This atricle appeared in the Pittsburgh Post-Gazette's Private Sector business section feature on Tuesday, November 12, 2002.

Give Steel a Break

By Stephen Herzenberg

Congress recently held hearings about the "legacy costs" of the steel industry. The question Congress faces -- should the United States government step in to relieve U.S. steelmakers of some of the health benefits of retired steel workers? The answer is a resounding "yes." Congress must act.

Much of the world's necessary steelmaking capacity reduction will be in the United States if there's no legacy relief or fair trade policies. (Stacy Innerst, Post-Gazette)

Providing for legacy costs is another key step toward saving our domestic steel industry, a process that began with President Bush's decision in March to impose tariffs on many steel imports.

Why does the U.S. steel industry need help? Because there is a global glut of steelmaking capacity. Without legacy relief as well as fair trade policies, a big part of global capacity reduction will take place in the United States. Such reduction would push U.S. steel-producing capacity even further below U.S. demand for steel.

An emaciated U.S. steel industry means more deeply ingrained trade deficits and a more wrenching reduction in U.S. living standards when foreign investors no longer see the dollar as a safe haven. A skeletal U.S. steel industry also threatens the long-term dynamism of steel-using industries, which will lose local partners in materials- and product-innovation efforts. A third concern: a smaller steel industry raises national security concerns.

Some insist we let "free trade" and the "free market" decide whether U.S. or foreign steel capacity goes belly up. But that's not an option -- the unrealistic free-trade and free-market model doesn't apply to this industry. The reasons include the role of government in foreign steel producers and the differences across countries in the funding of health care. While government pays for health care in virtually all of our major competitors, in the United States' health care costs fall on employers. U.S. steelmakers' health insurance costs for 600,000 retirees and dependents alone represent an average of $14 per ton of steel.

Lower health care costs and government support enable foreign producers to undercut more efficient U.S. producers or force them to sell at below-cost prices that, over time, lead to bankruptcy.

A third feature left out of the free-market model is the steel industry's capital intensity. When there is excess capacity in a capital-intensive industry, producers are willing to cut prices sharply so that they are not the ones left with idle plant and equipment. Since foreign producers use the U.S. market as their dumping ground for excess product, the most ruinous price competition happens here. Back in foreign steelmakers' protected home markets, higher prices sustain financial solvency.

These unique steel industry dynamics have led 34 U.S. steel companies into bankruptcy in recent years and eliminated 50,000 steel worker jobs. The benefits of hundreds of thousands of retirees have vanished.

As well as relieving U.S. steelmakers of a nonmarket cost disadvantage, legacy cost relief will enable the U.S. industry to restructure into a smaller number of more robust companies. Without relief, companies carrying huge legacy costs are not attractive companies for merger or acquisition -- even though their newest capacity may be world class. The only reasonable solution is for Congress to provide legacy cost relief. In a sensible world, global steel industry consolidation would eliminate inefficient, polluting facilities. As the industry is currently structured, consolidation will lead to the shuttering of some of the globe's most efficient and environmentally sustainable capacity here in the United States.

While steel-consuming industries may suffer from higher prices in the short term from tariffs (although it should be noted that these industries enjoyed plummeting prices for many years and prices remain low), U.S. consumers are ultimately better served by a steel industry stable enough to retain earnings, reinvest and achieve continuing productivity gains.

Through the tariff action, the president took an important first step toward helping our nation's steel industry consolidate and restructure for a competitive future. It is critical that he not bow to those who would have him weaken that action through exceptions and other measures that dilute the impact. Further, Congress must act on the issue of legacy costs. Together, these efforts will ensure that that the United States continues to enjoy a strong and competitive steel industry.