Hang-Sheng Cheng

Laura Leete

English

Research Papers in Economics

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February 4, 1983
Steel Imports
It is hardly news that the u.s. steel industry is
in trouble. What is news is that last October
the United States concluded an agreement
with the European Economic Community
(EEC) to limitsteel imports from the EEC
nations and the U.S. is currently negotiating
with Japan to restrict steel imports from that
nation too. Presumably, a large part ofthe
U.S. steel industry'strouble is duetoimports,
and limitingimports is thoughtto be at leasta
partial solution to the industry's troubles.
This Letter will examine the extent to which
imports have been responsible for the u.s.
steel industry's woes and the extent to which
importrestrictions can help increase employ-
mentin thesteel industryin particularand the
U.S. economy in general.
The industry's woes
Conditions in the u.s. steel industry have
grown desperate. Production in the industry
was down to 49 percentofcapacity in 1982
-well below an estimated "breakeven"
level of70 percent for most producers. As a
result, according to one estimate, the seven
largest steel producers lost an average of
$95 per ton at the average priceof $412 per
ton last year. Similar losses are expected to
continue well into 1983.
Cost-cutting efforts in the steel industryelim-
inated 100,000 jobs between January and
Septemberof1982, with September being
the 16th consecutive month ofdecline in
steel employment. The American Iron and.
Steel Institute estimates that employment in
the U.S. steel industry is nowonly one-half
ofits 1975-79 average.
The industry's distress reflects more than the
current recessionary conditions troubling the
entire economy. In the third quarter of 1982,
steel production was halfofits 1973 level,
down from 28 million to 14 million net tons.
By projectingatrend from the 1973 business-
cycle peak tothe 1981 peak and then beyond
to 1982, one can estimate that about 55 per-
cent ofthe 1973-82 decline in steel output
was dueto a downward secular trend and 45
percent to the 1981-82 recession. It is clear
that the current recessionmerely aggravates
the already severe problems ofa declining
industry.
Trade conflicts
The embattled industry blames import com-
petition for a large share ofits woes. Indeed,
imported steel's share ofthe u.s. market rose
steadily from 2 percent in the 1950's to 22.
percent in 1982. Recently, the U.S. steel
industryfiledcomplaintswi.th the Commerce
Department and the International Trade
Commission, charging the EEC countries and
Japan with violating General Agreement on
Trade and Tariffs rules.
Specifically, EEC producers were charged
with exporting government-subsidized
products, and Japanese producerswith unfair
pricing practices. In the first case, the Com-
merce Department ruled that subsidies from
European governments did cause material
injury to domestic industry. The subsidy
levels werefound to vary among countries:
20 percent ofthe average price charged for
the United Kingdom, 14-20 percent for
France, 13 percent for Belgium and 26 per-
centforItaly. In October 1982,an agreement
was reached whereby the EEC must limit its
steel shipments tothe United States to an
average of5.5 percentofannual U.S. steel
consumption forthe next three years. This
ceiling is only slightly above the 5.2 percent
averageforthe decade 1972-81,butit is well
below the 7.2 percent share the European
countries obtained in the first ten months
of 1982.
Proceedings against the Japanese are still in
the preliminaryphase. IfAmerican producers
have theirway, low-priced Japanese steel
will be judged an "unreasonable burden" on
U.s. commerce and, therefore, legally sub-IP®dl®if0\ll ~®~~if\IY®
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Opinions expressed in this newsletter do not
necessarily reflect the yiews of the management
of the Federal Reserve Bank of San Francisco.
or of the Board of Governors of the. Federal
Reserve System.
jecttotrade sanctions. The u.s. industry is
seeking a 25 percent importsurcharge to
offset an "undervalued" yen, and restriction
ofJapanese imports to aboutone-third ofthe
7.2 percent share ofu.s. consumption they
currently hold.
However, itwould be short-sighted to attrib-
ute rising steel imports entirelyto actual
or alleged unfair foreign trade practices. We
need to look beyond by examiningsome
basic factors.
Excess capacity
The U.s. steel industry's woes arose partly
