As public choice theory predicts, U.S. trade policy is dominated and controlled by well-organized, special-interest groups of domestic producers, who are able to take advantage of less-organized, dispersed groups of domestic buyers of imported goods that include millions of individual consumers and hundreds of industrial consumers. As a result of that domination of the political and legislative process by domestic producers, U.S. manufacturers are often successful at achieving favorable protectionist legislation for their industries.
One might ask: Protectionism against what and whom? The answer is always: Protection for domestic producers against more efficient, lower-cost foreign rivals. One might also ask: How is that protection achieved for high-cost, inefficient domestic producers? The answer is usually: Get government enablers to impose a “tariff” (i.e., a tax) on imported goods produced by your foreign competitors to artificially achieve what you have failed to do on your own: operate more efficiently and offer lower (or the same) prices than your foreign rivals.
Economic trade theory and mountains of empirical evidence on protectionist trade policy confirm conclusively that there is almost always a net loss of economic efficiency from protectionist trade policies. Reason? Protectionist trade policies generate costs to domestic consumers in the form of higher prices and reduced trading activity that outweigh the benefits to protected domestic industries, often by a factor of 2-to-1. In other words, protectionist trade policies always makes the country imposing them worse off on net, not better off, when considering all of the costs and benefits.
The latest example of successful trade protectionism? The U.S. steel industry successfully engaged in enough (wasteful) rent-seeking that it persuaded the U.S. Department of Commerce this week to impose punitive tariffs/taxes of 10-16% on its foreign, steel-producing rivals in South Korea. Below is how the WSJ reported it today, with the usual media bias of presenting protectionist trade policy completely from the viewpoint of the protected domestic industry. With some editing, the corrected text below reflects the alternative viewpoint of the U.S. consumer and U.S. businesses who buy foreign steel and who are now disadvantaged and burdened with higher prices for steel and all steel-containing products.
“U.S. Slaps Tariffs on U.S. Buyers of Korean Steel Pipe Because
of Alleged Unfair Pricing Economically Inefficient, but Politically Powerful and Well-Organized Domestic Steel Producers Have Successfully Been Granted Government Protection from More Efficient, Lower-Cost Foreign Rivals“:
The U.S. on Friday moved to impose punitive tariffs on American buyers of steel from South Korean steelmakers, saying they sold pipe used in the oil and gas industry at extremely competitive
artificiallylow prices that were below higher-priced domestic steel pipe. The Commerce Department’s final decision on Friday is a win for the U.S. steel industry, especially U.S. Steel Corp., after one of the most politically charged trade battlessuccessful examples of rent-seeking protectionism and crony capitalism in years. It’s also a major loss for the hundreds of U.S. companies that purchase foreign steel pipe, their employees, shareholders and customers. It’s also a major loss for the U.S. economy, which will suffer from a net loss of economic efficiency, a net loss of jobs, and a loss of economic growth from the protectionist trade policy that will artificially raise prices for hundreds of products that contain steel and use steel pipe.
If a special U.S. trade commission finds the alleged dumping hurt American steelmakers, even if those low steel prices helped American steel-using industries significantly more, then the
tariffspunitive taxes on American steel buyers will become permanent and likely buoy steelmaker profit margins in the U.S., while increasing the cost energy companies pay to drill today’s complicated wells. On the other hand, those increased costs of steel pipe will erode profit margins of energy companies, and hurt their shareholders, customers and employees. In other words, it’s another case of crony capitalism, where the government is deciding winners (U.S. steel producers) and losers (U.S. companies who use steel and steel pipe as an input).
Steel executives and a union leader have said
unfairlymore efficiently produced and lower priced imported steel could cost U.S. jobs, and numerous U.S. lawmakers have called or written the Commerce Department out of concern about the case. Speaking for the other side, energy company executives and a union leader said that low-cost foreign steel from Korea has enhanced their competitiveness and greatly helped their industry expand and grow as the U.S. shale boom has boosted their sales, business opportunities and jobs.
To protect the U.S. steel industry from more efficient foreign competition, the Commerce Department assigned
tariffstaxes of an extra 15.75% on the tubular steel products from Hyundai Hysco Co. and 9.89% for Nexteel Co.; Other Korean suppliers were subjected to punitive tariffs of 12.82%. As a result of the taxes on foreign steel, U.S. energy companies using steel pipe will face higher input costs and will therefore be less competitive and less profitable, which might likely result in fewer energy jobs for Americans.
