How Bush’s Steel Plan is Hurting Small Businesses

August, 2002: Cover Story

By Greg Rushford

Published in the Rushford Report

When the well-organized and well-financed Stand Up for Steel crowd visits Congress, they are accustomed to seeing lawmakers ask how high they should jump. The line that (inefficient) domestic mills are the victims of “unfair” foreign competition and not their own shortcomings might not stand up to close scrutiny — but it works politically.

            But Big Steel took a rare political thumping on Capitol Hill last month. For the first time since the venerable Rep. Sam Gibbons (D-FL) held hearings in the late 1980s that exposed the adverse consequences of steel protectionism, a congressman dared to embarrass the powerful steel lobby. The congressman’s weapon of choice was the same one Gibbons had deployed 13 years ago: facts.

            On July 23, some 150 enthusiastic people, most of whom wore “No steel tariffs” buttons, jammed themselves into Room 2360 of the Rayburn House Office Building . There, for two hours Rep. Donald Manzullo, a Republican from Illinois who chairs the Small Business Committee, took testimony from American businessmen who have been hurt by President Bush’s high steel tariffs ranging from 8 to 30 percent that were announced in March. Even labor union members stepped forward.

            The witnesses — who manufacture products made from steel — told how the Bush steel plan has cost them jobs and money because domestic steelmakers have jacked up prices. They related how their customers have been turning to competitors from Brazil , Canada , Europe and China . The Bush steel tariffs have given foreign manufacturers, who can buy their steel on the world market, a competitive advantage over American small businesses.

            At the hearing, Manzullo called for a Justice Department antitrust investigation into possible illegal price collusion and gouging by domestic steelmakers. “While the tariffs on foreign steel products were raised to 30 percent, many small manufacturers have seen price increases on domestic steel rise even higher to 70 and 80 percent,” Manzullo declared. “The first law of medicine — do no harm — is also valid in trade.”

            Since the president’s Section 201 steel plan was announced in March, Manzullo has heard from more than 200 American steel-using companies who have complained strenuously that the tariff increases have hurt their bottom lines. Manzullo, who was first elected to Congress in 1992, has a reputation on the Hill as a persistent legislator who does his homework when he latches onto an issue. That knowledge and persistence was on display at last month’s steel-tariff hearing.

            The congressman identified five general problems that have emerged in the steel-consuming business sector since the Bush steel plan was announced.

            “First, some steel-using manufacturers are caught in a price-cost squeeze,” Manzullo related. “Second, some steel-using manufacturers are subject to arbitrary allocations and shortages from steel manufacturers. They may be able to pay the higher prices but the U.S. steel manufacturer cannot produce enough steel to meet demand.” 

            Third, the congressman continued, “some steel-using manufacturers assert that the recent increase in the price of steel has made them uncompetitive as compared to their overseas rivals. They have lost sales to foreign companies that can purchase steel at world-market prices.”

            Fourth, he said, “some steel-using manufacturers lament that they have had to lay off a number of workers over the past four months because the high price of steel has made them uncompetitive. Many predict more layoffs by the fall unless the price of steel drops.”

            The fifth problem, Manzullo said was that “some steel-using manufacturers complain about big steel manufacturers breaking existing contracts to arbitrarily raise prices. As they are unable to break their own contracts with their customers based on a higher steel price, the small manufacturers are caught in a vise.” This issue is what led the congressman to send a letter to Attorney General John Ashcroft asking him to launch an antitrust investigation aimed at the domestic steelmakers.

            Advocates for the domestic mills — the American Iron and Steel Institute, the Committee on Pipe and Tube Imports, the Specialty Steel Industry of North America, the Steel Manufacturers Association, and the United

Steelworkers of America — deny the allegations. The trade associations maintained in a written submission that the president’s steel tariffs had been beneficial to them and the U.S. economy. “We had over 35 percent of our nation’s total steel capacity in bankruptcy, with disastrous impact on our industry’s suppliers, many of which are small businesses,” the statement declared. “Recent steel price increases in the U.S. have been reasonable and modest.”

            Charles Connors, CEO of Magneco/Metrel, which is based in Addison, Illinois and sells refractories — equipment used in steel making furnaces — to the domestic mills, defended the president’s program for the mills in testimony “[H]ow could anyone have expected that record low, below-cost steel prices would have persisted in the U.S. marketplace forever?” Connors asked.

            But Manzullo’s witnesses — some of whom testified that they pay more for high-quality foreign steel than they could obtain domestically — weren’t buying that. Maybe if the president had only imposed a 10 percent tariff instead of 30 percent, the marketplace would have not been so disrupted, they argued. But the president had shown no such restraint.

