politics, economics and the international steel industry

Politics, economics and the internationalsteel industryProf. I. Walter and K.A. Jones

Indexing term: Engineering administration and management

Abstract: The international steel industry has worked itself into a state of perpetual crisis, wherein politicsrather than economics is becoming important as the determinant of global production and trade relation-ships, and political decisions are replacing market decisions in determining the location of production. Thepeculiarities of the industry, together with increasing national concern for problems of economic adjustmenthave stimulated the direct and indirect intervention of government in the industry, and encouraged firmsto engage in protection-seeking rather than adjustment-oriented behaviour. More than in most other in-dustries, this protection-seeking behaviour has been successful, and has seriously eroded the role of marketcompetition. The paper explores the evolution of the international steel industry, and develops a political-economic model to explain such behaviour, and evaluate its results.

1 Introduction

The economic and political dynamics of firm and industryadjustments to international competitive shifts tend to behighly industry-specific. In some cases, the result even ofsevere and abrupt competitive shocks is a swift and rela-tively painless market-driven adjustment. In others, the resultsof far milder and more gradual trade-related disturbanceshave been direct government intervention in markets and inthe functioning of firms themselves, often producing pro-longed nonadjustment and severe deviation from market-related solutions. Which way things go depends on suchfactors as the degree of cross-product diversification of firms,the available scope for intra-firm reallocation of labour andproduction facilities, the degree of multinational activity,the pace of technical progress, regional concentration, avail-able channels for transforming economic interests into pol-itical power, profitability performance and growth, amongothers [21].

The steel sector represents a useful object for study inthis respect, and its trade-policy evolution contains somepotentially instructive points of political-economic interactionin the pathology of sectoral protection. We begin by sketchingout the political and economic factors responsible for theglobal trade and production situation in the steel industry.We go on to develop a simple schematic of political andeconomic linkages which may help explain how the observedstate of affairs may have come about, and suggest sometrade-policy implications for the future.

2 Evolving saga of international steel

There are four principal characters in the international steelstory: the USA, the EEC, Japan, and a geographically dis-persed collection of the more advanced developing countries,with supporting roles played by Canada, South Africa, andcertain Eastern European countries. The broad sweep of themain story-line — focused on long-term shifts in competitiveadvantage at the industry level — generates a number ofsubplots, which differ widely among countries and regions.

2.1 USA

The global pre-eminence of the US steel industry lasted forover 70 years, based on the existence of a large domestic andexport market, international technological leadership, low-

Paper 1939A, first received 21st April 1981 and in final form 14th April1982Prof. Walter is Professor of Economics & Finance, Graduate School ofBusiness Administration, New York University, 100 Trinity Place,New York NY 10006, USA. Mr. Jones is with the Graduate Institute ofInternational Affairs, University of Geneva, Switzerland

cost raw materials, plentiful skilled labour, capital adequacyand significant economies of scale. That era ended in thelate 1950s, when the industry began to lose its internationalcompetitive position for a number of reasons.

First, and perhaps most important, has been the role ofmonopoly labour linked to the oligopolistic structure of theindustry itself. In the 1950s, hourly labour costs (wages andfringe benefits) in the industry were only slightly above theaverage for all US manufacturing employment. As of 1967,they stood at 128% of the manufacturing average. By 1975they had reached 159%, and as of 1980 had increased stillfurther to 175% [18].

There are obviously a variety of reasons why labour com-pensation in an industry might differ substantially from thenational manufacturing average. However, it may not beunreasonable to suggest that management's resistance toextraordinary wage demands on the part of the UnitedSteelworkers of America (USW) — reinforced by a non-strikepledge in 1974 — was weakened by the assumption that theassociated costs could simply be passed through to consumersvia a tightly knit industry pricing structure. It is this assump-tion whose validity was progressively eroded by intermaterialsubstitution and import competition.

Certainly value added per production worker did not keeppace with wage rates during these years. In 1960 this figurestood at 121% of the national manufacturing average; by1980 it had declined to 103% [18]. As an internationalcomparison, labour productivity in the US steel industry, asmeasured by physical output (tonnages) per man-year in-creased 22% during 1970-79, compared with 82% in Japan; atthe end of that period absolute labour productivity in thetwo countries was roughly the same.

Additional labour problems in the US steel industry haveincluded stiff resistance by the union to changes in workrules and crew sizes, seniority requirements that have pre-vented assignment of the most skilled workers to particulartasks, poor worker-training programmes, sloppy qualityattitudes, high levels of absenteeism and labour turnover, andconfrontational industrial relations at the plant level.

Secondly, the nature, availability and cost of technology inthe industry has changed dramatically over the years. Steel-making today involves very little truly proprietary technology.Production techniques are relatively standardised, and innova-tions can be purchased internationally in the open market on acompetitive basis, either from some of the more advancedsteel firms or from contract engineering concerns. Innovationsnow tend to come at the margin — in the form of processimprovements such as computer-controlled production equip-ment — which is usually widely available for purchase in theopen market. US firms have been slow to upgrade their plantsto world technical standards in the production process — such

IEEPROC., Vol. 129, Pt, A, No. 4, JUNE 1982 0143-702X/82I040251 +10 $01.50/0 251

areas as continuous casting, direct reduction, and advances inbasic oxygen steelmaking, as well as production-controlequipment. They have, however, been quite active in productimprovements such as dual-phase, microalloyed, and coatedsteels. The result is that the traditional US technological edgeis long gone with respect to basic carbon steel, but remains insome of the specialty and tool steels.

Thirdly, capital investment in the industry has been inade-quate, both quantitatively and, in terms of embodied tech-nology, qualitatively as well. The industry has consistentlyhad difficulty attracting debt and equity capital for majorinvestments owing to unimpressive and erratic earnings. Theresult is an average age of capital stock that significantlyexceeds that prevailing in competitor countries. Moreover,with a few exceptions, most capital investment has gone intoround-out' of capacity in existing plants, rather thanbrand-new 'greenfield' plants. This has produced a level ofin-plant efficiency, attributable to plant layout and equipmentquality, that has lagged significantly behind the foreign com-petition. The best US plants are as efficient as those anywhere,but this cannot be said of the industry as a whole.

