Dumping Of Steel Essay, Research Paper

INTRODUCTION

Foreign steel producers plague the U.S. steel industry with unfair competitive practices. This practice is referred to as “dumping”. Dumping of foreign steel has been a problem throughout the history of the U.S. steel industry. In the 1990s dumping has become more of a problem, due to the breakdown of the Russian economy and its transition from Capitalism to a free-market economy. According to Microsoft Encarta 98 (1998), Free-Market Economy, is an economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions. In addition, the Asian financial crisis has led to another round of dumping into the U.S. markets by many Asian countries.

The effects of dumping have a positive as well as a negative impact on the health of the overall U.S. economy. On the positive side, steel-using industries enjoy lower prices for steel used in the manufacture of their products. Turning to the negative side, the U.S. steel industry has suffered tremendously through layoffs and a collapse of a number of steel makers.

Should the U.S. Government provide protection against dumping? The debate on protectionism has gone on for years. Protection of one industry by the U.S. Government has come at the cost of another including the U.S. consumer.

BREIF HISTORY OF THE STEEL INDUSTRY

The steel industry grew out of the need for stronger and more easily produced metals. During the last half of the 19th century, many technological advances in steelmaking played an important role in creating modern economies. These economies depended on the steel industry to supply rails, autos, girders, bridges, and many other steel products. Iron making can be traced as far back as 3,500 b.c. in Armenia. The Bessemer process, created independently by Henry Bessemer in England and William Kelly in the United States during the 1850s, allowed the mass production of low-cost steel; the open hearth process, first introduced in the United States in 1888, made it easier to use domestic iron ores. By the 1880s, the growing demand for steel rails made the United States the world’s largest producer. The open-hearth process dominated the steel industry between 1910 and 1960, when it converted to the oxygen process, which produces steel faster, and the electric furnace process, which makes it easier to produce alloys such as stainless steel. After World War II, the U.S. steel industry faced increased competition from Japanese and European producers, who rebuilt and modernized their industries. Later, many Third World countries such as Brazil built their own steel industries and large U.S. steelmakers faced increased competition from smaller, nonunion mills. The U.S. produced about

half of the world’s steel in 1945; by 1991 it was the third largest producer, with only 11% of the world market, behind the former Soviet Union and Japan. Since the 1970s, growing competition and the increasing availability of alternative materials, such as plastic, slowed steel industry growth; employment in the United States steel industry dropped from 2.5 million in 1974 to 1.6 million in 1991. Global production stood at 736 million tons in1991, down from 786million tons in 1988 (The Columbia Encyclopedia, 1993).

DUMPING

Columbia Encyclopedia, (1993) defined dumping as the selling of goods at less than normal price, usually as exports in international trade. It may be done by a producer, a group of producers, or a nation. However, dumping is usually done to drive competitors off the market and secure a monopoly, and/or to hinder foreign competition. Nations, in an effort to counterbalance international dumping, often resorted to flexible tariffs. International trade through acute competition from foreign producers often leads to dumping infractions of law. A policy regarding dumping, depends on its effectiveness in maintaining separate domestic and foreign markets, the monopolistic mechanism that influences the stability of high prices in the home market, on export bounties, or on low import duties in the foreign market help maintain economic balance. Dumping disturbs those markets that receive dumped goods and it may drive local producers out of business. Governments may condone, even sponsor, dumping in other markets for political reasons and/or to achieve more favorable balance of payments. In the late 19th century, dumping became part of the trade policy of great European cartels, especially German cartels. Britain, France, Japan, and the United States have also practiced dumping. Canada first passed antidumping legislation in 1904. The United States in an effort to discourage dumping, imposed various tariff acts that dealt with different types of dumping; in particular the Emergency Tariff Act of 1921, imposed special duties on goods imported for sale at less than their fair value or cost of production. It was amended by the Customs Simplification Act of 1954. The General Agreement on Tariffs and Trade (GATT) prohibits dumping and provides for increased import duties to combat the practice (Columbia Encyclopedia, 1993).

DUMPING IN THE 1990s

The dumping of steel products into the U.S. market has been going on throughout history. Nevertheless, it has become more prevalent during the 1990s. According To Robert J.Grow (1998), the first major shock of the 1990s came from the near total collapse of steel plate demand in the former Soviet Union and a concomitant surge in exports to the U.S. Fortunately, U.S. producers successfully challenged the dumping of plate into the U.S. market with trade cases filed in Nov. 1996. After findings of massive dumping margins and affirmative determinations of injury, the governments of Russia, Ukraine, and China reached suspension agreements that will reduce imports from these countries by 70 percent from 1996 levels of over 1 million tons. These countries essentially had not shipped to the U.S. market before 1993.

