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February 4, 1 983
Steel Imports
It is hardly news that the u.s. steel industry is
in trouble. What isnews is that last October
the United States concluded an agreement
with the European Economic Community
(EEC)to limit steel imports from the EEC
nations and the U.S. is currently negotiating
with Japan to restrict steel imports from that
nation too. Presumably, a large part of the
U.S. steel industry's trouble is dueto imports,
and limiting imports is thoughtto be at least a
partial solution to the industry's troubles.
This Letter will examine the extent to which
imports have been responsible for the u.s.
steel industry's woes and the extent to which
import restrictions can help increase employment in the steel industry in particular and the
U.S. economy in general.
to 1 982, one can estimate that about 55 percent of the 1 973-82 decline in steel output
was due to a downward secular trend and 45
percent to the 1 981 -82 recession. It is clear
that the current recessionmerely aggravates
the already severe problems of a declining
industry.
Tradeconflicts
The embattled industry blames import competition for a large share of its woes. Indeed,
imported steel's share of the u.s. market rose
steadily from 2 percent in the 1 950's to 22.
percent in 1 982. Recently, the U.S. steel
industry filed complaints wi.th the Commerce
Department and the International Trade
Commission, charging the EECcountries and
Japan with violating General Agreement on
Trade and Tariffs rules.
The industry'swoes
Conditions in the u.s. steel industry have
grown desperate. Production in the industry
was down to 49 percent of capacity in 1982
-well below an estimated "breakeven"
level of 70 percent for most producers. As a
result, according to one estimate, the seven
largest steel producers lost an average of
$95 per ton at the average price of $412 per
ton last year. Similar losses are expected to
continue well into 1983.
Cost-cutting efforts in the steel industryeliminated 1 00,000 jobs between January and
September of 1 982, with September being
the 1 6th consecutive month of decline in
steel employment. The American Iron and.
Steel Institute estimates that employment in
the U.S. steel industry is now only one-half
of its 1 975-79 average.
The industry's distress reflects more than the
current recessionary conditions troubling the
entire economy. In the third quarter of 1982,
steel production was half of its 1973 level,
down from 28 million to 14 million net tons.
By projecting a trend from the 1973 businesscycle peak to the 1981 peak and then beyond
Specifically, EECproducers were charged
with exporting government-subsidized
products, and Japaneseproducers with unfair
pricing practices. In the first case, the Commerce Department ruled that subsidies from
European governments did cause material
injury to domestic industry. The subsidy
levels were found to vary among countries:
20 percent of the average price charged for
the United Kingdom, 1 4-20 percent for
France, 13 percent for Belgium and 26 percent for Italy. In October 1 982, an agreement
was reached whereby the EECmust limit its
steel shipments to the United Statesto an
average of 5.5 percent of annual U.S. steel
consumption for the next three years. This
ceiling is only slightly above the 5.2 percent
average for the decade 1 972-81 , but it is well
below the 7.2 percent share the European
countries obtained in the first ten months
of 1 982.
Proceedings against the Japanese are still in
the preliminary phase. If American producers
have their way, low-priced Japanese steel
will be judged an "unreasonable burden" on
U.s. commerce and, therefore, legally sub-
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Opinions expressed in this newsletter do not
necessarily reflect the yiews of the management
of the Federal Reserve Bank of San Francisco.
or of the Board of Governors of the. Federal
Reserve System.
steel industry. The hourly wage cost, including benefits, rose from $3.30 in 1 956to
$25.20 in 1 982. The 6.6 times rise relative to
a 2.5 times increase in consumer prices has
meant a substantial improvement in the living
standard of steel-workers-at the expense of
a profit squeeze in the U.S. steel industry and
a deterioration in the industry's competitiveness compared to producers abroad.
jectto trade sanctions. The u.s. industry is
seeking a 25 percent import surcharge to
offset an "undervalued" yen, and restriction
of Japanese imports to about one-third of the
7.2 percent share of u.s. consumption they
currently hold.
However, it would be short-sighted to attribute rising steel imports entirely to actual
or alleged unfair foreign trade practices. We
need to look beyond by examining some
basic factors.
The profit squeeze arose because the wage
increases were not fulIy offset by productivity
increases, and because the resultant rise in
unit labor cost (labor cost per unit of output)
could only be partially passed on to steel
users through price increases. Between 1 956
and 1 982, labor productivity in the U.S. steel
industry rose by only 5.5 percent. Given the
6.6 times rise in thewage rate, thisllas meant
a 3.9 times increases in unit labor cost, compared to a3 times rise in average steel prices.
Since labor cost accounts for about 40 percent of total production cost in the U.S. steel
industry, the development has meant sharply
reduced profitability in that industry.
Excess
capacity
The U.s. steel industry's woes arose partly
from excess capacity in the worldwide steel
industry. From 1953 to 1 973, world steel
consumption grew rapidly at6 percent per
year. The boom attracted vast amounts of
public and private investment. Steel production capacity expanded in both the industrial
and the developing nations in order to keep
pace with the growth in demand until 1 973.
The boom ended in 1973. By 1 981 , consumption in the industrial ized countries had
dropped to 86 percent of its 1973 level, but
the drop was offset by increases in the
developing countries and in the planned
economies so that the net result was zero
growth in world consumption.
True, labor cost has also risen rapidly
abroad and in some cases even faster than in
the United States. For instance, from 1 956 to
1 982, unit labor cost rose 4.3 times in the
Japanese steel industry, compared to the 3.9
times increase in the u.s. industry. However,
the relative shift was not large enough to have
put more than a dent in the absolute cost
difference. By 1 982, at $265 perlon, the u.s.
unit labor cost was still substantially higher
than the $1 44 per ton in Japan. Moreover,
changes in labor cost only tell part of the
story. The rapid expansion in production
capacity abroad, noted above, has also
meant improved quality and availability of a
wide range of products to steel users in the
U.S. market. To remain competitive, the u.s.
steel producers would have had to limit labor
cost increases to a much greater extent than
they have been able to.
