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Industries Vital to National Defense Are In Need of Defense by National Leaders By: TradeAlert.org
TradeAlert.org | Monday, February 24, 2003

Since the 1997 world financial crisis, which started in Asia but soon spread to Latin America and Russia, the United States has been embroiled in a series of ant-dumping actions involving the steel industry. Prices in the U.S. for steel products have plunged. Some trade relief has been granted by the Clinton and Bush administrations, but the lack of strong overseas markets for steel has meant that nearly every foreign producer has looked to the American market as the place to export steel (both finished and semi-finished) to make up for lost domestic demand and collapsed export markets elsewhere. With the world economy sliding into another downturn, this problem is likely to intensify.

Dumping is a serious problem in international trade. Each leading nation seeks to build "national champion" industries to spearhead the process of economic development. This brings it into cutthroat competition with the industrial strategies of other states. Overinvestment in export-oriented industries leads to overcapacity and falling prices; declining market shares, intensifying rivalries; and cataclysmic currency devaluations. To avoid an adjustment phase, during which billions in unprofitable investments will be lost, every firm seeks to have its rivals bear the costs, while it tries to stay viable until the next economic upswing. That is why foreign steel producers will resort to dumping and other predatory policies. And governments, concerned about preserving jobs, industrial capabilities and the tax base, will back their firms' survival, with either subsidies or barriers. These "beggar thy neighbor" tactics are being used by foreign steel makers to shift the cost of adjustment to American steel firms. They must be resisted.

Dumping should not be considered an offense because it is "unfair" or "predatory." It should be opposed because it is a tactic in the eternal struggle for control of the world's productive assets, and the wealth and power than flows from such control. Treating "dumping" as an isolated action, subject to quasi-legal formalities of investigation, proof, and calculated remedies, is to miss this essential point.

The U.S. steel industry has undergone a massive restructuring over the past 20 years. Since 1980, the United States has lost approximately 50 million tons of integrated steel-making capacity. Imports of finished steel products have increased by 15 million tons over this same period. Approximately 20 percent of U.S. capacity is currently operating under chapter 11 bankruptcy filings and another portion has been driven into liquidation.

In recent years, the flow of imports of semi-finished steel has surged dramatically, quadrupling to 8.6 million tons during the last 10 years. Despite the continued growth in American demand for steel products, there has been virtually no growth in the amount of iron ore mined or semi-finished steel produced in the United States. Indeed, the growth of imported semi-finished steel, known as slabs, poses an imminent threat to domestic iron ore production and to the maintenance of blast furnace capacity, as integrated steel producers shut down their furnaces to use imported slabs shipped from overseas furnaces.

In 2000, the American mines supplied approximately 62 million gross tons of the 77 million tons of iron ore used by integrated mills to produce approximately 52 million net tons of steel. Since the peak steel production levels of the 1970s, domestic iron ore production has declined over 50 percent. The domestic iron ore industry has adjusted by closing the least efficient mines and consolidating operations into a few large mining facilities located in Minnesota and Michigan.

It is important to recognize the fundamental importance of integrated mills to U.S. economy, and particularly to national security.  "If you're worried about the security of the country and you become over-reliant upon foreign sources of steel, it can easily affect the capacity of our military to be well-supplied," said President George W. Bush on August 26 while speaking at a steelworkers picnic in Pennsylvania. Two months earlier, President Bush had ordered an investigation into steel imports from nations such as Japan, South Korea and Brazil, which are unfairly subsidized by the governments of those nations. Yet, if steel is a national security issue, the Bush Administration is going to have to go beyond merely providing the "level playing field" promised by the president. The industry is going to have to be protected from attack by its foreign rivals whatever tactics those rivals use.

Steel is a basic heavy industry, the core of much of the rest of the manufacturing base of the country which in turn is the foundation of American economic capabilities and the sinews of national power in the modern world. At the end of the 20th century, the United States held the supreme position in the world political system. It was the only Superpower. America dare not let the economic foundations of that position fall out from under it----or let it be pulled out from under it by either strategic or commercial rivals.

The United States cannot rely on "minimills" for domestic steel production. For metallurgical and technical reasons, only steel produced from integrated mills using iron ore is suitable for end uses in some applications of vehicle manufacturing (including armored vehicles and warships), container fabrication, and production of certain heavy gauged plate and beams used in construction. Most minimills are designed to produce hot-rolled sheet in thinner gauges than can be produced in the hot-rolling mills operated by the integrated producers. Minimills primarily obtain their raw material from the melting of steel scrap which does not meet the metallurgical needs of heavier gauge or exotic steels with military applications.

The threat to the ore industry has not been caused by imports of ore, which have increased only slightly during the past 10 years. Imports in 2000 were estimated at 18.3 million gross tons, with over half of all imports coming from Canada. This situation is not expected to change due to cost and logistical considerations. It is more cost-effective for foreign exporters to ship semi-finished slabs than iron ore to American mills. Such exports maintain both mines and blast furnaces overseas.

Clearly, imports threaten both mines and blast furnaces here at home. Under pressure from imported finished steel products, some American steel producers have been tempted to use imported slabs to cut costs. This is how the cancer spreads from one part of the economic body to another. Yet, this solution is at best a short-term response by the steel industry to the initial problem. The consequence of replying upon imports at any step in the integrated steel production process has serious implications for the entire country. It will reduce the defense-industrial capabilities in time of war, because the nation will not have control over all the critical elements needed to rapidly expand production. This would be further complicated if there was a  threat to the flow of semi-finished steel imports, which could reduce steel output just when it was needed most.