Fourthly, government enforcement of environmental andworker health and safety standards has seriously affectedUS steelmakers, who are engaged in an inherently dirty anddangerous business. Estimates are that expenditures for suchpurposes during the 1970s absorbed about 17% of totalcapital investment in the industry [1]. Comparable environ-mental and health and safety requirements have confrontedsteel industries abroad as well, including Japan. But in somecases they have lagged well behind the USA. In others, asignificant part of the costs were borne by government, andin no case were the measures imposed on the industry byregulators in such an abrupt, incoherent and confrontationalmanner as in the USA.

Fifthly, unlike most other countries, the US governmenthas been only indirectly involved in business decisions affect-ing the steel sector at the level of the firm. It has, however,played an important part in setting prices and wages in theindustry as a whole, beginning with the Truman adminis-tration's threats to nationalise all steel firms in 1952 and theKennedy administration's jawboning on prices in the early1960s, continuing through various wage-price guidelineschemes affecting all industries in the 1970s. In addition,there have been severe legal constraints on the ability offirms to undertake cost-saving mergers and joint ventures,yet with little government effort to curb the monopoly powerof the union. Taken together, these external factors maywell have contributed to profit levels chronically inadequateto finance capital expansion and modernisation. The US steelsector has thus suffered the negative aspects of governmentmeddling in economic decisions, without having the benefitsof access to the public purse available to its competitorsabroad.

Finally, professional management in the US steel industrycan only be judged as poor. Oligopoly conditions bred mana-gerial lethargy. Minimal consideration was, for a long time,given to future competitive conditions in the industry, andhow best to meet them. Innovations, even when developed athome, were slow to be recognised, and often first appliedabroad. Little thought was devoted to adaptability, diversi-fication, or foreign investment activity. Marginal domesticand export markets were neglected, often to be captured byimports. Foot-dragging was the general response to growingenvironmental and health and safety challenges. Succesfulproduct innovation was frequently the result of marketinroads of other materials, such as glass, aluminum, plasticsand paper, rather than an internal drive to advance the state

of the art. And the condition of management-labour relationsin the industry was a perennial cause for concern.

The results of all this are not difficult to detect. WhereasUS steel imports remained under 5% of apparent consump-tion in the 1950s, a 116-day strike in 1959 for the first timedemonstrated the viability of imported steel for many dom-estic customers. From 4.7% of apparent consumption in1960, steel imports rose to 16.7% in 1968 and a high of18.1% in 1978, as depicted in Table 1. The data also illustratethe pre-eminent position of Japanese and EEC suppliers inthe US market during this period, and the dramaticallygrowing role of 'other' suppliers during the 1970s.

Deepening import penetration under the conditions inwhich the industry found itself naturally led to intensifiedprotectionist pressure; in 1967 for the first time forging analliance between the industry and the United Steelworkers.

In 1968, US steelmakers were able to obtain protectionthrough voluntary export restraints (VERs) on carbon steelnegotiated by the State Department with Japanese and Euro-pean suppliers [24]. These provided for import limits of5.75 Mt. each in 1969, with permissible increases of 5% in1970 and 1971. They were later extended to the end of1974, at which time they were abolished under conditionsof extremely strong domestic steel demand.

In 1976 a depressed domestic steel market, coupled with anew surge of (mostly Japanese) imports, allegedly dumped inthe American market, moved US steel firms to seek moreairtight forms of protection. Relief was first sought througha petition for relief filed with the Office of the Special TradeRepresentative by the American Iron & Steel Institute, andthen through individual antidumping suits filed with the USTreasury Department. The Gilmore Steel Corporation filedthe first of these in February 1977, followed by UnitedStates Steel Corporation in September — both against Japanesesuppliers — and over a dozen others by the end of the year.These effectively swamped the Treasury's ability to copewith the time-consuming and complex dumping investigations.In February 1978, following a report by an interagency taskforce, the Carter administration introduced a more systematicprotection device, the 'trigger-price mechanism' (TPM).

Ostensibly an antidumping and not a protectionist measure,the TPM established 'fair value' import reference prices con-structed on estimated Japanese production costs, profitmargins and expenses. Imports entering below these referencesprices were presumed to be dumped (sold at less than fairvalue - LTFV), and were then subjected to 'fast-track' anti-dumping investigations. The dubious nature of the fair-valueestimates and the impact of the trigger device itself, throughincreased risk faced by shippers and importers, deterredlow-priced steel imports in general. In particular, the Japaneseimport share dropped dramatically from 1977 to 1978. Ithas been estimated that the TPM caused import prices in theUSA to rise by about 10% in 1979 [5].

However, the TPM did not succeed in stilling protectionistsentiment among US steelmakers. Because of the imperfectsubstitutability between imported and domestically producedsteel, the TPM caused average domestic steel prices to rise byonly about 1% in 1979 [5]. The TPM procedure also gavehigh-cost European steel suppliers a virtual licence to dumpin the US market, leading to inflated European import sharesat the expense of Japan, and prompting the United StatesSteel Corporation to file a massive antidumping suit againstEEC suppliers in March of 1980. In retaliation, the Carteradministration immediately suspended the TPM. Importsfrom Europe dropped precipitously under the new threat ofantidumping action. In an accord between the governmentand the steel industry, the TPM was reinstated in October

252 IEEPROC, Vol. 129, Pt. A, No. 4, JUNE 1982

Tab

le 1

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1980 - with significantly (12%) higher trigger prices as well asspecial provisions for quantitative import restrictions in theevent of future import 'surges', accelerated depreciation onthe industry's capital equipment, and pollution control relieffor the domestic steel firms. US Steel abandoned the suit.

In 1981 imports once again began to rise steadily, especiallyfrom Europe and Canada, influenced in part by a strengtheneddollar on foreign exchange markets. This prompted someEuropean suppliers to begin selling steel in the USA belowtrigger prices on the presumption that they could withstandTPM scrutiny, and indeed the Reagan administration proposedlowering trigger prices for certain steel products enteringGreat Lakes ports. Both Canadian and European supplierssought 'preclearance' of their prices to insure them againstantidumping investigations under the TPM.