“We are deeply disappointed by the determination, which disrupts the current level playing field” with unfair high tariffs that will ultimately be paid for by American buyers of steel, said an official at the Korean embassy in Washington. “We had expected the U.S. government to lead by example and resist protectionist pressure from well-organized and politically connected U.S. steel producers. This provides one of the best recent examples of exactly the type of distortionary crony capitalism that makes the U.S. less economically efficient and worse off, not better off. We will consider every possible option to challenge this unfair protectionist decision favoring U.S. steel producers over U.S. steel buyers, including at the World Trade Organization.”
After news of the decision, U.S. Steel shares climbed 3.2% in price on Friday to $27.64 by the close, providing empirical evidence that successful rent-seeking, protectionist trade policies, and crony capitalism generate significant financial benefits for the shareholders of domestic industries who use the political process to artificially distort markets in their favor. Offsetting the gains in the stock prices of American steel producing companies like U.S. Steel were losses on Friday for the stock prices of U.S. energy companies that rely on low-cost steel pipe from Korea as one of their main inputs.
“We applaud their decision to
prevent further gamesmanship of our lawshobble our more efficient rivals in Korea with artificially higher prices that will allow us to gain market share, and to secure our nation’s economyartificially higher, government-enhanced profits for our shareholders,” U.S. Steel Chief Executive Mario Longhi said. “As a result of rising imports of more efficiently produced, lower cost steel, United States Steel has suffered mightily: orders have been reduced, mills have been idled and jobs have been lost. We’re obviously not efficient enough to compete on our own merits, and we need the heavy hand of U.S. government intervention to survive. Our rent-seeking efforts are a great example of how crony capitalism works in America today to protect well-organized special interest groups of domestic producers against more efficient foreign competition.”
The U.S. International Trade Commission will next decide whether the
alleged dumpinglow-cost steel imports harmed the U.S. steel industry more than it helped U.S. steel-using industries and, if so, make the tariffstaxes on foreign steel permanent. Economic theory and overwhelming empirical case study evidence suggest that the economic benefits to the U.S. economy from cheap, foreign steel significantly outweigh the costs to the U.S. steel industry. Therefore, a protectionist outcome of permanent steel tariffs would result in a “dead weight loss” to the U.S. economy, and an overall net loss of jobs, profits, and economic benefits.
It wasn’t immediately clear whether the tariffs would stop Korean firms from selling the product, known as oil-country tubular goods, or OCTG, to willing, loyal buyers in the U.S. market.
A complete shift from low-cost, more efficiently produced Korean steel to higher-priced U.S.-produced steel would raise the cost of developing a new oil well by between 1% and 4%, depending on the quantity and quality of steel tubes needed for it. Those higher production costs could results in higher energy costs for millions of American consumers and businesses, and a significant net loss of economic benefits.
MP: This would be a good time to invoke the wisdom of French economist Frederic Bastiat:
Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.
If the viewpoint of the consumer, i.e. mankind, were seriously considered in the case of imported steel from Korea, there would be no question about the outcome – no government protection for the U.S. steel industry. And to get the lowest possible steel price for American consumers, we should welcome the Koreans to engage in as much “dumping” as they are willing to…. the lower the price they offer us, the better…. even if it’s below their cost of production… And if that’s really the case and they’re selling steel and steel pipe at a loss, we should gladly accept their generous gift of foreign aid to America, and stop complaining….
Update: Don Boudreaux sent a letter to the WSJ about the steel tariffs, here’s an excerpt:
The ostensible principle behind Uncle Sam’s action is that we Americans are made poorer when non-Americans act especially vigorously to increase our access to foreign-made products. But this principle is economically insane. People grow prosperous, not by rejecting, but by embracing enhanced access to goods and services, regardless of the sources of this enhanced access.
If the principle that motivates Uncle Sam to tax Americans who buy inexpensive imports were valid, then, for example, my household would be made poorer whenever I buy - rather than make myself - my own furniture and clothing. After all, Ethan Allen and Nordstrom charge prices so low that they not only “hurt,” they destroy, my capacity to make for myself the goods that they offer for sale. Should I perhaps, in my quest to grow more prosperous, hire my neighbor to threaten to shoot me whenever I seek out merchants willing to sell to me especially low-priced sofas and shirts?