            Michael Nelson, the general manager of Arnold Engineering, which is based in Marengo, Illinois, testified that unless he can persuade U.S. officials to grant him an exclusion from the tariffs, he will have to lay off at least 5 of his 50 employees. Arnold Engineering imports an alloy named ARNOKROME-5C, which it sells to a domestic producer of anti-theft tags that are then sold to U.S. retail stores. He has looked hard, but has been unable to find a domestic supplier of ARNOKROME-5C, Nelson declared.

            Lester Trilla told a similar tale. Trilla is president and CEO of the Chicago-based Trilla Steel Drum Corp., which makes steel drums used to transport various products, including hazardous materials. The 30 percent additional tariff on the steel his company needs to import has been “a disaster,” Trilla declared. “Only imported steel consistently meets our exacting requirements and those of our customers.” Trilla said that his prices have gone up more than 54 percent since March.

            David Pritchard is president and CEO of A.J. Rose Manufacturing, of Avon , Ohio , which makes metal stampings and air bag components for automakers. He gets his steel from Corus, a European steel producer that was formed from the merger of British Steel and Hoogovens. Corus is expensive, but well worth the price, Pritchard added. “I’ve never been able to buy cheap foreign steel.”

            “Corus supplies us with hot-rolled material with the guaranteed tight tolerances and unique characteristics that we need, and that as yet cannot be duplicated by other mills,” Pritchard said. “ U.S. producers are unable to produce products meeting these requirements without significant retooling and diversion of their production line.” He hasn’t been able to get price quotes from the domestic mills, Pritchard added. Meanwhile, A.J. Rose — facing a 38 to 42 percent” price disadvantage because of the U.S. tariffs — has lost business to competitors in Brazil and Asia who can buy their steel on the world market, Pritchard added.

            Robert Herrman, a machine technician at A.J. Rose Manufacturing Co., sat next to Pritchard at the witness table. Herrman is a member of the United States Steelworkers Local #735-14, which represents 250 workers at the company. “The steel tariffs were supposed to protect American businesses and save American jobs,” Herrman declared. “So why do the steel mills deserve to stay in business more than A.J. Rose? And why are jobs at steel mills more important than the 250 jobs of the union associates who work at A.J. Rose?” the steelworker asked.

            John Grove told Manzullo that his company and its production workers — members of the United Steelworkers locals 3047 and 1999-2 — were in a similar position. “As a result of the Steel 201 tariffs, we have been put on allocation by our domestic suppliers, and cannot get enough steel for our operations,” said Grove, who is vice president for procurement of the Pennsylvania-based Cold Metal Products, Inc. Cold Metal Products makes specialty and conventional strip steel for precision parts manufacturers, and also provides value-added products to manufacturers ranging from automakers to consumer goods. He has “been forced to accept non-negotiable price increases of $130 per ton” this year, Grove added. This has been “the largest increase in a six-month time span ever seen by Cold Metal since its founding in 1926,” he said. Grove added that he has lost business to England and China .

            Merle Emery, the vice president and general manager of G.R. Spring and Stamping, which is based in Grand Rapids , Michigan , related what the price-cost squeeze had meant to his company: price hikes of 20-30 percent. “With the increased cost and decreased supply of available steel, our service centers have broken their long-term commitments to supply us with steel.” Emery said that his company has lost business to a Canadian competitor, which he did not name. “This Canadian company is now able to purchase its steel for 30 percent less than we can, and this cost advantage was directly reflected in their bid.”

            Michael Tanner is president of Wren Industries, Inc., in Tipp City , Ohio , just north of Dayton . He told Manzullo that several of his service center suppliers had breached existing contracts. “For example, our service center provider that supplies 25% of our steel requirements increased the price of delivered steel by as much as 48 percent despite our contract.” Unless things change, Tanner told the committee, “my company will lose business to foreign competition, now that our international competitors have a build-in cost advantage and a ready supply of steel.”

            Responding to the testimony, Manzullo said that he would work with U.S. Trade Representative Robert Zoellick to try to obtain exclusions from the president’s steel program for small manufacturers who could demonstrate that they had been hurt. The congressman attributed the horror stories to “the law of unintended consequences.” Surely, the Bush administration had not anticipated that its tariff hikes would hit innocent American businesses so hard, Manzullo reasoned.

            As Manzullo spoke, I glanced over at one man sitting quietly in the audience who knows a thing or two about this “unintended consequences” business, and what the Bush administration had to know before the draconian March 6 tariff hikes.