Canadian suppliers were indeed able to obtain preclearanceunder the revised TPM; in 1981 they were estimated to supplyabout 2Mt. out of a total of about 17Mt. of steel importsinto the US market. The Canadian ability to justify pricesbelow TPM levels was based on lower unit labour costs, afavourable exchange rate and relatively efficient plants, withsubstantial Canadian shipments being steel slabs and ingotssold to US steel firms for further processing.

In response to these developments, US steel firms onceagain filed suit against European dumping and subsidisationin early 1982. Separately, the government initiated a set ofinvestigations, on evidence of material injury, against majorEuropean suppliers under the GATT subsidies code in late1981.

Besides specialty steel, which represents a principal area offuture concentration among the more competitively orientedUS integrated producers, the other growth component of theindustry are the minimills — roughly 60 plants owned by 45firms. These are nonintegrated electric-furnace mills usingferrous scrap to produce primarily structural steel. They aregenerally nonunion, flexible, low-cost, efficient plants, able toundersell both the domestic integrated suppliers and importsin their respective regional markets. In 1980, minimills ac-counted for about 15% of US capacity, and this is expected toexpand to 25—30% by the latter part of the decade. Return onequity for these firms in 1980 averaged 14%, twice that of theintegrated firms. It is expected that the availability of 153 Mt.of scrap in the USA annually, together with technical inno-vations permitting them to widen their product lines, will playa role in futher strengthening this segment of the US steelindustry [20].

There is little question that the US steel industry willsurvive, even in a relatively free international competitiveenvironment — but with perhaps 10% of existing capacity shutdown; new technologies available to increase productivity; theremaining integrated mills concentrated in the Great Lakesarea; a much larger role assumed by the specialty sector;concentration on higher value-added metalworking activities;and expansion of nonintegrated minimills producing forgeographically concentrated markets.

2.2 EEC

Meantime, conditions in the European steel industry haveinvolved even greater intervention on the part of government.Large-scale nationalisation of steel firms has occurred in theUK, France, Italy, and Belgium. Massive investments in steelmodernisation has been financed out of government grantsand concessionary credits, adding enormously to productivecapacity. However, European governments have often refusedto permit obsolescent plants to be shut down, to safeguarddepressed regions, thereby allowing productive capacity toexpand well beyond any reasonable projection of demand.

Operating losses among major steel suppliers in Europe havereached epic proportions, with mainly the German steel firmsand small, efficient minimill operators in northern Italycontinuing to produce without massive government subsidy.Aggressive price-cutting, moreover, has marked the Europeansteel producers' attempts to raise their rates of capacityutilisation.

In December 1975, the EEC Commission announced mini-mum voluntary reference prices for certain steel products,preceded by a VER agreement negotiated in Mexico Citywith major Japanese steel suppliers, that successfully rolledback Japan's exports by 25.5% from 1975 to 1976 [2].Some of these supplies were undoubtedly diverted to theUS market in 1976 and 1977. In addition, the Commission setout to gear EEC steel production increasingly to exportmarkets, specifically to the USA. However, conditions facingproducers in the EEC steel market did not improve very muchas a result of continued cutthroat pricing by European steelfirms, and the EEC's so-called 'forward programme' was thusquickly judged a failure.

In October 1976 a crisis cartel, Eurofer, was created to setand enforce minimum prices for steel reinforcing bars andreference prices for six other product categories. EEC pro-ducers were forbidden to align their own prices to those ofimported steel. Import monitoring and mandatory licensingwas introduced, as was a set of uniform antidumping proce-dures, representing a clear signal that undercutting the estab-lished minimum price levels would meet with stern action onthe part of Community authorities.

New EEC reference prices for steel were instituted on amandatory basis in May 1977 under the so-called DavignonPlan, and seemed to stick reasonably well. However, they hadto be protected against erosion by imports, and this was donebeginning in December 1977 by means of the so-called 'basisprice system' (BPS). Announced shortly after the US TPM, theBPS set 'fair value' import prices based on estimated Japanesecosts for all carbon steel products. Imports below BPS pricesmet with an immediate assessment of antidumping duties, anofficial antidumping investigation, and an offer to withdrawthese measures if the affected suppliers would agree to nego-tiate VERs with the community.

VERs were in fact very quickly negotiated with Austria,Finland, Norway, Sweden, Portugal and Switzerland, sub-sequently also by Japan, South Africa, Czechoslovakia andSpain after preliminary BPS fines had been levied against,them. Only after final determination of BPS fines did Hungary,Romania, Australia, Poland and South Korea also concludeVERs with the Community. The BPS/VER system, coupledto a tightened dirigiste regime for EEC steel, thus sought todeliver a comprehensive governmental 'solution' to problemscreated in large measure by the member governments them-selves.

Yet, because of market pressures and the complexityof steel pricing, actual compliance with EEC price dictateswas not always forthcoming. By the summer of 1980, thefailure of minimum prices to hold up in the face of continuedcrisis conditions caused the Commission to abandon themcompletely. In their place, more drastic intervention in theform of mandatory production quotas was introduced inOctober 1980.

However, crisis conditions have in fact caused some move-ment toward restructuring the EEC steel industry. For ex-ample, a 1981 agreement between two major German steelproducers, Hoesch and Krupp, to co-ordinate production isindicative of one form of industry response that reflects EECgoals. The two firms will jointly decide who produces whatand where, exchange customer lists, and market each other'sproducts. By complementing the product and process


strengths of its partner, each hopes to form a competitiveyet smaller entity. Carrying out the plan will involve tappinginto the German federal and state government allocations ofDM 1.8 billion for steel industry restructuring to cover two-thirds of the cost, with the remainder coming from privateinvestors and banks.

2.3 Japan

While the US and the EEC steel industries and their respec-tive governments struggle with problems unique to them-selves, Japan has remained by far the world's most capablesteel supplier, with a major part of its industry concentratedin large-scale, modern, linear-layout, energy-efficient inte-grated mills, usually located adjacent to deep-water portfacilities with easy access to imported raw materials andexport shipping.

