Trade Policy as Corporate Welfare:

The Case of the U.S. Steel Industry

Robert W. McGee

Presented at the 15th Annual Conference of The International Academy of Business

Disciplines, Orlando, Florida, USA, April 3-6, 2003.

Key Words: trade policy, corporate welfare, antidumping, steel industry, rent
seeking, protectionism, tariffs, quotas

JEL Codes: D23, D6, D72, F13, F14, I39, L52, L61

Abstract
This paper begins with a discussion of what constitutes corporate
welfare, then proceeds to apply the corporate welfare concept to the
steel industry in the United States. A review is made of the various
government supports that the steel industry has enjoyed since 1969.
Studies have estimated that support to the steel industry has totaled
between $90 and $151 billion. The paper concludes with a discussion
of the 30 percent tariff that George Bush imposed on foreign steel
producers and suggests that the steel industry should be taken off
welfare and allowed to sink or swim on its own.

Welfare can generally be viewed as a one-way transfer, the giving of

something to someone with no expectation of receiving anything in return. People

usually think of welfare as something that government provides to individuals.

Examples include subsidized housing, subsidized or free health care, education and

pensions. But welfare can include other one-way transfers as well, and these

transfers do not have to be limited to recipients who are individuals. Government can

also give assistance to industries or to particular projects. Such assistance can take

the form of tax abatements,1 low interest loans, export subsidies, farm subsidies
(Edwards and DeHaven, 2001) and numerous other forms of help. One might label

such welfare corporate welfare because the recipient is a corporation. According to

one estimate, corporate welfare costs U.S. taxpayers $87 billion per year (Slivinski,

2001).

In the case of corporate welfare, sometimes things are expected in return. For

example, if some municipal government grants tax abatement in exchange for a

corporation establishing a factory in an industrial park or the inner city or builds a

sports stadium (Cato, 2001), the government might require the company to hire a

certain number of local workers. Campaign contributions might also be part of the

unofficial arrangement.

Corporate welfare might also take the form of trade protectionism. Such

protection might include export subsidies, establishing or maintaining high tariffs or

quotas, or permitting domestic producers to prevent foreign competitors from

entering the market by using antidumping laws. Antitrust laws have also been

labeled as a form of corporate welfare, since they often have anticompetitive effects

that protect one company at the expense of the general public (Crews, 1997).

Sometimes protection is intended to be temporary. The infant industry

argument, for example, is based on the premise that a certain new industry only

needs protection until it can become strong enough to compete with more mature

established industries in other countries. The problem with the infant industry

argument is that such protection turns out to be a long-term proposition. The infant

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steel industry in the United States, for example, has been protected ever since

Alexander Hamilton issued his Report on Manufactures in 1791 (Hamilton, 1791).

The infant sugar industry has been protected since 1816 (Bovard, 1991: 71). The

farm program the U.S. Congress passed in 1985 guaranteed cane farmers and sugar

beet producers about 21.5 cents a pound for their product when the world market

price was about 4 cents a pound (Novack, 1989). Government grants the protection,

but consumers are called upon to pay for it.

Once the infant industry argument no longer applies, we are introduced to its

close cousin, the breathing room argument. This argument basically states that some

industry only needs temporary protection until it can restructure and get on its feet

again. This argument is put forth to justify protecting a mature industry. However, in

practice, such temporary measures are often applied to protect senile industries from

dying a natural death. Such is the case with the textile industry in the United States

and also with the steel industry. There is no need for the United States to produce

steel if steel buyers can purchase steel cheaper someplace else, yet the steel industry

in the United States continues to be subsidized.

The Steel Industry in the United States

Slivinski and Stansel define corporate welfare as "any government spending

program that provides unique benefits or advantages to specific companies or

industries" (2001, 79-80). The 30 percent tariff that President George Bush imposed

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on foreign steel producers during the first quarter of 2002 does not meet the strict

definition of corporate welfare according to this definition because the tariff does not

strictly speaking constitute a spending program. Technically, it is not a program

either, but rather a policy. However, the tariff definitely provides advantages to an

industry. It appears that the Slivinski and Stansel definition needs to be expanded to

include any government policy that provides assistance, not just spending programs

and not just programs.

