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Steel in the Spine By: Dr. Paul Kengor
FrontPageMagazine.com | Tuesday, October 23, 2007

Dr. Paul Kengor, interviews Dr. Thomas J. Usher, former chairman and CEO of the U.S. Steel Corporation. This Q&A is in keeping with a long tradition of healthy debate within the conservative movement over the often contentious domestic-economic issue of free trade. On October 24 at 7:00 PM, Dr. Usher will be delivering the College’s annual Albert A. Hopeman Jr. Lecture in Science and Engineering. The title of his talk is "Engineering for Wealth Creation."

V&V: Dr. Usher, you’re not comfortable with the dichotomy of either “free trade” or “protectionism,” or the common characterization that one is either a free trader or a protectionist. You say that the subject is more complicated. Please elaborate.

Dr. Thomas J. Usher: The reason I object to the term “protectionism” is that I would rather refer to it as simply “enforcement of our trade laws.” We in this country have laws for many things. We have laws against smuggling, obviously for many good reasons. Well, we also have laws against bad trade practices—against illegal trade practices …. Our trade laws are like any other laws; they were passed by Congress and there’s a reason for them, and that is to keep people from doing things that run contrary to a competitive situation.

Consider, for example, a situation where the more efficient/lower-cost steel producer is being undersold by a less efficient/higher-cost steel producer because the latter is either being subsidized by its government or helped by government policy [that does not] allow steel to come into the country.

Over the last decade, the cost of steel from a labor standpoint has dropped from about 50 percent of the sales dollar to about 17 percent. As for the costs of any producer bringing steel into this country … well, we can match that anywhere. So, it’s not a question of lower efficiency or lower cost. It’s more a question of whether you’re going to allow those steel producers from other countries to bring in steel and price it—on a short-term basis—at a price below their production, with the help of those governments.

Now, if you’re a free trader who says that you don’t care what the foreign government is doing, because you just want the American consumer to get a lower price, then fine. I don’t agree, but intellectually I have more respect for that position than to simply say that we are being unfairly protected.

Some people call this protectionism. But what they’re really saying is that they don’t want us to have any trade laws. They’re really saying, “If someone wants to bring something here—for whatever reason or advantage—they should be able bring it.”

V&V: You note how and why this is an unhealthy situation for a nation of entrepreneurs and investors. Explain that.

Usher: If you think about it from a business person’s standpoint, if you don’t have laws that allow an investor to know what the future is like, why would the investor ever invest in anything? Why would I build another steel plant, why would I invest in another refinery, why would I keep drilling for oil, if I didn’t know there was some type of guarantee against predatory practices? That’s why trade laws were passed…. Our view, as business people, is that if you don’t have a structure of law for capital-investment decisions, it brings in uncertainty.

V&V: You could make this same point about the purpose of IPRs—Intellectual Property Rights—of patents, trademarks, copyrights. These are actually marketplace guarantees—what is commonly called “rule of law” or a “legal framework”—that enable entrepreneurs and investors to take risks and create capital; they are a signal to investors, a signal that provides predictability and reliability in a market economy.

Usher: That’s right. I find that many free traders are much more diligent on IPRs—on laws protecting intellectual property—than they are for the enforcement of trade laws for our products.

One of the great uncertainties we always had with investment decisions was the appointment of new members to the ITC [the U.S. International Trade Commission] and whether these new “free traders” on the commission were going to enforce the law or not—that is, enforce the trade laws on the books, passed by Congress.

Look, you just can’t allow what takes place in other governments—subsidies and so forth—and then allow steel or any other product by foreign producers to come in and be priced below the cost of production simply because it benefits the American consumer in the short term.

V&V: Give us an example of foreign government intervention that hurts American steel.

Usher: Here’s an example: We can sell steel to Toyota right down here in Kentucky. That same Toyota being made in Kentucky is being made in Toyota City in Japan. Now, we can’t sell that same steel in Japan. Why not? It’s the same steel, same fenders, some of those cars are being sent over here, some are staying over there, some are going somewhere else. So, why can we sell it here but can’t sell it over there? Because they don’t have an open market. I could even put that steel on a plane and send it over there and make money.