As noted earlier, Japanese unit labour costs remain wellbelow those in the USA (and Europe), and this advantage isreinforced by high worker motivation and performance.Technologically, Japanese mills incorporate the most recentadvances in automated, computerised production processesand plant layout based on indigenous innovation and carefultechnology monitoring around the world. Unlike the USindustry's growth phase in the 1940s and 1950s, the periodof major Japanese steel-plant construction occurred aftersuch technological developments as bulk carriers, basic oxygenfurnaces, continuous casters, and computer process controlhad been developed. This, plus exceedingly high-leveragefinancial structures of firms in the industry, favourable tax andantitrust policies, financing of plant construction before thecapital-cost spurt of the 1970s, and elimination of historicaldisadvantages in raw-material costs and availability, all help toaccount for Japan's preeminent position in international steelmarkets.

Despite this underlying competitive strength, Japanesesteel firms have periodically been accused of being heavilysubsidised and engaging in cyclical dumping. The latter in-volves LTFV export sales during recessions to avoid thedomestic worker layoffs that are anathema in the Japaneseindustrial system, and to help contribute to heavy debt-servicecosts. There is some evidence that LTFV sales did occur in1976, and this may in part explain the runup in Japan'sexports to the USA in that year. However, they probablyinvolved only a few product groups, and did not extendbeyond a few months [16]. And most studies come to theconclusion that subsidisation of Japanese steel exports has infact been negligible [7]. However, it is hard to deny that thepublic-policy environment and institutional capital-marketfactors that guarantee Japanese steel firms capital adequacyhave backstopped the industry's highly successful exportdrive.

In the 1980s, the Japanese integrated steel producers areaiming increasingly at the high-value-added end of the pro-duction spectrum. They have already cut back plans for futurecarbon-steel production capacity in the light of prospectiveadverse global market developments, focusing more on higher-valued steels and steel products, and reducing the industry'soverall role in the national economy. In part, this may be dueto the recognition that the days when large productivity gainsfrom new plants using the latest technology lie mainly in thepast, and that international competitive advantage in theindustry is probably already shifting elsewhere. It may also bedue to the fact that steel demand is likely to expand onlyslowly in the decades ahead, making the industry itself a poorbet as an agent of national economic growth. Moreover, theindustry is increasingly selling steel-making technology andturnkey plants to countries such as China, Taiwan, Brazil,

and even steel firms in the USA and Europe. Indeed, there are,few major steel firms today that do not have some sort oftechnology co-operation agreements with at least one of theJapanese majors.

2.4 Emerging suppliers

The final set of players in the international steel game are themore advanced developing countries. Some, such as India, havebeen active in steel for a long time with decidedly mixedsuccess. However, it is the newer entrants in South Korea,Taiwan and Spain, as well as Mexico, Venezuela and Brazilthat are making increasing market inroads. The reasons forthis are very similar to the factors underlying the Japanesecompetitiveness of the 1970s — new mills, state-of-the-arttechnologies, optimal plant siting, good labour quality and-low transport costs and wages. The latter seem unbeatable inthe foreseeable future. It has been estimated that new mills inTaiwan or South Korea, for example, could undercut anidentical US mill by almost 20% in delivered prices for majorsteel product categories in principal US markets [5].

Moreover, it is generally in the earlier stages of the develop-ment process that economic growth tends to be relativelysteel-intensive, as compared with the later stages, when growthoften shifts from heavy industry and infrastructure to lightmanufacturing and services. Therefore, one would expect theonly really buoyant demand for steel to reside in the develop-1ing countries themselves during the 1980s and beyond. Ifseveral of these countries also have an emerging competitiveadvantage in steel, these relatively high-growth markets oughtto be supplied partly from intra-LDC trade and partly fromJapan. In addition, LDC suppliers will be able to undertakeincreasing exports to the USA and Western Europe. However,a number of LDCs have themselves pursued highly protection-ist steel-import policies and subsidisation on infant-industrygrounds.

The world steel market thus finds itself in a state of flux,with shifting competitive advantage and trade patterns amongtraditional suppliers, newly emerging LDC suppliers, relativelystagnant demand, and competition from other materials — allpointing to substantial market-driven structural adjustment invirtually every country involved. As noted, the economic andsocial costs of that adjustment have triggered governmentintervention to ease those costs or forestall them. In the pro-cess, economics has largely given way to politics as the deter-minant of the future global structure of the industry.

3 Economics and politics in sectoral protection

The steel industry case illustrates rather well the industry-specific characteristics of trade and protection. The protection/adjustment scenario such as the one just described for steelmay be quite different — in terms of underlying causes,course and consequences — in synthetic fibres, footwear,automobiles, pipe flanges, clothespins or garments. However,there do appear to be some general principles that may beuseful in tieing all of these stories together.

Shifts in the competitive positioning of national industrieshave always been a part of the historical process of economicdevelopment. To the extent that national governments havemade a commitment to the principles of liberal internationaltrade, this process has been accepted as both a natural con-sequence of the market economy and fundamentally in theirown long-range self-interest. Technical advance and its world-wide dissemination has given rise both to an accelerated pro-duct cycle and faster changes in production techniques.Changing products and production processes mean changingcost and quality factors, to be exploited by indigenous firmsand by multinational companies moving capital, labour,

IEEPROC, Vol. 129, Pt. A, No. 4, JUNE 1982 255

technical knowhow, marketing, management and entrepre-neurship across national borders.

Concurrently, industrialisation in low-wage countries hasled to the rise of new entrants into the world market for agrowing variety of manufactured goods. Evolving worldmarkets also mean changing demand patterns, and the capacityto innovate and improve products has become even more,crucial in determining the competitiveness of firms. Changing •technological, factor, input, and product conditions thusthrust on industries and nations the need to adjust to inn-ovate, specialise, expand, or perhaps contract - if their com-petitive health in a dynamic international market is to bemaintained.

3.1 Economic basis of sectoral adjustment and protectionIndustry's response to shifting competitive advantage at thesectoral level can normally be expected to take place withinindividual enterprises, where the optimum combination ofproductive factors and firm size are determined by conven-tional profitability considerations. Even if an industry is notstructured competitively at home, the introduction of inter-national trade tends to compel firms to adopt the competitivebehaviour required by the rules that apply in world markets.The rather straightforward nature of the relevant decision-making process under such circumstances should not, however,

obscure the crucial element of risk involved in medium- andlong-term investment and strategic planning judgments on thepart of management. These not only involve an evaluation ofcurrent markets but also the anticipation of future marketdevelopments.

