Bush's Costly Meltdown on Steel

By slapping tariffs on imports, he's raising taxes for steel-using U.S. industries and American consumers -- and hampering growth

By Christopher Farrell

"The tariff is the protection the wolf gave the lamb."

-- Representative James Beck, 1882

So much for President Bush's pledge not to hike taxes. The best that can be said about his Administration's decision to protect the domestic steel industry with high tariffs -- a tax on American consumers of steel, such as auto makers and car buyers -- is that the policy could have been worse. Big steel lobbied hard for a 40% levy. Instead, the industry got only an 8% to 30% tariff on a range of products, with important exceptions carved out for a number of developing nations, including North American Free Trade Agreement (NAFTA) partner Mexico.

The Administration's political calculation is clear, and the domestic power play understandable. Bush wants to shore up support for Republican candidates in such steelmaking states as Pennsylvania and Ohio before the coming congressional elections. And the tough tariff maneuver could prove a useful bargaining chip to get reluctant competitors from other countries to reduce the global glut of steel (see BW, 3/18/02, "Bush's Steely Pragmatism").

Yet the price tag for abandoning free-trade principles for political expediency is too high. Protectionism inevitably invites bigger government and economic stagnation.


  Team Bush has lost political capital both at home and abroad. A long line of industries "vital" to the nation's security is forming on Capital Hill, all calling for greater protection. If steel can tax consumers, why can't agriculture, textile, timber, and other sectors similarly squeezed between falling prices and too much capacity? The Administration's action also risks a debilitating round of retaliatory measures from other steel-producing countries and weakens its moral negotiating authority during future international border-opening initiatives.

The economics are worse. Most economists agree that freer trade and open borders played a critical role in underpinning America's prosperity in the 1990s. World trade soared with the collapse of communism, the embrace of freer markets by much of the developing world, the completion of NAFTA, the conclusion of the Uruguay Round of the General Agreements on Tariffs & Trade (GATT), and the creation of the World Trade Organization.

America's manufacturers grabbed a growing share of global merchandise trade. U.S. service companies, such as architects, software developers, investment bankers, and educators, found profitable opportunities abroad too.


  Traditionally, economists have argued that consumers benefit from freer trade through lower prices and increased choice. A trip to Home Depot or a car-buying expedition would offer far fewer choices and cost a great deal more if it weren't for foreign competition. The new tariffs will likely destroy more jobs in the steel-using sector of the American economy than it will save among steel producers.

A generation of new theorists has stressed an even more important benefit of free trade: It invigorates long-term economic growth. These growth theorists, such as Paul Romer of Stanford University, argue that trade encourages the spread of new commercial ideas, new technologies, and new ways of doing business. One example: U.S. companies learned to emulate just-in-time inventory practices, quality statistical-control techniques, and other organizational innovations of foreign rivals, especially Japanese manufacturers during the 1980s. A colleague of mine once dubbed the flow of ideas generated by the creative relationship between trade and innovation as the "light bulb" theory of growth.

Bush's willingness to sacrifice his free-trade principles comes on the heels of the Administration flirting with various initiatives to limit the exchange of scientific knowledge and information. The federal government understandably wants to block terrorists from adopting technological advances for their own nefarious purposes, so it has withdrawn several thousand technical documents that were once freely circulating and asked several scientific societies to control potentially dangerous information that's disseminated in its journals.


  No one wants to aid terrorists. But limits on the diffusion of scientific knowledge, while never absolute, threaten the economy's long-term growth prospects. Similarly, raising trade barriers, although that policy is sometimes a realistic choice, is a dangerous path to take. Taken altogether, a worrisome pattern is emerging for the Information Age.

Yes, America is battling terrorism, and homeland security carries a cost. But that's no excuse for government to impoverish consumers and cosset inefficient industries through protectionism. The freer flow of commerce and knowledge that encourages entrepreneurs and their appetite for risk-taking is one reason why this nation is so wealthy.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online

Edited by Beth Belton

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