from excess capacity in theworldwide steel
industry. From 1953 to 1973, world steel
consumption grew rapidly at6 percent per
year. The boom attracted vast amounts of
public and private investment. Steel produc-
tion capacity expanded in both the industrial
and the developing nations in orderto keep
pace with the growth in demand until 1973.
The boom ended in 1973. By 1981, con-
sumption in the industrialized countries had
dropped to 86 percentof its 1973 level, but
the drop was offset by increases in the
developing countries and in the planned
economies so that the net result was zero
growth in world consumption.
While the growth in worldwide demand
stagnated, steel production capacity con-
tinued to expand. From 1973 to 1981,
capacity increased by 10 percent in the
developed countries and by 7 percent in the
developingcountries. The resultant world-
wideexcess capacity set thestage for increas-
ingly fierce price competition that threatens
the continued survival ofless-efficient, high-
cost producers.
Unfortunately, the u.s. steel industry has
been among the less-efficient, high-cost
producers in the world market, because
ofhigh laborcosts and the use ofoutdated
equipment, compared with those abroad.
labor costs
Labor cost has increased rapidly in the u.s.
2
steel industry. The hourlywage cost, includ-
ing benefits, rose from $3.30 in 1956to
$25.20 in 1982. The 6.6 times rise relative to
a 2.5 times increase in consumer prices has
meantasubstantial improvement inthe living
standard ofsteel-workers-atthe expense of
a profit squeeze in the U.S. steel industry and
a deterioration in the industry's competitive-
ness compared to producers abroad.
The profit squeeze arosebecause the wage
increases were notfulIyoffsetbyproductivity
increases, and because the resultant rise in
unit laborcost (laborcost per unitofoutput)
could onlybe partially passed on to steel
users through price increases. Between 1956
and 1982, laborproductivity in the U.S. steel
industry rose by only 5.5 percent. Given the
6.6times rise in thewage rate, thisllasmeant
a 3.9 times increases in unit laborcost, com-
pared to a 3 times rise in average steel prices.
Since laborcost accounts for about40 per-
cent oftotal production cost in the U.S. steel
industry, thedevelopment has meant sharply
reduced profitability in that industry.
True, laborcost has also risen rapidly
abroad and in some cases even faster than in
the United States. For instance, from 1956 to
1982, unit labor cost rose 4.3 times in the
Japanese steel industry, compared tothe 3.9
times increase inthe u.s. industry. However,
the relative shiftwas notlargeenough to have
put more than a dent in the absolute cost
difference. By 1982,at $265 perlon, the u.s.
unit laborcost was still substantially higher
than the $144 per ton in Japan. Moreover,
changes in laborcost only tell partofthe
story. The rapid expansion in production
capacity abroad, noted above, has also
meant improved quality and availability ofa
wide range ofproducts to steel users in the
U.S. market. To remain competitive, the u.s.
steel producers would have had to limitlabor
cost increases to a much greater extent than
they have been able to.
Outdated equipment
Numerous studies have focused on the
reasons that u.s. productivity growth has
lagged behind growth rates abroad. In thesteel industry, amajor cause has been the
continued use ofrelatively old plants and
equipment. Steel experts generally agree that
the most modern, efficient method ofsteel
production is the so-called "continuous cast-
ing" process whereby molten steel is poured
directly into molds. This process reduces the
high energy and labor costs ofthe conven-
tional practice offirst casting steel and later
reheating it for molding and rolling. Accord-
ing to experts, the more efficient process
accounts for 71 percent ofJapan's steel out-
put, 45 percent ofthe EEC's and only 21
percent ofthe United States'.
But, why hasthe u.s. steel industry lagged so
far behind in renovating its plantand equip-
ment in comparison to other countries? One
would think that, given the high labor cost,
there should have been astrong incentive for
the producers to economize on labor cost by
substituting capital for labor. And, surely,
there has been no lackofcapital in the u.s.
market relative to markets abroad.
Two explanations suggest themselves. First,
as stated above, high laborcost has'brought
aboutasevere profitsqueeze in the u.s. steel