It is particularly important that management recognise thenature and implications of changes in international marketsin order to encourage the development of an optimal firmresponse. And so the difference between cyclical disturbancesand basic structural change in global markets is crucial inestablishing, to the extent possible, the relative needs forshort and long-term adjustments.

In general, the main origin of the 'adjustment problems'that now confront industries like steel is what in retrospectwas bad planning or investment decisions — poor managerialperformance that can nevertheless be justified by those respon-sible if government 'bail-outs' through sectoral protection ordirect intervention could reasonably have been expected. Itis this precedent-setting aspect, and its role in forming ex-pectations, that makes government actions so critical indetermining the sectoral adjustment process at the industrylevel in the future.

The ultimate measure of the correctness of investmentdecisions is their value to the society as a whole - whether

shifts in competitiveness

market - driven

adjustment

market-driven

adjustment

firm and industryreaction function

protection -seeking

behaviour

politicalinfluence

public - policy

reaction function

choice of vehicletariffsquotasVER/OMAsubsidesmisc . NTBs

decline in natural trade barriersfactor-cost shiftsinput -cost shiftstechnological changescale economies alterationscompetitive structure changesforeign market interventiontrade-policy changesexternalities -policy shifts

technical ease of adjustmentdegree of mult (nationalisationlabour rigiditiesmanagerial judgmentflexibility —expectations regarding public policy

economic ideologydomestic macroeconomic conditionsimportance of industry or firmstrength of opposing interestpublic policy abroad

organising abilitityformation of coalitionsdirect political actionfunding base

expected aggregate and group welfare effectsimplementation issuesprobability of retaliationinternational commitments (GATT,EEC etc.)domestic-legal issues

none

direct and indirecttrade consequences

foreign reaction

functionretaliation

Fig. 1 Schematic diagram of sectoral adjustment and protection

I 2

I J


they result in the optimal allocation of scarce resources.This standard tends to be pre-eminently enforced by themarket, both domestic and global. The social calculus ofprivate enterprise calls for the consequences of private riskto be internalised as private gain or loss, and consistent ad-herence to this principle demands that an objective market-linked criterion of efficiency dominate the process of econo-mic policy formation at the national and international level.

Within a market-dominated framework, government inter-vention is properly limited to the provision of public goods,and to cases where the market itself is not functioning pro-perly. Even here, policy must be carefully assigned to itsspecific task, as the purpose of optimal market interventionis to correct divergences between marginal social costs andbenefits at their source. Pleas for protection based on claimsof distorted markets (e.g., subsidies, cartels) do not, therefore,aim at the root of the problem, and in the end can cause newpolicy-induced distortions that compound the damage causedby the existing departures from market dictates.

Yet protectionist measures are fundamentally the result ofpolitical rather than economic processes. Intervention corre-spondingly reflects political expediency rather than economicefficiency as its standard. Protection, which usually maintainsa low public profile, and tends to persist by virtue of itspassive nature is, in fact, the ideal political instrument ofeconomic intervention by the state. Bifurcation of politicaland economic criteria for market intervention is thus thecentral theme of the whole protectionist issue [26].

The process of generating protectionist policies at thesectoral level can perhaps be analytically disaggregated intothree phases. The first comprises a 'triggering' disturbance, e.g.a competitive shift attributable to events either at home orabroad, and the economic process which follows from it.The firm or industry reacts, depending in part on its capacityto adjust, by either following market signals and adapting tothe shock or by resisting the necessary adjustment. In thelatter case, the second phase begins with a call for protectionby the industry, and centres on the domestic political process.Protectionist influence competes with countervailing free-trade interests and constraints in any policy debate thatfollows [25]. If some decisive politically defined 'threshold' isreached, protectionist policy is adopted. This leads directly tothe third phase, during which selected policy measures areimplemented. In their wake come both political and economicconsequences, based on foreign reactions and domestic welfareeffects, which in turn may have important 'feedback' linkagesto the first and second phases that can help to explain theproliferation of protectionist measures in recent years. Thewhole process is diagrammed in Fig. 1, as a general frameworkwithin which specific firm and industry characteristics can bediscussed.

3.2 Disturbance, reactions and ease of adjustment

What factors contribute to the vulnerability of an industry tostructural changes in world markets? One would expect thatthese should ultimately lie in the nature of productive factormarkets and in the production process itself, as well as differ-ences in proprietary product or process technologies. Oneelement, obviously, is the difference among countries inreturn to factors, such as labour, which usually represent asignificant component of production costs. If such differencesare wide and the requisite technology for production is quicklydisseminated and adapted, or if barriers to market access areotherwise overcome, competitive advantage among suppliers indifferent countries with respect to that product group is likelyto shift, perhaps dramatically, and often quickly.

While wage rates can be expected to differ among countriesas a result of differences in the value of labour's marginal

product, such gaps can be widened even more with imperfectlycompetitive markets. As in the steel case, monopolistic tradeunions may, for example, restrict the supply of labour, andthereby cause the wage rate to rise above its competitive level.And there is the presence of less-than-competitive domesticproduct markets, where wage demands or other increased costscan be passed along easily as price increases. Industry's day ofreckoning arrives when lower-priced imports begin to makeserious inroads on the domestic market.

Hence, for a given industry there is no real need for adjust-ment until, under the existing trade regime, market penetra-tion by international rivals passes some predetermined butuncertain threshold in the industry's collective reactionfunction, where profitability of member firms is seriouslyendangered. The threshold level itself is partly dependent onthe perceptions and expectations of those who manage thefirms, and whose decisions are in turn affected by the stakesinvolved in adjustment. Intuitively, one would expect lowreaction-function threshold levels to be associated with amore flexible response capability of firms and the probabilityof smooth structural adjustment to the new competitiverealities. High threshold levels can, in contrast, be taken toindicate a reluctance to adjust or a propensity to delayadjustment to the point where an eventual call for protectionbecomes increasingly likely - particularly given the elementof managerial inertia.