As was previously mentioned, the steel industry in the United States has been

protected from foreign competition since 1791. In spite of that protection it is in a

state of decline. Many steel companies in recent years have had to declare

bankruptcy and many of those that survive are unprofitable. The price system is

sending signals to investors that they should get out of the steel business and into

something else. Protecting the steel industry distorts this signaling mechanism

provided by the price system, with the result that resources continue to be

misallocated. Perhaps it is time to let this senile industry die a natural death.

This recent tariff is not the first time since 1791 that the U.S. steel industry

has been helped by government. The steel industry has a long history of such

assistance. When the U.S. steel industry was faced with rising imports in 1977-78

the American Iron and Steel Institute went to the Special Trade Representative for

help. A series of antidumping actions followed shortly thereafter. The trigger price

mechanism came into existence around this time as well (Destler and Odell, 1987,

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11-12). The trigger price mechanism was effectively ended in 1982 when U.S. steel

makers delivered 494 boxes containing three million pages of documentation to the

government to support the submission of 132 antidumping and countervailing duty

petitions against foreign steel producers (Destler and Odell, 1987, 15).

However, imports continued to rise. Those petitions were aimed mostly at

European and Japanese steel producers. When the flow of steel from these sources

ebbed, countries that were not included in the antidumping and countervailing duty

petitions, most notably Brazil, Korea and Mexico, picked up the slack. The domestic

steel industry responded by launching a three-prong attack in early 1984. That attack

included more antidumping and countervailing duty petitions as well as quotas and

an escape clause petition. The United States International Trade Commission

(USITC) responded by recommending tariffs and quotas that covered 70 percent of

steel imports. President Reagan rejected the USITC recommendation but substituted

a comprehensive set of voluntary restraint agreements in their place (Destler and

Odell, 1987, 18).

The American Institute for International Steel conducted a major study on the

cost of subsidizing the U.S. steel industry (Barringer and Pierce, 2000). It estimated

that various protectionist measures have cost American consumers between $90 and

$151 billion in constant 1999 dollars since 1969 (p. 3). Restraints have taken many

forms. The major ones include:

Voluntary Restraint Agreements 1969-1974

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 The Trigger Price Mechanism 1978-1982

Voluntary Restraint Agreements 1982-1992

Antidumping and Countervailing Duty Petitions 1992 - Present

The first set of Voluntary Restraint Agreements (VRA) were estimated to

have cost between $4.4 and $8.6 billion a year in constant 1999 dollars, which

amounted to as much as $240,000 for each job claimed to have been saved (pp. 55-

56). The Trigger Price Mechanism, a form of federal price fixing, is estimated to

have cost consumers between $2.0 and $11.3 billion a year in constant 1999 dollars,

or $620,000 for each job claimed to have been saved (p. 62). The second set of

VRAs were estimated to have cost between $5.1 and $9.2 billion a year in constant

1999 dollars, or between $48.8 and $67.0 billion over the ten-year period of their

existence, or approximately $750,000 a year for each job claimed to have been saved

(p. 71).

The cost of antidumping and countervailing duty actions continues to mount.

In 2001 the USITC determined that U.S. steel companies were injured by foreign

steel imports (Kahn, 2001), which led President Bush to impose tariffs of up to 30

percent on foreign steel producers (Sanger, 2002). This decision will cause prices to

rise for products made of steel (Deutsch, 2002) and is likely to lead to retaliation. A

day after President Bush announced his decision to slap tariffs on foreign steel,

Russia announced that it would no longer import American chicken legs. Bush's

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tariff is expected to cost Russia $1.2 billion in revenue over the next three years.

