much of both.

Certainly, the Asian and Russian economic crises pushed these dumped steel exports to higher levels in 1998 than previously had been the case. Still, were it not for many years of systematic market distortion there would be far less excess production capacity in the world and efficient steel industries, like that of the United States, would suffer far less from dumped imports.

Second, dumping is damaging to the U.S. economy. Some observers naively argue that dumping should be viewed as a gift to consumers and happily accepted. If other countries are willing to subsidize and dump steel, we should benefit from their mistake and enjoy the lower prices.

This view simply ignores the competitive realities in world industrial markets and cannot withstand rigorous analysis. As documented in my recent study of dumping in the steel industry, dumping is a periodic phenomenon that greatly impacts the U.S. industry on average only once every several years. Consumers only benefit in the year the dumping is actually taking place. Steel manufacturers, however, feel an ongoing negative impact. Investment and production decisions continue to be affected by the threat of dumping even after dumping has ceased. Without vigorous use of antidumping laws, the result would be a U.S. steel industry, which despite being otherwise competitive, would shrink dramatically in response to dumping. The cost to the U.S. economy in lost wages, production, and investment rapidly outweighs the transient consumer benefits from dumping. Over the course of a ten-year simulation of the steel market, uncountered dumping resulted in a $30 billion decrease in U.S. steel shipments.

Further, the potential costs to steel consumers of countering dumping are small. Even if dumped imports were entirely eliminated, the U.S. steel market would still be quite competitive and open, with more than a dozen U.S. companies competing vigorously among themselves and with fairly traded imports. Under these condition, countering dumping is highly unlikely to result in prices above normal market prices.

CONCLUSION

Mr. Chairman, no one would dispute that other factors, such as increased productivity, and demand disruptions, have had an impact on the steel industry. That said, however, the U.S. steel industry has made enormous competitive strides in recent years and, if dumping is countered, stands well positioned to generate high-paying jobs and contribute many billions of dollars to the U.S. economy in coming years.

By countering dumping, the U.S. government attempts to re-establish the level playing field that has been distorted by subsidies, cartels, and government industrial policies. On a level playing field, investment and production decisions will be made on a rational basis, which will greatly benefit the U.S. economy in the long term.

Countering dumping also has the significant secondary benefit of bolstering public support for free and open trade. Simply put, free trade will not long be politically viable without fair trade. The founders of the world trading system were well aware of this political reality and that is why the WTO fully endorses the operation of U.S. antidumping laws.

Those who want to ensure an open U.S. market and pursue further trade negotiations would be well advised to be certain that U.S. trade laws, like antidumping laws, are vigorously enforced. For without the operation of those trade laws, trade problems, like those now being experienced by the U.S. steel industry, would likely shatter public support for free trade.

Thank you, Mr. Chairman.

Leveling the Playing Field: Antidumping and the U.S. Steel Industry
Greg Mastel
Andrew Szamosszegi

Executive Summary

Driven by mercantilist trade distortions that underlie the global economic crisis, foreign exports of steel to the United States have hit record levels in 1998 and are continuing at high levels in 1999. This sudden flood of steel into the United States has forced U.S. steel mills to close or slow production and put thousands of steel workers out of work. These problems have, in turn, sparked a debate over what response, if any, the U.S. government should pursue. This paper analyzes the causes and impact of the surge in steel imports and analyzes the appeal of various policy responses, including U.S. trade laws aimed at countering unfair trade practices, such as subsidization and dumping.

The world steel market is perhaps the most distorted industrial market in the world. To achieve economic and political objectives, many countries have pursued industrial policies aimed at nurturing a steel industry with trade protection and subsidies.

In contrast, the United States steel industry has generally not been the recipient of such special treatment. The U.S. economy is open and subsidies have been very limited, especially when compared to those of other major industrial countries. In the 1970s and 1980s, the U.S. steel industry had serious competitive problems, but $50 billion in new investment has built an industry with some of the highest productivity levels and lowest costs in the world.

Success in today's highly distorted world steel market, however, often has less to do with investment, adoption of new technology and increased labor productivity than with the industrial and trade policies of foreign governments. The combined result of the numerous steel industrial policies is that the world has tremendous excess production capacity in steel. In such a situation, the high-fixed cost structure of the steel industry encourages fierce price competition during downturns. The involvement of governments, which press for keeping production lines open and workers employed, greatly accentuates this tendency. Dumping - sales in export markets below cost or sales below the price in the home market - is the frequent result.

The United States has frequently used antidumping laws, which counter dumping with offsetting duties, and countervailing duty laws, which counter unfair subsidies, to level the international playing field in steel. Since 1980, there have been 46 successful antidumping (AD) cases involving steel and 27 countervailing duty (CVD) cases. In response to the recent surge of steel imports, the U.S. steel industry has filed a number of new AD/CVD cases. These complaints allege, with considerable factual support, that companies from a number of countries, including Russia, Japan, South Korea, and Brazil are again receiving subsidies or are engaged in injurious dumping in the U.S. market, which are illegal under both U.S. and international law. If these allegations are upheld by U.S. authorities, offsetting duties will be imposed to counter the injurious impact of these practices on U.S. steel manufacturers and workers.

However, the economic desirability of imposing AD/CVD duties has been questioned. Some argue that the United States would be better off simply accepting dumped and subsidized products as "gifts to consumers." While this line of analysis is superficially attractive, it cannot withstand rigorous analysis.

The long term costs to producers and workers of failing to counter the dumped and subsidized steel in the U.S. market substantially outweigh the transient consumer benefits arising from short term price cuts. Without an assurance that action can and will be taken against trade distorting and illegal commercial practices, investment in and production of steel and many other manufactured products in the United States will become an unattractive proposition. Over time, the losses to the U.S. economy in terms of lost production, investment, and high-wage jobs, mount to painful levels.

This paper will demonstrate this point by using a dynamic partial equilibrium economic model to simulate the economic impacts of unrestrained steel dumping on the U.S. economy. Based upon historical experience, injurious dumping is modeled as an intermittent or periodic practice that is employed by foreign companies in only some years. Also based upon historical experience, scenarios for 5 percent to 15 percent price cuts due to dumping were considered. The results suggest that if the United States had not imposed antidumping duties in the 1990s, the economic costs of dumping would have outweighed the benefits of low prices to consumers within several years. In 1997, the total net costs of failing to counter dumping - lost economic activity, lower wages, etc. - would have totaled between $71 and $338 million, depending upon the level of dumping.

Based upon this simulation and related analysis, the paper concludes that the United States has a strong interest in countering dumped and subsidized steel imports. The alternative of simply accepting these market distortions would harm the U.S. industrial base, erode high-wage employment, and impose considerable net costs on the U.S. economy. Additionally, political support for free trade in the United States would likely erode in response to an obviously unlevel playing field.

Without question, the global steel market is entering a period that will require substantial adjustment. There is simply too much production capacity in the world and some of it must close. By employing AD/CVD duties, the U.S. government can ensure that efficient, competitive U.S. capacity will not be driven out of business by unfair foreign trade and industrial policies. By imposing duties on the imports that are most heavily subsidized or dumped, AD/CVD laws also encourage the closure of the least competitive steel mills around the world - a desirable and efficient market outcome.

An alternative approach that is often suggested, limiting imports through a Voluntary Restraint Agreement (VRA) may also preserve the U.S. industry. This approach is far less attractive, however, because governments, not markets, determine VRA market shares, and because quota rents would go to foreign governments or companies.

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