The entire U.S. steel industry is attempting to overcome the second major shock of the 1990s the Asian financial crisis. The Asian financial crisis has meant collapsing currencies for many Asian countries, International Monetary Fund (IMF) bailouts for several of these countries, soaring domestic interest rates, bankruptcy filings, and significantly reduced home-market demand in Asian countries (Grow, 1998). This crisis has forced many Asian countries to resort to dumping steel on the U.S. market due to low demand at home.

THE CAUSE

For years, the Asian model involved government-directed lending within a closed financial system to favored companies and industries in export-targeted sectors like steel despite the creditworthiness of the enterprises receiving the financing. Long-term capital expenditures were financed with short-term debt, and increased capacity was used to fuel higher exports and increases in the standards of living for workers. Workers in Korea were granted lifetime employment. Profits or the lack thereof, was not important; instead, market share and increased exports were emphasized. When the poster child of these Asian financial abuses, Hanbo Steel, filed for bankruptcy in Jan. 1997, the dominoes began to fall. Incredibly, at the time of the bankruptcy, Hanbo had received $5.8 billion in loans, led by the Korean-government-owned Korea Development Bank. Since the bankruptcy, Hanbo has been managed by Pohang Iron and Steel, now the world’s largest steel producer and still 36-percent-owned and controlled by the Korean government (Grow, 1998).

Because of the lack of demand for steel products in many Asian countries coupled with subsidized over capacity the U.S. has witnessed an inflow of steel products into the country. Korea has exported record numbers of steel pipe to the U.S. Also, increased exports of plate from Korea and Indonesia, and increased imports of hot-rolled sheet from Japan, among other countries in the region. According to American Metal Market (1999),

By June of 1999, the list of countries allegedly dumping steel has grown to include Argentina (28 percent), Brazil (32 percent to 63 percent), China (27 percent),

Japan (49 percent to 53 percent), Russia (76 percent to 100 percent), South Africa

(17 percent), Slovakia (35 percent to 44 percent), Taiwan (38 percent to 59

percent), Thailand (94 percent to 122 percent), Turkey (33 percent and Venezuela

(25 percent to 56 percent). Cold-rolled imports from these countries totaled

2,283,710 tons in 1998, accounting for 13.7 percent of the total U.S. domestic

market and 63.2 percent of all cold-rolled imports.

THE EFFECTS

The dumping of foreign steel into the U.S. market can have a positive effect on the economy; However, dumping can effect the economy in a negative way as well.

First lets look at the positive effects dumping has on the economy. The dumping of steel by foreign countries has caused the price of commodity grade sheet steel to drop to as little as $220 a ton, down from around $300 a ton. The lower prices due to steel imports have been a boon to steel-using industries, from carmakers to lawnmower manufacturers. Companies are always looking for ways to cut costs and increase their total profit. Companies that use steel in the manufacture of their products will benefit from the use of substitutes that the foreign steel companies provide through lower priced steel. This will allow the steel-using industries to hold the line on price increases of their products, allowing the American consumer to benefit from lower prices due to dumping. In 1998, the demand for steel was so great that domestic producer’s were themselves taking advantage of cheap foreign produced steel. A number of domestic steel producers were buying cheap slabs from foreign producers to run through their mills. Domestic producers found that it was cheaper to buy slabs from foreign mills than to make the slabs themselves (Robertson, 1998).

For the U.S. steel industry, the negative effects of dumping out-weigh any positive effects. Demand for steel in the U.S. has been perfectly inelastic for much of the 1990s meaning that whatever the steel makers could produce the market would absorb no matter what the price. If demand is inelastic, a price rise leads to an increase in total revenue, and a price fall leads to a decrease in total revenue (Arnold, 1998). Dumping leads to lower prices, although demand is the same, total revenue decreases. Since 1997, The U.S. steel manufacturing industry has been suffering from the record level of steel imports that have been flooding the country. The situation has caused the collapse of a number of steelmakers, a reduction in operating levels and the layoff of thousands of workers. Before 1998, the peak level of U.S. steel imports was 27 million tons. Steel imports, in 1998 reached an all-time high of 41.5 million tons, a 54-percent increase over the previous record level (Garvey, 1999). U.S. Steel producers blame more than 10,000 layoffs in late 1998 and the bankruptcies of three steel companies in 1999 on the surge in steel imports.

