U.S. steel costs are normally higher in the U.S. due to the wages and benefits productions to employees and retires; many U.S. steel producers are lagging behind technologically. In 1976, import restrictions imposed had little effect, hence U.S. steel is still considered of lower quality. By 2002, 31 U.S. steel companies filed for bankruptcy protection.
Analysis of Alternatives
Given the situation with U.S. steel companies, the U.S. government needs to decide what to do regarding protecting the steel industry.
There are a number of strategies that U.S. government should consider, including that the U.S. government should not be involved in protecting the steel, but instead should allowed for free trade, consider imposing import restrictions in the form of a tariff on imported steel, or consider offering support to the U.S. steel industry in the form of subsidies and/ or the absorption of legacy costs. The alternatives will be analyzed according to factors such as the impact they will have on the steel producing industry, the international reaction(retaliatory trade restrictions), the domestic reaction from other U.S. industries that are hurt by imports, consider implications to U.S. taxpayers and also the impact each alternative will have on the individual consumer. According to these factors, following is an analysis of these alternatives.
The strategy that states the U.S. government should not be involved in protecting the steel, but instead should allowed for free trade, has several costs and benefits associated with it. First of all, free trade will be a great deal in terms of U.S. steel industry production, because U.S. is a prominent buyer from the rest of the world, that means U.S. imports more than it exports. According to this, the save on import tariffs will be really helpful for the development of the steel industry and also it will facilitate the increase of importing raw materials, which will be translated in an improvement of the industry, due to, for example, the faster time to market, without the inconvenient of the import restrictions. The opportunity should not be missed; it will allow U.S. to reduce costs and invest in modern technologic equipment for the increase of steel industry benefits. Under a consumer point of view, this free trade will be beneficial, because we could purchase for a lower price; the free trade also means, in terms of consumer, more imports, so, at the same time, more variety for the consumer. Finally, the U.S. taxpayers will be also beneficiated with this strategy of free trade, because they will avoid paying tariffs, which obviously is always beneficial for a business.
This strategy of free trade also has important disadvantages that need to be considered.
First, the free trade is likely to import raw materials, as I have said before, so the U.S. industry will be damaged, specially the refining industry (part of the steel industry production), because, if they can import the same materials from another country with a lower price, they will product less nationally, and this means that a lot of workers will lose their jobs, so the implied meaning to this, is that the U.S. industry will become mediocre. The domestic reaction from other U.S. industries that are hurt by imports will be really harmful for the U.S. economy; in terms of production and sells, will be very difficult to maintain the same market level with this new competence that imports will create, because the cost of confronting the competence prices will be very high: hence this industries will not sale enough products to maintain the costs of the business, the consequence could be bankruptcy. Finally, this strategy could also mean a retaliatory international reaction, because the developed countries will be adapted in a better way to this new situation of free trade, but the non-developed nations will probably be seriously damaged, becoming isolated by the other stronger economies.
The U.S. government should also consider imposing import restrictions in the form of a tariff on imported steel. Although it’s known that U.S. companies don’t often take advantage of import restrictions, this strategy should not be missed. It is advantageous in that the U.S. industries will obtain a higher level of benefits because the tariffs imposed will be traduced in a higher price of selling the imported steel in the U.S., so the domestic companies will be able to face easier the foreign competence and will be beneficiated also because, as lower as the national companies will sell their products (and they will be able to do it hence the import restrictions), as higher their sells benefits will be. According to this, the U.S. steel industry will become more autosufficient , because they will not lay as much as they were used to do, on the international markets.
At the same time, the domestic reaction of other U.S. industries that are hurt by imports, considering importing restrictions in the form of tariffs on imported steel, will be negative: they will also want to impose tariffs in other imported goods, that are related and will make competence with their own businesses. Hence this, the closest related disadvantage that we can find is the International conflict that this import restriction will create, because the tariffs will increase enormously foreign steel industries costs (both market and production costs) and will make a really hard competence for them to enter U.S. market. Finally, the effect of this alternative will become in retaliation from another countries; consequently, they will make trade restrictions to the U.S. In terms of individual consuming, this restrictions will be harmful at the basic level: the consumers will pay increasing prices and, as a result, corporations will face increasing cost of production. While this strategy is attractive from an initial economic benefit, the risks associated with the retaliatory international reaction will be too great.
Analyzing that the government should consider offering support to the U.S. steel industry in the form of subsidies and/or the absorption of legacy costs, we can realize that it will be advantageous in some aspects. The absorption of legacy costs will suppose a save of $13 billion that U.S. steel industry usually spends in workers retiree’s health benefits, money that they could invest in technology improvement and become more competitive producers in an International scale.
Although the subsidies and the absorption of the legacy costs from the government will suppose a clear advantage for U.S. steel industry, it also has many risks; the domestic reaction from other U.S. industries that are in a similar situation will be a serious problem for the government, because they will want to enjoy the same advantages as the steel industry enjoys.
Recommendation
Given an analysis of the alternatives, it is recommended that the U.S. government should consider offering support to the U.S. steel industry, both in the form of subsidies and in the absorption of the legacy costs.
This change in the government administration, will enforce U.S. industries and will be beneficial not only for the steel industry, but also for the industry in general, because the steel industry is also responsible of the development of many other industries, such as the car production, buildings, ships, etc…so it will also help to maintain and create more jobs, so the life standard will be improved. Hence this improvement, U.S. steel industry, even it’s known that it will be a slow process, will be able to compete with other nations, such as European or South Korea, that owns the biggest steel mill in the world, which make their steel industry independent enough to compete worldwide. Following this, U.S. steel industry income will be higher, consequence of the successful competition based on an international scale. Finally, this new measures will help U.S. steel industry to prevent bankruptcy situations, helped with the attachment of protectionist laws.