Reliance on semi-finished imports will almost certainly lead to the eventual elimination of steel primary and finishing operations in the United States. Once American blast furnaces have been closed, and the domestic steel industry no longer invests to maintain and upgrade this part of the integrated steel business, foreign rivals will be able to exercise considerable leverage on the American steel industry. Integrated foreign steel producers will be able to squeeze the "dis-integrated" and dependent American steel firms between manipulated export prices for slab and dumped prices for finished products. Basic concepts of war apply just as well on the commercial battlefield as anywhere else. Control the flow of supplies and the resistance of the front line combatants will be weakened.

Once America's iron ore production and transportation infrastructure has been curtailed (or has even disappeared), it would take a minimum of 3-5 years to restart production. The integrated steel industry's blast furnaces and basic oxygen furnaces would take 3-4 years to be reconstituted after they have been closed down or scrapped. With a quarter of the industry already facing closure, it is critical that action be taken now.

A key component of the steel industry often overlooked is the U.S.-flag commercial ships which carry iron ore and coal across the Great Lakes, providing the link between mine and mill. These ships, and the shipyards that build and maintain them, are national security as well as economic assets. They form part of the maritime reserve of trained crewmen and shipyard workers upon which the nation can draw in an emergency. During both the Gulf War and the Kosovo intervention, Great Lakes sailors were called upon to man ships carrying military supplies to American forces overseas. If the iron ore industry is lost, so will be lost much of the Great Lakes maritime industry which depends on iron ore shipments for its business. As ships are laid up and shipyards close, skilled mariners will leave for other pursuits. Their exit will not only hamper any reconstitution of the iron and steel industries, but also reduce the pool of experienced crews available to man the supply and logistics ships needed to support the global projection of American power.

The only response to the recent steel-import crisis has come from the anti-dumping laws. Without them, layoffs in the U.S. steel industry caused by imports from the Japanese steel cartel, Russian state-sponsored steel mills and the heavily subsidized Brazilian steel industry would have been much larger. Yet, this is not a adequate response.

As argued above, the anti-dumping laws are based too much on a quasi-legal process rather than on policy-making that aims for a certain outcome. When U.S. Trade Representative Robert Zoellick submitted the formal request to the U.S. International Trade Commission to launch an global safeguard investigation of steel imports under Section 201 of the Trade Act of 1974, he stated that the goal was merely "to provide time for affected industries to enhance their competitiveness and, in the long run, restore market forces and free trade." Yet, given that the global "market" is still dominated by foreign cartels, trusts, and government subsidies; the affected American firms cannot survive simply by enhancing their own competitiveness. The battle is being fought on other grounds, by other means.

Furthermore, U.S. antidumping laws are under attack at the World Trade Organization. The European Union has challenged the relief granted wire rod and line pipe producers announced in February 2000 after a similar Section 201 investigation. The EU has asked for a WTO dispute settlement panel to rule on the legality of American law. A broad based effort to have a revision of antidumping laws included in the agenda of a new round of WTO negotiations is expected in November at the Qatar ministerial conference. The purpose of such a revision would be to compel changes in U.S. law to undermine even the limited effectiveness it now has.

On February 01, 2001, the Department of Commerce initiated a second investigation to determine the effects on the national security of imports of iron ore and semi-finished steel. The findings and recommendations of the investigation are to be reported by the Secretary of Commerce to the President not later than October 29, 2001. The investigation is being conducted under Section 232 of the Trade Expansion Act of 1962 (as amended). The final report, which includes findings and recommendations, is to be submitted to the President no later than 270 days after the date of initiation. Should the assessment determine that imports represent a threat to national security, the President then has 90 days to determine whether to use his Section 232 statutory authority to "adjust imports" by limiting them.

The latitude for taking action under Section 232 is potentially more straight-forward and results-oriented. It is also easier to explain to the public and to defend in international forums. Unfortunately, this approach has not been used very often, and probably will not yield the kind of comprehensive action plan needed in this case due to the naive reliance on "free trade" ideology and legalistic procedures prevalent at the higher levels of the Commerce .

The proximate cause of the crisis in the American steel industry is the economic downturn that has affected most of the rest of the world since 1997. The remedy most directly related to the cause would be to rollback imports of iron ore, semi-finished steel and finished steel products to their pre-crisis, 1997 levels, by executive order on the grounds of protecting national security. Such an action would have a positive impact on the domestic steel industry, providing it with the stability it needs to rebuild and attract new capital investment for continued modernization. It would also set a precedent useful for other industries menaced by foreign rivals, and greatly strengthen the negotiating position of the United States in any future trade talks.

More broadly, the nation needs an economic strategy that returns manufacturing to the center of policy making. With the U.S. economy teetering on the edge of a recession, more than cuts in Federal funds rates and individual taxes is needed to revive productive activity. Swamped with imports and burdened with consumer debt, the United States has to work its way out of trouble; it cannot coast in the policy vacuum created by the "free trade" sophistry. The plight of the steel industry is not an aberration in the U.S. economy, it is the norm. Regaining control of the American market so it can support American production and income generation is the key to solving the crisis that afflicts virtually all domestic manufacturing.

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