Are AD/CVD Duties Providing an Economic Benefit to the U.S.?

In a recent article in the Institute’s Free Trade Bulletin, Pearson writes that trade remedies make U.S. produced steel higher than the rest of the world which hurts downstream manufacturers who rely on steel for their products. The result is manufacturers who end up less competitive, encouraging imports of steel-containing products from other countries.

Instead of focusing on the steel industry, Pearson suggests taking advantage of the more economically significant steel-consuming sector. Low priced steel imports benefit U.S. manufacturers and, thus, China should be encouraged to transfer their wealth to the U.S. through the export of steel at artificially low prices.

“The United States should change the dynamic of the debate by encouraging China to continue transferring wealth by selling all the low-priced steel it possibly can in this country,” writes Pearson. “That approach is likely to get the attention of Chinese policymakers and hasten the downsizing and restructuring that is so badly needed in that country’s steel sector.”

Trade duties should only be used when economic analysis indicates they will benefit the economic welfare of the U.S says Pearson. Low-priced steel imports may seem unfair to steel producers but trade duties are even more unfair due to the cost to the steel-consuming sector.

Pearson notes that much of China’s steel overcapacity is due to government policies. The U.S. should find ways to take advantage of China’s propensity to operate mills at a loss instead of shutting them down.

“China’s decision to run its steel mills at negative rates of return means, in essence, that China is helping to increase the competitiveness of U.S. manufacturers that use steel as an input. In terms of the underlying economics, China takes the losses and the United States reaps the gains. What’s not to like about those circumstances?”

According data from the Department of Commerce value added to the U.S. economy by “primary metal manufacturing” (including nonferrous material producers) was $59.7 billion in 2014. Downstream manufacturers using steel generated added value of $990 billion, 16 times that of the metal producers. Primary metal manufacturers employed about 399,000 people in 2014 compared to 6.5 million by downstream manufactures.

Pearson’s point is that the problems of the steel industry should be kept in perspective to the economic welfare of the U.S. as a whole. U.S. steel prices are higher than in most of the world, and AD/CVD orders keep it that way, giving U.S. manufacturers less access to competitively priced inputs which leads to loss of sales. Protecting steel producers, says Pearson, causes harm to steel users, reducing the economic welfare of the United States and making the country poorer.

Pearson notes the recent moving of manufacturing firms to Mexico where production costs are lower. One of those manufacturers, Carrier, moved its air conditioning production to Monterrey, Mexico stating, “This move is intended to address … ongoing cost and pricing pressure.” Cost pressures, which according to Pearson, are likely related to inputs covered by AD/CVD orders.

Pearson’s approach to dealing with the onslaught of Chinese low-priced steel–removing all AD/CVD restrictions against steel imports– would not be a “death knell” for the U.S. steel industry. Instead, he says, the steel industry is used to cyclical markets which during low times (like now) cause capacity utilization declines and industry downsizing and consolidation. Pearson said such moves in combination with China’s own downsizing and restructuring will lead “relatively promptly to restoring a balance between steel supply and demand that would allow profitable operation of U.S. mills.”

An advantage and degree of protection that U.S. steel producers have is the ability to produce higher-value and specialty steels. The ability provides a measure of comfort to manufacturers who can rely on qualification tests and transportation logistics that are easier to deal with than foreign suppliers.

“In other words, realities of producer-customer relationships provide the U.S. steel industry with partial insulation from overseas competition,” writes Pearson.

Pearson is doubtful that U.S. steel producers can be comfortable with an open-market approach but would have a hard time making a “compelling argument that their economic interests are somehow more important than those of companies that require steel as an input for their value-added manufacturing processes.”

Pearson suggests that the optimal policy response to low priced steel imports would be to require AD/CVD duties to undergo an economic analysis showing that imposing duties would increase economic welfare in the U.S.

Writes Pearson, “It is important to ensure that the policy ‘cure’ isn’t worse than the ‘disease’ of low-priced steel. The goal should be to pursue policies that serve the best overall interests of the United States.”

The Cato Institute is a public policy research organization — a think tank — dedicated to the principles of individual liberty, limited government, free markets and peace. The full text of Daniel Person’s article can be accessed here.