The reaction-function threshold is reached when, after aperiod of growing import competition, management decidesthat 'something must be done' — either adjustment must beundertaken or protection must be sought. In the absence ofany reasonable possibility of government intervention, a purelymarket-driven reallocation of resources is the only alternative.Workers may have to be iaid off, plants closed, mounting lossesreported to shareholders and banks, and the like, mandating acompetitive revitalisation or slimming-down at the firm level,and possibly financial reorganisation or merger. The privatecosts and consequences of such adjustments will naturallyaffect the readiness or willingness of industry and labour tocarry out what market forces dictate. If recourse to thegovernment is possible, a strong incentive is created to aban-don the adjustment process and engage in protection-seekingbehaviour.

The ease of adjustment is, therefore, a central element indetermining the motivation of firms in an industry to seekprotection. The private cost of adapting to structural changereflects the industry's inflexibility in response to competitiveshocks. High fixed costs resulting, for example, from thecapital intensity of an industry or long-term contracts forinputs increase the difficulties of adjustment. Inflexibilityof wages and work rules creates rigidity on the labour side,with the sometimes politically difficult alternative of layoffs.The specificity of factors to the production process maypreclude their easy transfer to alternative uses, and the spec-ialised nature of the production process itself may preventfirms from moving into alternative lines of activity.

The specific nature of firms' operations and the structureof the production process also provide a measure of its adap-tability to change. For example, to the extent that the man-ufacturing process can be disaggregated into intermediategoods and that firms are vertically integrated, the possibilityexists to transfer component operations to geographical areaswhere more cost-effective production methods or lower factorcosts can be exploited. Thus, multinational companies canabsorb at least part of the effects of shifting competitiveadvantage by reaping its benefits, and so are frequently absentfrom among those pleading the case for protection in thepolitical arena [12].

In short, competitive shocks to an industry trigger a search


for channels of adjustment and, insofar as the means ofabsorbing these shocks are present, a market-driven solutionbased on reallocation of resources is likely. The greater theinflexibility of response, on the other hand, the higher theexpected private cost of adjustment, and the more reluctantthe firm or industry will be to accept the consequences of itsshifting competitive position. Management and shareholders,who face the prospect of writing down the value of the firm'scapital, are joined by workers who have acquired a vestedinterest in the maintenance of industry as (at internationalprices) their wages may well be excessive. Their options areto work elsewhere, perhaps in another region and at lowerwages, retire early, or remain unempolyed.

3.3 Sectoral adjustment problem and trade policy formation

The economics of adjustment in democratic societies is usuallylinked to trade policy by a political process of competing in-fluences and constraints within the framework of governmen-tal powers. We have just suggested that the adjustment pro-blem typically arises, in industries vulnerable to internationalcompetitve shocks, when a certain threshold of market pene-tration by imports is reached or threatens, and that the firm'sinherent flexibility of response defines the scope of managerialdecisions designed to cope with the problem. If the firmabandons structural adjustment in favour of a call for protec-tion, the problem moves from the microeconomic to themacropolitical sphere, where it must be placed in a broadercontext of national and international objectives of the state.This is stage II of the sectoral protection scenarios, as ident-ified in Fig. 1.

In general, receptivity to a call for sectoral protection at thepolicy-making level depends on an often subtle formation ofpublic and official attitudes based on both the economic andpolitical dimensions of the contemporary environment — notonly macroeconomic (recessionary) conditions that maycreate a bias against imports, but also associated politicalcircumstances that foster xenophobia, isolationism, or a generalstate of social malaise, as well as an ideological belief in freemarkets and trade. The focus, however, has to be on theefficacy of individual currents of political influence on finalpolicy decisions regarding specific industries. The size andregional concentration of an industry, coupled with logrollingand political compromise, for example, may point to potent-ially strong power and impact. The lobbying organisationsmaintained by the industry, as well as support from theaffected trade unions, reinforce its power to affect policydecisions.

To actually obtain protection, however, these elements ofpolitical influence must find resonance within the national-lolicymaking structure. The authorities must ultimatelyperceive the fate of the industry, for example, as being politi-cally defensible with respect to the achievement of certainhigh-priority national goals, such as employment, regionalbalance or the national defence. Elected or appointed officialsmay, in addition, associate a commitment to these goals withtheir own personal or collective fortunes, and there may exista genuinely interventionist ideology among policymakers whoinherently distrust the market or fear its consequences. Inter-vention may even be institutionalised in the form of nationalindustrial commissions or planning bureaus, in which caseprotectionism may be able to find ready acceptance withinthe bureaucratic structure — the 'low road' to protection viaadministrative and technical action rather than the 'highroad' via political decisions [9]. The degree of interactionthat is achieved between industry's own influence and thegovernment's receptivity to its pleas will determine the powerof protectionist sentiment in the national policymakingprocess.

Opposition to protectionist thrusts at the sectoral levelarises in part as a reaction to its adverse potential welfareeffects and in part (as noted) as an embedded social belief inthe advantages of free and open markets. In practice, thefirst category of opposition may well be limited to any userindustries that will be directly hit by the increased price orreduced availability of the protected goods. In principle, ofcourse, all industries and consumers who reap the benefits oftrade in general are potential opponents of protection thrustsat the industry level. But in the last analysis, it is often aconscious public commitment to liberal trade that standslargely alone against protectionist pressures, reinforced, to besure, by fear of retaliation abroad.

There are, finally, elements in national competition law andinternational trade agreements that restrict the types of pro-tection that can ultimately be adopted (phase III in Fig. 1).However, these tend to divert protectionist sentiment towardscertain other, often more subtle, measures, especially nontariffbarriers. Ironically, restrictions imposed on unilateral changesin tariffs under the GATT have effectively closed what isperhaps the least onerous valve for protectionist pressure, andhave contributed to the development of an alternative tool forsectoral protection that may be significantly more damaging tosociety at large.