PROTECTION

The illegal dumping of foreign steel products in the U.S. is depressing the steel-manufacturing sector in the U.S. America’s steel industry wants special protection from falling prices in the global marketplace. Should this come at the expense of our nation’s overall economic health?

U.S. steelmakers and their unions have banded together and petitioned for protection against illegally dumped foreign steel. This campaign “Stand Up For Steel” has worked by putting the pressure on politicians in Washington to “do something.” Doing something, particularly when it comes to a political heavy hitter like steel means relying on anti-dumping statutes. Anti-dumping laws, which penalize companies for selling their products for less than production cost, have been a useful cover from global competition for the steel industry: one out of three anti-dumping actions in the past 20 years was directed at imported steel (Morrissey, 1999). The U.S. anti-dumping law is stacked in favor of domestic producers, virtually guaranteeing that a dumping margin will be found. The Commerce Department upholds more than 95 percent of all dumping charges. In addition, U.S. law punishes foreign producers for engaging in practices that are legal, and common, in the domestic U.S. economy, where struggling companies often sell at a loss to clear inventory and cover fixed costs (Griswold, 1998).

In March of 1999, the House of Representatives voted overwhelmingly, (289-141), to slap quotas on dumped steel imports. The quota bill would cost the private sector almost $900 million over the next three years, according to a Congressional Budget Office report (Morrissey, 1999). The quota bill would drive up domestic steel prices; this would be a boon to the relatively small steel-producing sector but a burden to far larger steel-using industries. Higher steel prices will drive up costs and depress sales and employment in steel-using sectors such as automobiles, construction, home appliances and food packaging. For Example, the average five-passenger sedan contains $700 worth of steel, a fact that has prompted General Motors to file a brief this fall with the U.S. International Trade Commission urging caution about steel dumping duties. Caterpillar Inc., a major exporter of construction equipment, buys 600,000 tons of steel a year. General Electric uses 750,000 tons a year in home appliances and a range of other products. Overall, the major steel-consuming sectors of the U.S. economy transportation equipment, fabricated metal products, and industrial machinery and equipment employ 3.4 million production workers, compared to 175,000 employed by the basic steel industry (Griswold, 1998, p.2).

For every steelworker whose job is made more secure by protection, nearly 20 workers in steel-using industries will be made less secure (Griswold, 1998, p.2). Propping up steel prices will cheer unions and stockholders of domestic steel, but will hurt far more numerous Americans who buy and make steel products. Most steel companies posted profits in late 1998 and all of 1999. Lower prices will potentially drive some of the less efficient U.S. producers out of business, but the more efficient among them, will survive and thrive, leaving the U.S. industry more competitive overall.

FUTURE OUTLOOK

The U.S. steel industry can look forward to a prosperous year 2000 and beyond. Kenneth Hoffman, steel industry analyst with Prudential Securities, .New York, predicted hot-rolled sheet prices would be in the range of $365 per ton to $400 per ton. Hoffman also predicted prices for cold-rolled sheet would be in the range of $425 per ton to $465 per ton (up, from current prices of around $410 per ton) and galvanized sheet up to $525 per ton to $600 per ton from current prices of around $420 per ton. “I think U.S. prices will go nuts next year,” Hoffman said. “Asia right now is a boom or bust economy. It is the U.S. of 100 years ago, and it will be significantly stronger next year. That strength will help curb the high levels of imports that came from Asia to the U.S. in the second half of 1998 and early 1999″ (Robertson, 1999). This will cause less dumping into the U.S. market, thereby allowing domestic steelmakers to raise their prices. Furthermore, supply will decrease as demand rises. Thus increasing total revenue for most steel companies.

CONCLUSION

Dumping is a worldwide problem, the breakdown of the Russian economy and the Asian financial crisis were problems during the 1990s. Finding ways to deal with dumping is one of the major issues facing U.S. steel makers in the new millenium. Should the U.S. Government protect the steel industry at the expense of the rest of the U.S. economy? Furthermore, at the chance that foreign countries will retaliate due to punishment levied against them because of dumping. As global expansion continues, U.S. steelmakers will have to become more aggressive in finding ways to compete in the global marketplace. This will have to be done through modernization of old mills and the use of new technologies to make a better product at lower costs. Dumping will always be a threat to the U.S. steel industry. Finding the way to fight it will be the big challenge facing the U.S. steel industry in the 21st century.

BIBLIOGRAPHY

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