Chronic Murmuring

Steel and the EU

In retaliation against Bush's protection of steel last year, Europe is planning a trade war against American exports. Now Bush has to figure out whether to take the tarrifs off of steel imports (which he should do, ultimately, if he wants to help consumers and the economy). But then with the election coming up, he has to balance this against what he potentially loses in alienating those powerful unions.

The steel tarrifs ultimately helped steel workers and steel producing companies in America, and hurt all steel consumers who weren't able to experience the lower global prices in steel. While 100,000 jobs were saved in the steel industries, over 400,000 jobs were lost in steel consuming industries. At least, according to Walter Williams, who was on the radio a few weeks ago debating a steel worker.

I tell my kids that this is sad situation. Globalization does hurt, even while it helps. Those who benefit from globalization are consumers. Those who are hurt are the domestic firms unable to compete on a global market. While maybe none of us are shedding any tears over US Steel not achieving its forecasted profits for the 3rd and 4th quarters, the truth is that globalization would require American production of steel to shrink, due to the drop in prices. The demand for steel workers would also drop, as the value of the worker's marginal product would drop due to the decline in world prices. Real wages for steel workers, along with employment in general, would decline due to this decrease in demand for that specific labor. This in turn means many steel workers without jobs, and worse of all, without the skills needed to move into other growing industries.

This is the touchy situation you find yourself in with protectionism. You protect now, but when does it stop? Eventually, it has to stop, as this impending trade war with the EU shows. The protection of a domestic industry hurts foreign competitors who are busy putting their own pressure on their governments for help. And it when it does finally stop, the industry's workers has even less time to adapt to the new competitive environment. Protectionism is never so cruel as when it ends.