V&V: So, in that situation, the problem for your steel company has nothing to do with inefficiency in your company?

Usher: That’s right. Look, protectionism is bad. If you have a totally inefficient industry that isn’t competitive, and you allow the government to keep pumping money into it, that’s not a good thing, it shouldn’t be protected. But that’s not the situation with our industry.

V&V: You have another example of how foreign-government intervention hurts the U.S. steel industry, this one involving Value-Added Taxes—VATs. Can you talk about that?

Usher: Many of these foreign governments have VAT taxes as opposed to income taxes. So, they produce a product over there, and that VAT is deducted, whereas over here we can’t do any deduction for our income taxes. That’s a totally unfair system to compete against.

V&V: And the reality is that most of Europe, as well as many other countries around the world, have VAT taxes.

Usher: Yes, they do.

V&V: You’ve shared with me an example based on a $100 local price of steel for the United States, China, and Germany. As that U.S. steel goes to China, it gets hit with a 17 percent VAT that raises the price of that steel to $117 in China; on the contrary, when that China steel is exported to the United States, China applies a 13 percent VAT rebate, bringing it down to $88.89. Likewise, Germany does the same thing with a 16 percent VAT and a 16 percent VAT rebate. So, their governments are giving them advantages that U.S. steelmakers do not get from our government…. In a separate point, you also make the argument that the steel industry is in fact unique and must be viewed differently from other industries. Can you address that?

Usher: I do feel that there are certain industries that are critical to a nation’s infrastructure. Right now there’s a furor over oil, over the price of gasoline. As a country, we don’t want to become dependent on foreign governments for certain things, and I think oil is a perfect example of how that has happened. If the Saudis want oil at 23 dollars per barrel, they can get that.… We have found ourselves as a nation much more dependent than I think we would want to be.

V&V: And that vulnerability, that dependence on foreigners for our oil, truly affects our foreign policy.

Usher: Yes, it affects our foreign policy, our national security, our safety. And I would put steel in that same business. We don’t want to wake up tomorrow with no steel industry in the United States. Steel is one of the most critical industries in the country. And, then, on top of that, you have trade laws being violated against that industry.

V&V: Dr. Usher, we talked about the common complaint that the U.S. steel industry unfairly benefits from intervention by the federal government. Yet, often not mentioned is the reality that your industry can also be hurt by federal regulation or intervention that adds to your costs, right? Please address that.

Dr. Thomas J. Usher: A common example is the environmental-compliance regulations. Granted, a lot of those are the same country to country, but we also have compliance laws unique to us. We can live with many of those, but what’s difficult to live with is a foreign government that gives a one percent low-interest loan to the building of a new facility for one of our competitors, or a foreign government picking up all the social costs for employees, such as when people retire or when our competitor lays off people.

V&V: On that, you note that U.S. Steel does things for its employees that foreign companies do not, especially when it comes to benefits for employees, where, again, the foreign government (rather than the foreign company) picks up the tab.

Usher: We pay a big burden in pensions and health care. We have roughly four retirees for every active worker, whereas in other countries all of those costs for those retirees go on the government dole. That’s fine, but my point is that when you’re looking at a competitive posture, these things make a big difference, that’s a major disadvantage to us.

V&V: You argue that America needs to take better advantage of its vast marketplace to ensure better trade laws worldwide.

Usher: In general, what sort of bugs me is that we have the marketplace that everyone wants but don’t use it to our advantage. Everyone around the world wants to come here. They all want to sell here. Look at all the Chinese products in our stores. But what bugs me is that we don’t use that advantage to force better equity among our trade partners, whether on intellectual property or better trade laws. We don’t use the tool that we have to insist that others play by the same rules—to insist on fair trade.

Look, we don’t want help from the government. We simply want the government to enforce the laws it has passed. We made decisions based on trade laws that are on the books. We want those laws enforced. That’s not protectionism.