American chicken farmers stand to lose $600 million a year in lost sales (Tavernise,

2002).

The Russian retaliation is only the tip of the iceberg. Other countries are also

likely to retaliate, which might lead to additional American retaliation, and on and

on. Meanwhile, American steel companies are asking for even more handouts. They

are complaining that workers from the bankrupt companies will lose their health

benefits and are asking the federal government to bail them out by paying these

benefits.

Concluding Comments

The U.S. steel industry has been receiving heavy government support for

more than three decades. If one includes the high tariffs that the U.S. government

imposed on a wide range of products throughout the nineteenth century and well into

the twentieth, with legislation such as the Smoot-Hawley Tariff Act of 1930, such

protection has been given for more than 200 years. The steel industry has been

"restructuring" since 1969, if not before. It is time that it sinks or swims on its own

power. Consumers should no longer have to pay to support this corporate welfare

that has been foisted upon them by politicians, bureaucrats, the steel industry and

labor unions.

References

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Barringer, William H. and Kenneth J. Pierce (2000) Paying the Price for Big Steel:

$100 Billion in Trade Restraints and Corporate Welfare: 30 Years of the

Integrated Steel Companies' Capture of U.S. Trade Policy, American Institute for

International Steel, Washington, DC, www.aiis.org

Bovard, James (1991) The Fair Trade Fraud, St. Martin's Press, New York.

Cato Institute (2001) Home Run for Corporate Welfare: Taxpayer Subsidies for

Sports Stadiums, Cato Institute, Washington, DC, April 2,

www.cato.org/events/010402pf.html

Crews, Clyde Wayne, Jr. (1997) Antitrust Policy as Corporate Welfare, Competitive

Enterprise Institute, Washington, DC, July, www.cei.org/pdf/1615.pdf

Destler, I.M. and John S. Odell (1987) Anti-Protection: Changing Forces in United

States Trade Politics, Institute for International Economics, Washington, DC.

Deutsch, Claudia H. (2002) U.S. Users of Steel Worry That Tariffs Will Be Costly,

The New York Times on the Web, March 7. www.nytimes.com

Edwards, Chris and Tad DeHaven (2001) Farm Subsidies at Record Levels As

Congress Considers New Farm Bill, Briefing Paper No. 70, Cato Institute,

Washington, DC, October 18. www.cato.org/pubs/briefs/bp-070es.html

Hamilton, Alexander (1791) Report on Manufactures, reproduced in Industrial and

Commercial Correspondence of Alexander Hamilton (Ed.) A.H. Cole, Augustus

Kelley, New York.

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Kahn, Joseph (2001) Trade Panel Backs Steel Makers, Enabling Broad Sanctions,

The New York Times on the Web, October 23. www.nytimes.com

Novack, Janet (1989) Three Yards and a Cloud of (Sugar) Dust, Forbes, September

4, p. 39.

Sanger, David E. (2002) Bush Puts Tariffs of as Much as 30% on Steel Imports, The

New York Times on the Web, March 6. www.nytimes.com

Slivinsky, Stephen (2001) The Corporate Welfare Budget Bigger Than Ever, Cato

Policy Analysis No. 415, October 10, www.cato.org/pubs/pas/pa-415es.html.

Slivinsky, Stephen and Dean Stansel (2001) Corporate Welfare, in Cato Handbook

for Congress: Policy Recommendations for the 107th Congress, 79-84, Cato

Institute, Washington, DC. www.cato.org.

Tavernise, Sabrina (2002) U.S. Duties on Steel Anger Russia, The New York Times

on the Web, March 7. www.nytimes.com

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1
Tax abatements cannot be considered welfare in the strict sense, since the money

the corporation is allowed to keep is its own money in the first place. To hold that

allowing the corporation to keep some of its own money constitutes welfare would

mean that one begins with the premise that the government is entitled to 100 percent

of income and anything it does not take constitutes a gift. Slivinski and Stansel

(2001) make this point at 80.

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