            Jon Jensen has seen this before. In 1989, Jensen, then president of the Precision Metalforming Association, was a key witness in hearings before the House Ways and Means Committee on the adverse consequences of President Ronald Reagan’s “voluntary” steel quota restraints on foreign steel. Those hearings were chaired by Sam Gibbons, who then chaired the Ways and Means Committee’s trade panel. Like Manzullo in 2002, Gibbons in 1989 was a man who did his homework.

            The stories that Manzullo heard last month were chapter and verse like those that Gibbons heard 13 years ago. “We have documented nearly 100 specific examples of where our members lost jobs, lost contracts to our competitors in Europe and in the Pacific” because of the US steel quotas, Jensen told Gibbons. (For more details on the Gibbons hearings, see James Bovard’s The Fair Trade Fraud, St. Martin’s Press, 1991).

            Jensen attended the July 23 Manzullo hearing as an active participant in CITAC, which stands for the Consuming Industries Trade Action Coalition. Jensen’s CITAC played an important role in bringing the horror stories about the Bush steel plan to Manzullo’s attention. Manzullo’s leadoff witness was Laura Baughman, who is president of Trade Partnership Worldwide, a Washington economic and trade research firm that did a study for CITAC on the adverse impact of the president’s steel program.

            “The President’s steel decision added formidable import barriers to already substantial barriers caused by antidumping and countervailing duty orders and investigations,” Baughman told Manzullo. “These barriers have hurt American steel-using manufacturers badly and will continue to do so as long as they are in effect.”

            For sure, the Bush White House knew all this before they announced the tariff hikes. U.S. Trade Representative Robert Zoellick first learned about the dirty business of administering steel protectionism in the 1980s, when he saw the consequences of the trade restraints that Sam Gibbons held up to public ridicule. And earlier this year Laura Baughman’s CITAC study reminded the Bush officials that there are at least 59 jobs in the steel-consuming sector for every job in the mills.

            But the Bush administration disregarded the warnings. For them, the numbers that really count in this affair are in the Electoral College in the Ohio Valley , come the president’s reelection campaign in 2004. It’s that simple. 

            Now the small businessmen who have been injured by the Bush steel plan are in the position of groveling to administration officials, hoping to get the steel products that they require exempted from the tariffs. Since March, some 270 product lines out of more than 1,200 requests have been lucky enough to obtain exemptions. This doesn’t mean that 270 small businesses have been granted exemptions for the steel they need to survive. Perhaps 100 of the exemptions have gone to just one company, the European steel giant Arcelor.

            But the small American businesses that will manage to obtain permission from their government to keep on doing their business without particular high tariffs are expected to be grateful for the favor. It’s a bit like thanking your Uncle Sam for only raping you once.

            Moreover, companies that obtain exemptions are expected to keep quiet from then on. In 1987, for example, the Hurco Co, a world-class machine-tool manufacturer, obtained an exemption from the Reagan administration’s quotas on machine tools. The Commerce Department granted Hurco a special license to import certain machine-tool components from Taiwan that it had to have.

            That was fine for Hurco, until 1991. Then, bureaucrats were angered when Hurco lobbied against extending the overall quota scheme on foreign machine tools. For advocating free trade, Commerce officials — George H.W. Bush was then president — yanked Hurco’s license to import parts from Taiwan . The company was thrown into a tailspin (see MITI Without Brains: The Commerce Department‘s Troubled Import Administration, The Rushford Report, February 1995).

            At least Hurco somehow managed to survive, and is still in business.

            Last month at the Manzullo hearings, I was reminded of this unfortunate history when one witness told his story.

            Gordon Jones is a drum loader and a member of the Sign, Display, Pictorial Artists, and Allied Workers, Local Union #830. He sat at the witness table next to President Lester Trilla, his boss at Trilla Steel Drum Corp. Jones and his family know that their welfare — and that of their fellow union members and their families — is linked to the question of whether the Bush administration gives Trilla an exemption to import the steel that it requires.

            Jones explained the consequences of what President Bush has done in human terms.

            “If this is going to get worse, and we lose all of our overtime hours, and even some of our regular hours, because of the lack of steel or because our steel costs make the drums too high-priced, it will leave me and my family in terrible shape. As a father of six, it takes all of my wages to pay the rent and to feed and clothe my family,” Jones declared.

            “Now, all of a sudden there seems to be a possibility that we might have to cut back production or even turn away business because of these tariffs that have nothing to do with steel drums, this company, or my family, Jones added. “I don’t understand why the union jobs of steel producers are any more important than my union job,” he said.

            “It doesn’t make sense.”

            But it does make political sense, if you understand the president’s political calculations.

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