To summarise the phase II and III scenarios depicted inFig. 1, the initial threshold, set up by institutions and influ-ences opposed to protection, must be overcome by the con-certed forces of the industry's political influence and thegovernment's propensity to protect, for import-shieldingmeasures to be adopted. Since the debate may pit specialinterests against more general commitments and attitudesfavouring liberal trade, it is the degree of interaction of indust-rial influence with the government's propensity to protect,either by ideological proclivity or organisational capacity, thatis likely to be decisive. This then leads the selection of pro-tective vehicles, subject to various constraints including thepossible consequences in the form of retaliation by othercountries and its feedbacks into the domestic economic andpolitical arena.

4 Politics and economics in steel protection

It is instructive, finally, to apply the preceding discussionto our opening analysis of the global steel situation. In termsof Fig. 1, the competitive shifts in the industry have beendramatic, due in part to market forces and in part to directgovernment intervention in the industry for essentially politi-cal and sometimes ideological reasons. Industry-specificcharacteristics have made it difficult for the steel sector toadjust, and when combined with managerial inertia, directgovernment ownership in some countries, and the expectationof protection, these characteristics have produced adjustmentscenarios that seriously depart from market dictates. Thearguments for protection in this sector have been inherentlypowerful. When combined with the regional and nationalsignificance of the industry, this has generated politicalinfluence sufficient to overcome most resistance and counter-vailing interests to generate widespread protection. The vehiclesof choice have been VERs, minimum import prices andsubsidies, resulting in substantial trade deflection, reactions onthe part of other countries, impacts on steel-using industries,and the like.

Why did the steel industry in the USA and Europe obtainprotection where other industries have not? Basically, theinteraction of the industry's political impact with the percep-tions of policymakers has created enormous influence. In theUSA, the size and visibility of the industry translate quicklyinto the potential of large-scale worker layoffs, media head-lines and political pressures, which have strengthened the


voice of the 'steel caucus' protectionist constituency in Con-gress and the steelmakers' industrial lobby. In the EEC, onthe other hand, the higher propensity of governments tointervene directly in industry difficulties has transformed thepolitical power of the steel sector into the vested interestof an established industrial-policy apparatus.

The perceived link between steel and the national wellbeingis no less important in determining the industry's influence.The alleged strategic value of steel to national defence, al-though perhaps exaggerated by industry claims — and almostnever couched in intellectually defensible terms of the require-ment to maintain an excessively large steel industry as an'insurance premium' to be added to the cost of nationaldefense — still carries considerable persuasive power withpolicymakers. And steelmaking is surrounded by a mystiquewhich seems to be deeply rooted in the consciouness ofindustrial society. Because it is so closely associated with theheyday of economic growth, there is a widespread belief thatfurther growth cannot occur without 'big steel'. As the verysymbol of industrial strength, the prospect of steel's decline orcontraction has apparently excited a certain fear of economicimpotence.

In terms of Fig. 1, the steel industry has shown a singularability to penetrate governmental institutions and achieve atelling impact on public policy. This has created amonggovernments a high propensity to protect the industry strongenough to override the general reluctance to implement protec-tionist actions and long-standing constraints against takingsuch action — based on overall welfare effects, the impact onsteel-using industries, international commitments and thepossibility of foreign retaliation. US and European govern-ments have thus gone to great lengths to assure the properlegal and political frameworks within which the sectoralprotection of steel can be realised.

Clearly, private and public mismanagement in the USAand Europe have transformed a once healthy, albeit slow-growth, industry into what is essentially a ward of the state,helped along by fundamental shifts in competitive advantageand predatory behaviour on the part of some suppliers. Whatconclusions can we draw about the prospective consequencesof protection in the steel sector?

First, there are the dangerous political dynamics of sectoralprotection — international accommodations on industry-leveltrade policy by a club of 'concerned parties', in the absence ofantagonistic trade interests and their countervailing power —probably inherently biased toward 'solutions' of a fundament-ally protectionist nature.

Secondly, governments do not get very high marks foradapting their policy responses to the particular needs of thesteel industry under market criteria. Protection has been.accorded, pointing to some sort of eventual internationalmarket-sharing arrangement for the industry. Politics threatensto replace economics as the main determinant of the structureof global production in the industry.

Thirdly, questionable competitive behaviour by someimportant suppliers has probably played a catalytic role inaccelerating developments toward protection and organisationof international markets. This places a premium on the oper-ation of the Subsidies Code negotiated during the TokyoRound and an enforcement of antidumping regulations incases of predatory and cyclical dumping without using themas permanent protectionist devices.

Fourthly, the steel case points to the growing inflexibilityin labour-force use that appears to be taking hold in manyindustrial countries. Intended to provide a greater measure ofequity for factors of production affected by import compe-tition and structural change, there is the danger that suchrigidities will evolve into a kind of economic sclerosis — a

hardening of the economic arteries — which will at oncemisallocate resources, slow economic growth, and lead toeven greater future pressures for protection. New ways needto be found to deliver affirmative adjustment and retain thenecessary degree of flexibility in national economic structures.

Fifthly, judging from the steel case, it may well be thatcompanies which are multinational in their operations anddiversified in production tend to adapt more readily, and areless likely to plead for protection, than companies that arenot. This issue is clearly related to the prospects for intra-firmadjustment versus the need for adjustment via factor markets.The efficiency and growth benefits of affirmative adjustmentclearly exist, but the equity aspects related to the impactedfactors of production need to be considered as well. At leastin the steel industry, the solution of this problem remainsobscure. Until it is addressed, the protection 'thresholds'suggested in this paper will continue to be crossed and struct-ural adjustment to economic change impeded.

5 Acknowledgments

An earlier version of this paper was presented at a NationalScience Foundation Workshop on the Politics and Economicsof Protection, Minneapolis MN, 29th-31st October 1981.

The work described in this paper is in the public domainin the USA.