V&V: Speaking of those laws, there is a recent example that got a lot of press: President Bush, beginning in March 2002, imposed 18 months of tariffs on foreign steel, which he could’ve imposed for 36 months, but neglected to extend for the full three-year period. You favored his decision but regretted that he didn’t do the full extension. You said at the time that while restructuring did take place in the U.S. steel industry, no one “could honestly expect this industry to completely restructure in as little as eighteen months.” Here is one of those areas where the critic asks, “Well, then, how long do you need?”

Usher: The law that applies here is Section 201 of our trade laws. It needs to be understood that the president didn’t do this unilaterally. Bear in mind that his decision was preceded by probably the most extensive hearings maybe in the history of the ITC [International Trade Commission]. There were months and months of testimony by both sides. The conclusion that was reached and went to the president was that the violation of our trade laws had been so excessive and to such a degree that this had to stop, and that if we didn’t blow the whistle on the violators this whole industry could potentially go down the tube.

And the reasons for this is that we got into a very weak market in which foreign steel was coming in at prices that basically no one else in the world could match from a cost standpoint. Now, they could price it at those levels, but that wasn’t the cost. It is important to distinguish price from cost, which people often fail to do.

The testimony before the ITC showed that those who were selling in this country were selling at a price far below their cost of production. And this was attacking an industry that is critical to this nation’s security.

Here again, if you have a government subsidy involved, that distorts the actual cost of production. That means that we are competing not so much against a foreign company but a foreign government.

So, the president agreed and gave us some relief. If we hadn’t had that, if these practices would have went on for another couple of years, there was a very real chance that we probably wouldn’t have any steel industry left.

V&V: It would have been that bad?

Usher: It would have been that bad. And it is a much healthier industry today as a result of that decision by the president. It worked. I’m disappointed that President Bush after a while seemed to back track a little and apologized for it, when in fact I thought he should’ve said, “Look, this was the law, and it worked exactly as intended.”

V&V: I’d like to wrap up with a final, big-picture question that gets to the issue of parties and politics and even ideologies: This subject of trade is always a divisive issue within politics, including splits among both parties, Democrats and Republicans, among libertarians and conservatives, among a Pat Buchanan vs. others in the Republican Party. Where will this subject end up in the future, politically speaking?

Usher: I think it all goes back to the issue of how wealth is created. My view is that wealth is created by mining something, making something, producing something, growing something, that’s how you produce wealth. This country became a wealthy country because we produced a lot of things. In agriculture, we became the breadbasket of the world. We produced an awful lot of goods in this country. If, as a country, we fail to make things, we are not going to have wealth. Some people think we will be the “managers” of the world, that we have the intellectual capacity—

V&V: —they are talking about our educational strength, about our so-called “services” and service industry, about those being our strength in the global economy—

Usher: —yes, but let me tell you, there are an awful lot of smart Indians and Chinese and others who will not need us to manage the world, they will manage their own things. They can also do services. For a country to be an advanced economy, I think you need a manufacturing base. Some disagree, but I think you can’t be simply a service economy and remain a great nation.

Having said that, I’m certainly not anti-trade. Now, some countries will have a natural competitive advantage in trade in certain areas, which is fine. We have that in certain areas. You can create win-win situations for both countries in certain areas of trade.

But what I object to is when we don’t have a win-win situation and when we allow our industrial base to be destroyed, especially when we’re in the driver’s seat and we have the ability to insist on equity and fair trade. Thirty years from now, we may not be in that driver’s seat anymore. We don’t want to lose that base which allows that wealth to be created. Meanwhile, those other countries are building up their own manufacturing base.

Free trade is good if it’s fair trade. We, from a political party standpoint, need to be much more aggressive in ensuring that it is fair trade. In the end, thirty to forty years down the road, we will be a much poorer nation if we don’t do that.

V&V: Tom Usher, thanks for talking to V&V Q&A.

Usher: Thank you.

Paul Kengor is author of God and George W. Bush (HarperCollins, 2004), professor of political science, and executive director of the Center for Vision & Values at Grove City College. His latest book is The Judge: William P. Clark, Ronald Reagan's Top Hand (Ignatius Press, 2007).

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