Comment: Francis H Schott on "making trade policy while pursuing war on terrorism" - 1 - Comment and Reply - Paula Stern's address to the National Association of Business Economists - Brief Article

Business Economics, April, 2002 by Francis H. Schott, Paula Stern

Paula Stem's March 25 address to the NABE 2002 Washington Policy Conference raises issues that should not go unchallenged in Business Economics. Under the guise of political realism the author rationalizes the administration's decision to impose additional tariffs on selected steel imports. Yet, the steel tariffs remain the abomination virtually all professional economists declare them to be.

First, Stern recognizes that the President has authority under Section 201 of the Trade Reform Act of 1975 to modify or reject International Trade Commission (ITC) recommendations. She cites case after case when Presidents Reagan and George H. W. Bush rejected relatively moderate ITC proposals or exceeded them by negotiating extralegal steps such as "Voluntary Export Restraints" by foreign countries. Furthermore, she acknowledges the unusual nature of the recent Section 201 proceeding (on steel) initiated by the George W. Bush administration, which did not wait for the usual industry request. Thus, it is uncontested that the administration is wholly responsible for the imposition of the new steel tariffs.

The obvious fact is that foreign countries resent and tend to retaliate against any application of Section 201, correct or not under U.S. law. It is the exercise of protectionist powers that is the problem.

Second, Stern seeks to convince us that the steel decision was necessary to obtain Congressional approval for fast-track trade agreement authority (TPA) and for continuation of a new round of multilateral trade negotiations (the Doha round). While this assertion constitutes a political judgment that cannot be conclusively proved or disproved, the author hardly helps her case by noting (a) that further concessions--on textiles, and before steel tariffs were imposed--were required to obtain House passage of TPA; and (b)that the major compromises to get Doha going were made by November 2001, well before the imposition of the steel tariffs.

Third, Stern fails to note and discuss that protecting steel further is possibly the worst single-industry decision this or any other administration could have made. In a devastating and compelling recall of past steel protection, a CATO Institute expert recently concluded that "the costs of protection will far exceed the benefits, and any benefit accruing to steel firms from that protection will be fleeting" (Ikenson, 2002). CATO and others have pointed out that steel protection has not prevented about thirty integrated-mill bankruptcies in recent years while contributing to the building of "legacy" costs for workers of mills kept open overly long.

Perhaps the best summary of professional opinion on the matter comes from Anne O. Krueger, now Deputy Managing Director of the International Monetary Fund (IMF), reporting on "Big Steel" in 2000 (while still a Stanford professor):

The American Big Steel industry has been the champion seeker of protection. It provides a key example of the ability of special interests to lobby in Washington for measures, which hurt the general public and help a very small group. (2)

Obviously, the vast majority of NABE member firms are among the "general public" harmed by increased steel costs.

Fourth, Dr. Stern, along with the administration, seeks to minimize the possible damage to international trade relations arising from the unilateral decision on steel. The arbitrary exclusions and inclusions from the new tariffs have left the European Union (EU) as the most aggrieved party (a thirty percent tariff on about one-third of $4 billion of steel exports to the U.S.). Stern acknowledges, as everyone must, that the EU has a case against the U.S. before the World Trade Organization (WTO). However, by following WTO rules (and in hoping to negotiate the new U.S. tariffs away), the EU may give the U.S. a two-year leeway--a probability that has not, of course, escaped Beltway "realists." Yet, it is U.S. leadership in promoting free trade that is at stake. There is no grace period around the world on that point. It is what we do today, not what we say about tomorrow, that matters most abroad.

(1.) The author, a consultant, is a past president of NABE (1977-78).

(2.) This conclusion is quoted and endorsed by commentator Robert J. Barrow in Business Week (Barrow, 2002).

REFERENCES

Barrow, Robert J. 2002. "Big Steel Doesn't Need Any More Propping Up." Business Week. April 1. P.24

Ikenson, Daniel. 2002. "Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel Industry." CATO Briefing Paper.

RELATED ARTICLE: Reply: Paula Stern to Francis H. Schott

Francis Schott reinforces the essential points I make in the article. His quarrel is not with me. I say that in the trade area "the Bush administration is taking entire chapters out of the book called 'Containing Communism"' authored by President Ronald Reagan, and that Reagan--based on his actions with respect to automobiles in 1980, and other products as well--was the "most protectionist President since Herbert Hoover."

The purpose of this article and of the speech I gave on March 25, 2002 to the NABE is to be descriptive, not prescriptive, and to describe the process and some of the political aspects of recent trade decisions. In the 1970s and 1980s I spent sixteen years in the U.S government shaping trade policy and voting on some tough trade issues within a framework of trade laws that have emerged from the political process. My mission in this article is to explain how the political process in Washington, D.C. works. These trade decisions, as I am sure Schott understands, are not all made by economists based purely on economic criteria, nor--in my opinion--should they be.