6 References

1 'Steel at the crossroads: the American steel industry in the 1980's'(American Iron & Steel Institute, Washington DC, 1980)

2 BRADFORD, C: 'Japanese steel industry: a comparison with itsAmerican counterparts' (Merrill Lynch, New York, 1977)

3 'Report to the President on prices and costs in the United Statessteel industry' (Council on Wage & Price Stability, Washington DC,1977)

4 CRANDALL, R.W.: 'Steel imports: dumping or competition'.Regulation, July/Aug. 1980

5 CRANDALL, R.W.: 'The U.S. steel industry in recurrent crisis'(The Brookings Institution, Washington DC, 1981)

6 DRISCOLL, D.: 'Steel and the European Community: the protec-tion issue' (Congressional Research Service, Washington DC, 1980)

7 'The U.S. steel industry and its international rivals' (Federal TradeCommission, Washington DC, 1977)

8 FINGER, J.M.: 'The United States trigger price mechanism for steelimports'. World Bank, 1981

9 FINGER, J.M., HALL, H.K., and NELSON, D.R.: 'The politicaleconomy of administered protection'. Office of Trade Research,US Treasury Department, 1980

10 'Administration of the steel trigger price mechanics' (GeneralAccounting Office, Washington DC, 1980)

11 'New strategy required for aiding distressed steel industry' (GeneralAccounting Office, Washington DC, 1981)

12 GLADWIN, T.N., and WALTER, I.: 'Multinationals under fire:lessons in the management of conflict' (Wiley, New York, 1980)

13 JONDROW, J., LEVINE, E., JACOBSON, L., KATZ, A., andO'NEILL, D.: 'Removing restrictions on imports of steel' (Centerfor Naval Analyses, Arlington VA, 1975)

14 JONES, K.A.: 'Forgetfulness of things past: Europe and the steelcartel', The World Economy, May 1979

15 JONES, K.A.: 'The political economy of voluntary restraint and theincidence of trade diversion in steel import markets'. GraduateInstitute of International Studies, University of Geneva,1981

16 KAWAHITO, K.: 'Japanese steel in the American market, conflictand causes', The World Economy, Sept. 1981

17 KAWAHITO, K.: 'The Japanese steel industry' (Praeger, New York,1972)

18 MUELLER, H.: 'The competitiveness of the U.S. steel industry afterthe new trigger price mechanism'. Middle Tennessee State University,1981

19 'Technology and steel industry competitiveness' (Office of Tech-nology Assessment, US Congress, Washington DC, 1980)

20 'U.S. industrial competitiveness: a comparison of steel, electronicsand automobiles' (Office of Technology Assessment, US Congress,Washington DC, 1981)

21 PUGEL, T.A., and WALTER, I.: 'Firm and industry deterninants oftrade policy behaviour'. New York University, 1981


22 PUTNAM, HAYES and BARTLETT: 'Economics of internationalsteel trade' (American Iron & Steel Institute, Washington DC, 1978)

23 PUTNAM, HAYES and BARTLETT: The economic implications offoreign steel pricing practices' (American Iron & Steel Institute,Washington DC, 1978)

24 WALTER, I.: 'Protection of industries in trouble: the case of iron

and steel', The World Economy, May 197925 WALTER, I., and ARESKOUG, K.: 'International economics'

(Third Edition, Wiley, New York, 1981)26 WALTER, I., and JONES, K.A.: 'The battle over protectionism:

how industry adjusts to competitive shocks', J. Business StrategyFall 1981

Book reviewsEnvironment, energy, public policy: toward a rational futureRegina S. Axelrod (Ed.)Lexington, 1981, 175pp., £12ISBN: 0-669-03460-6

This book is timely in that it addresses a subject of importanceto both the professional engineer and society in general.Indeed, there are many who argue that there exists in the UKno public policy towards energy and the environment.

The text has some eleven authors (among whom, unfortu-nately, there is not one engineer or scientist), each contri-buting either singly or jointly to a chapter on a different partof the subject. As such, the content is something of a mixedbag: those chapters where the author concentrates on thestraightforward political, legislative and social issues are wellpresented and illustrate clearly the problems faced (althoughthe text concentrates totally on the USA).

However, set against these informative and well arguedchapters, there are parts of the book where the writers displaya disturbing lack of understanding of technical considerations,and a lack of appreciation of the interaction between poli-tical, social and technical issues. In addition, discussions oftendemonstrate a surprising naivety. For example, one author,after several pages of attack on OPEC policies, explains thatthe US imported-energy problem could largely be solved:'Instead of subsidizing Chrysler to rescue it from the effectsof poor management and bad market judgement, why notturn the plant over to Volkswagen or Toyota, which alreadyknow how to produce economic cars at a profit?'

In parts too, there is the irritating and, at times, misleadinghabit of ignoring conventional scientific symbols. For ex-ample, one chapter explains the background to the construc-tion of an 800 mw (sic) overhead line from Canada to NewYork state.

Despite these criticisms of parts of the book, on balanceit does make a worthwhile contribution to the field, if onlyto demonstrate the magnitude and seriousness of the diffi-culties which face any governing body which attempts todevelop a national energy policy against a background ofvested interest, environmental-group pressure, public ignoranceand apathy, and political manoeuvering.

H.W. WITTINGTON

Conditions of work and quality of working life — a directoryof institutionsMrs. L. Stoddart (Ed.)Internationa/ Labour Office, 1981, 255pp., £8.75ISBN: 92-2-102648-5

1980/81 was the first session of the IEE's new Management &Design Divisional Board. The Board has defined the scope ofits four Group Executive Committees, and the institution ofGroup M2 'Engineering and society' marks a new and timelyconcern with social responsibility.

The directory under review marks a concurrent initiativeby the ILO, to identify key institutions, in all regions of theworld, that are concerned with conditions of work and thequality of working life.

More than 230 institutions in 54 countries are covered.They include government agencies, employers' organisations,trades unions, professional institutions, research institutes,university departments and others.

As a first edition, the listing is less than complete, but is aquantitative indication of the international concern existingwith regard to our standards of the quality of life.

The technological and scientific professions have a specialresponsibility to recognise this concern. First, because they areat the spearhead of the technological changes that initiatesocial change and concern, and, secondly, because they havethe abilility to point to the 'trade-off possibilities, whereby asensible balance can be struck between advances in technicalefficiency, and their environmental and social effects.

This directory indicates the great scope for the IEE to col-laborate with kindred bodies beyond a narrow interpretationof 'engineering', and it is interesting to reproduce here the newDivision's definition of the interests of the Group for 'Engin-eering and society':

Conservation of resourcesResponsibility to the communityThe image and role of the engineerThe impact on the environment, aesthetics etc.The implications of change

DENIS L.JOHNSTON


politics, economics and the international steel industry

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