Leibowitz on Trade: What Happened to Globalization?

Like most of you, I am trying to make sense of the world during the pandemic; and trying to figure out what will change when we are back at work. It could be a while. In the meantime, I hope all are safe and able to live without want, if not without fear.

I have read a lot of articles in the last couple of weeks announcing an end to globalization and the rise (or restoration) of economic nationalism. Just last week, Sen. Josh Hawley (R-Mo.) wrote an op-ed in The New York Times advocating the abolition of the World Trade Organization. As I wrote two weeks ago, I think that idea needs some work—we have the WTO because the world without it is worse.

Today, I look further at the choices that we have as a country and as an international community as we work through the issues made more urgent by the pandemic. 

I start with the two new investigations announced last week by the Commerce Department under Section 232—transformer components (cores and laminates) and mobile cranes. Rather than go into the industry details, I want to set up the economic choices we face when we decide to protect industries or companies rather than letting the market work. 

In the transformer case, the protective effort was started by Cliffs Resources, the parent company of previously independent AK Steel. AK is the only current producer of electrical steel in the United States. Cliffs has threated to terminate electrical steel production if Section 232 tariffs on steel are not extended to components of transformers that are not currently covered by the steel Section 232 tariffs. Last month, representatives and senators from Ohio and Pennsylvania urged the president to expand Section 232 steel tariffs to laminates and transformer cores, not to protect domestic producers of those products, but to protect AK Steel. 

If imported laminates and transformer cores are hit with tariffs, the increased cost will make the next level of production, the transformer producers in the United States, less competitive. Only if finished transformers are hit with tariffs will they and their suppliers like AK Steel be free from import competition from foreign producers; but that would cost the electric utilities and manufacturers that buy the transformers, causing electricity prices to rise. This effect is a weakness of using tariffs. Somebody has to pay the bill; if AK does not improve its competitiveness, it will likely go out of business. If producers of cores and laminates can’t compete with imports, they will go out of business. And if transformer manufacturers can’t compete with imports of transformers, they will go out of business, which will cost AK, because its customers would disappear.

Because Section 232 is about national security, it must be asked which layer of production—steel, transformer parts or transformer producers—should pay the bill. The answer is not obvious. AK is not necessarily the right choice for special protection. 

The Commerce Department will announce the initiation of the investigation this week. Those questions are sure to arise. Electrical steel from AK Steel is widely reported to be very expensive compared to foreign sources. If AK Steel is given a monopoly in the United States, should the company be required to make changes to reduce costs and increase competitiveness? So far, that has not been required of steel companies in the Section 232 cases. Improvement is a requirement under another trade statute, Section 201—companies benefiting from protection must demonstrate that they are using the temporary protection to improve so that, when the protection is withdrawn, the company can compete in the global market.

Section 232 does not have these requirements—should it? Should AK Steel be guaranteed a captive market where it can sell its product at high prices? Should the laminate and core producers also have a guaranteed market? The transformer producers? 

Steel imports have been with us for about 60 years now. The first imports into the U.S. appeared in 1959, during a four-month steel strike that shuttered 80 percent of the industry. Customers had no choice but to import—and through service centers and trading companies, customers were able to bring steel to the U.S. Customers were pleased with the imported product. The strike was a key event leading to the decline of U.S. steel production. When steel prices went up, steel imports did too.

Over the last few months we’ve seen increased calls for economic nationalism, encouraged by other countries willing to restrict imports and exports. If all countries are economic nationalists, all will be poorer. If we insist on customers buying all their steel from American suppliers, the capability of American suppliers must improve, in quality and quantity. 

Any program that aims to bring production back to the U.S. must assure that adequate supply is available. Unfortunately, weekly capacity utilization statistics do not reveal actual surplus capacity. Much of that capacity is idle because it is obsolete.  Customers need steel from plants that are up to date and able to make products to the latest specifications.

A lot more companies and workers in the U.S. use steel than produce it; their jobs and factories need to be competitive too. 

The Law Office of Lewis E. Leibowitz
1400 16th Street, N.W.
Suite 350
Washington, D.C. 20036

Phone: (202) 776-1142
Fax: (202) 861-2924
Cell: (202) 250-1551