industry, thus reducing the incentive for
investment in capital renovation. Second,
the worldwide excess capacity and the en-
hanced import competition, also noted
above, have made iteven less attractive for
investors to pour large amountsofcapital into
the industry.
Effects ofprotection
In the face ofincreasing import competition,
U.s. steel producers have appealed to the
government for protection and received vari-
ous types ofrelief. For instance, "voluntary"
agreements were concluded in 1969withthe
EEC and Japan to restrict the growth ofsteel
imports from those countries to no more than
afive-percent annual rate. Since 1977, a
"trigger-pricemechanism" has been in place
to impose duties on steel imports should the
import price fall below the production and
transportation cost ofthe most efficientfor-
eign producer, Japan. These measures were
3
intended to protect domestic steel producers
against abrupt, massive shocks from abroad
and togive them the time to generate the
much-needed cash for modernizing their
production facilities.
Studies, however, show that capital expendi-
tures in the domestic steel industry declined
in the five-year period after 1968even though
the voluntary restraints reduced imports by
25 percent from what they would otherWise
have been in the same period. Between 1969
and 1974, in contrast, capital expenditures
more than doubled in the Japanese and EEC
steel industries. Studies also show that the
trigger-price mechanism did not have any
measurable impacton the market shares of
u.s. domestic steel producers.
Even ifimportbarriers had been effective in
keeping outorreducing imports, thus provid-
ing short-run relief to the u.s. steel industry,
their ultimate effect would have been to raise
U.s. steel prices. Since steel is amajor input
in so many other industries, the higher steel
prices would clearly have deleterious effects
on the competitivepositions ofthe U.s. auto-
mobile, machinery, home appliance, and
other industries. Thus, it is not clear that total
employment would have been helped by
effective barriers against steel imports.
Conclusion
The u.s. steel industry's problems are deep-
rooted. The steel producers' solution-
import barriers-can no doubt stem the tide
in the short run. Past experience, however,
has shown that past barriers were no more
than temporary palliatives that failed to
address the steel industry's troubles at their
many sources. Moreover, because steel is a
major input in other industries, restricting
steel imports would inevitably raise steel
prices, thus adversely affecting the competi-
tiveness ofother U.S. industries. Although
import restrictions can provide temporary
relieftothe steel industry, the wisdom ofsuch
apolicy isquestionablefrom the viewpointof
the economy as awhole.
Laura Leete and Hang-Sheng ChengUQlSU!YSE'M • yE'ln • uo2aJO • E'peAaN • oyepi
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
selectedAssetsand liabilUies .
Large Commercial8anks
Amount
Outstanding
1/19/83
Change
from
1/12/83
Change from
year ago
Dollar Percent
loans (gross, adjusted) and investments* 163,608 301 6,567 4.2
loans (gross, adjusted) - total# 142,547 65 6,878 5.1
Commercial and industrial 45,33~ 514 3,841 93
Real estate 57,423 - 134 1,127 2.0
loans to individuals 23,890 - 81 275 1.2
Securities loans 2,455 - 142 410 20.0
U.s. Treasury securities* 7,445 50 1,406 233
Other securities* 13,616 186 - 1,717 - 11.2
Demand deposits - total# 40,221 - 932 - 164 - 0,4
Demand deposits - adjusted 27,928 -1,023 - 151 - 0.5
Savings deposits - total 56,014 2,620 25,146 81.5
Time deposits, - total# 79,195 -2,991 - 11,235 - 12,4
Individuals, part. &corp. 70,021 -2,635 - 11,383 - 14.0
(large negotiable CD's) 26,851 -1,364 - 8,901 - 24.9
Weekly Averages
of Daily figUres
Member Bank Reserve Position
Excess Reserves (+)/Oeficiency (-)
Borrowings
Net free reselVes (+)/Net borrowed(-)
Weekended
1/19/83
213
o
213
Weekended
1/12/83
108
33
75
Comparable
year~ago period
75
21
54
,. Excludes trading account securities.
# Includes items not shown separately.
Editorial comments may be addressed to the editor (Gregory Tong) orto the author....Free copies of this
andother Federal Reservepublicationscan beobtained bycallingor writingthe PublicInfonnationSection,
federal Reserve BankofSan francisco, P.O. 80x 7702,San francisco 94120. Phone (415) 974-2246.

Steel imports

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Steel imports

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