Figure 1
Assuming the government of the country now imposes a tariff, depicted by PQ per unit of the good. This will push the price to domestic consumers up to OQ. Domestic producers will not have to pay the tariff and will therefore find it profitable to expand production to OK. Higher prices cause demand to fall to OM. Hence, we see that the volume of imports shrinks to only KM. Consequently, expenditure on imports will fall from JTWN to KYZM. Of that area, KUVM will be the revenue gained by foreign firms. The remainder is the tax collected on the imports, which goes to the government.
Bush’s protectionist approach to the steel market presented him with two possible courses of action. The first of these involved granting subsidies to steel manufacturers, which would have had the same effect as imposing a tariff. By granting a subsidy to the steel producers, he would be increasing their revenue and therefore allow them to increase production and lower prices. This would enhance their competitive appeal with regard to imports.
However, at this juncture, he chose not to subsidise the industry, as this would cost the government further, thus detracting from the available budget for expenditure (over $30 billion had already been spent on quotas and subsidies). The second, more viable option involved the introduction of a tariff on imports. Bush pursued this option as it not only protected the industry, but also brought in additional revenue from tax (refer to area UYZV on Fig.1).
It can be said that the reasoning behind President Bush’s decision to impose the tariffs had been a long time in the coming. Tracing back to 1976, an ailing steel industry approached the White House and the then President, Gerald Ford, in an attempt to secure import protection to revive the US industry. Twenty-six years later the situation remains virtually unchanged.
The repercussions, which ensued from the implementation of the tariffs by President Bush in March 2002, had effects on steel production and distribution in both domestic and global markets. The remainder of this coursework will outline and explore the period during which the tariffs were in place in chronological order.
Implementation:
The nature of the steel industry in the United States today, is a fragmented one. The companies inhabiting the upper echelons of the industry account for only a fraction of the total output. Promoting efficiency should call for an approach emphasising consolidation. However, US president George Bush preferred a protectionist approach, involving the implementation of tariffs on foreign steel ranging from 8% - 30%, which would affect approximately $8 billion (10% of the world market) of global imports.
The President referred to the tariffs imposed on the steel market in March 2002, as “temporary steel safeguard measures”. Bush applied these tariffs to protect the US steel market from foreign competition. This had an array of advantages, but also resulted in a number of drawbacks, as the response from other countries was a very negative one. They were very displeased by this tariff that had been imposed on their steel and retaliated by threatening to place counter tariffs on US products. This quite quickly had the effect that was desired and over the next year the US had to remove its tariff on imported steel due to mounting pressure.
In June 2001, President Bush made the initial move towards tariffs by launching an investigation into whether the American steel industry needed protection against foreign imports. At this point prices were at a 20-year low and over 20 steel mills had filed for bankruptcy.
President Bush’s decision to put these tariffs in place was made in an effort to protect the domestic steel market. However, it had the reverse effect because even though the steel producers were benefiting from the tariff, the rest of the industry was suffering from high prices. Due to the fact that the steel producers in the US were inefficient, prices rose, making it impossible for steel distributors to buy and sell the steel at a reasonable profit. In fact, a greater number of jobs were lost in the market for steel distribution than would have been lost in the market for steel production, had the tariffs not been introduced. This shows that Bush’s method of protectionism was not as effective as he claimed it would be. Although it did salvage many of the old sunset steel producers, in the long run they would still have dwindled as many other countries have a comparative advantage over the US, in steel production. Inexpensive factors of production such as cost effective labour and machinery, in countries like Russia and China, reduces the ability of other countries to compete with their low prices and the amount that they produce.