While the growth in worldwide demand
stagnated, steel production capacity continued to expand. From 1 973 to 1 981,
capacity increased by 10 percent in the
developed countries and by 7 percent in the
developing countries. The resultant worldwide excess capacity set the stage for increasingly fierce price competition that threatens
the continued survival of less-efficient, highcost producers.
Unfortunately, the u.s. steel industry has
been among the less-efficient, high-cost
producers in the world market, because
of high labor costs and the use of outdated
equipment, compared with those abroad.
Outdatedequipment
Numerous studies have focused on the
reasons that u.s. productivity growth has
lagged behind growth rates abroad. In the
labor costs
Labor cost has increased rapidly in the u.s.
2
steel industry, a major cause has been the
continued use of relatively old plants and
equipment. Steelexpertsgenerally agree that
the most modern, efficient method of steel
production is the so-called "continuous casting" processwhereby molten steel is pou red
directly into molds. This processreduces the
high energy and labor costs of the conventional practice of first casting steel and later
reheatingit for molding and rolling. According to experts,the more efficient process
accountsfor 71 percent of Japan'ssteel output, 45 percent of the EEC'sand only 21
percent ofthe United States'.
intended to protect domestic steel producers
againstabrupt, massiveshocksfrom abroad
and to give them the time to generatethe
much-needed cash for modernizing their
production facilities.
Studies, however, show that capital expenditures in the domestic steel industry declined
in the five-year period after 1968 eventhough
the voluntary restraintsreduced imports by
25 percent from what they would otherWise
have been in the sameperiod. Between1969
and 1974, in contrast, capital expenditures
more than doubled in the Japaneseand EEC
steel industries. Studiesalso show that the
trigger-price mechanism did not have any
measurable impact on the market sharesof
u.s. domestic steel producers.
But,why hasthe u.s. steelindustry lagged so
far behind in renovating its plant and equipment in comparison to other countries?One
would think that, given the high labor cost,
there should have been a strong incentive for
the producersto economize on labor cost by
substitutingcapital for labor. And, surely,
there has been no lack of capital in the u.s.
market relative to marketsabroad.
Even if import barriers had been effective in
keeping outor reducing imports,thus providing short-run relief to the u.s. steel industry,
their ultimate effect would have been to raise
U.s. steel prices. Since steel is a major input
in so many other industries,the higher steel
prices would clearly have deleteriouseffects
on the competitive positions of the U.s. automobile, machinery, home appliance, and
other industries. Thus, it is not clear that total
employment would have been helped by
effective barriers against steel imports.
Two explanationssuggestthemselves.First,
as statedabove, high labor cost has'brought
about a severeprofit squeezein the u.s. steel
industry, thus reducing the incentive for
investment in capital renovation. Second,
the worldwide excesscapacity and the enhanced import competition, also noted
above, have made it even lessattractive for
investorsto pour largeamounts of capital into
the industry.
Conclusion
The u.s. steel industry's problems are deeprooted. The steel producers' solutionimport barriers-can no doubt stemthe tide
in the short run. Pastexperience, however,
has shown that past barriers were no more
than temporary palliatives that failed to
address the steel industry's troubles at their
many sources. Moreover, becausesteel is a
major input in other industries,restricting
steel imports would inevitably raisesteel
prices, thus adversely affecting the competitiveness of other U.S. industries.Although
import restrictions can provide temporary
relief to the steel industry, the wisdom of such
a policy is questionable from the viewpoint of
the economy as a whole.
Effectsof protection
In the face of increasing import competition,
U.s. steelproducers have appealed to the
government for protection and received various types of relief. For instance, "voluntary"
agreementswere concluded in 1969 with the
EECand Japanto restrict the growth of steel
imports from those countries to no more than
a five-percent annual rate. Since 1977, a
"trigger-price mechanism" hasbeen in place
to impose duties on steel imports should the
import price fall below the production and
transportation cost of the most efficient foreign producer, Japan.Thesemeasureswere
Laura Leete and Hang-ShengCheng
3
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BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amountsin millions)
selectedAssets
andliabilUies
.
LargeCommercial8anks
loans (gross,adjusted)and investments*
loans (gross,adjusted)- total#
Commercialand industrial
Realestate
loans to individuals
Securitiesloans
U.s. Treasurysecurities*
Other securities*
Demand deposits- total#
Demanddeposits- adjusted
Savingsdeposits- total
Time deposits,- total#
Individuals,part. & corp.
(large negotiableCD's)
WeeklyAverages
of Daily figUres
Amount
Outstanding
1/19/83
163,608
142,547
57,423
23,890
2,455
7,445
13,616
40,221
27,928
56,014
79,195
70,021
26,851
Weekended
1/19/83
Change
from
1/12/83
301
65
514
- 134
- 81
- 142
50
186
- 932
-1,023
2,620
-2,991
-2,635
-1,364
Changefrom
yearago
Dollar
Percent
4.2
5.1
93
2.0
1.2
20.0
233
- 11.2
- 0,4
- 0.5
81.5
- 12,4
- 14.0
- 24.9
Comparable
period
6,567
6,878
3,841
1,127
275
410
1,406
- 1,717
164
151
25,146
- 11,235
- 11,383
- 8,901
Weekended
1/12/83
MemberBankReserve
Position
ExcessReserves(+ )/Oeficiency(-)
Borrowings
Net free reselVes(+ )/Net borrowed(-)
213
o
213
108
33
75
75
21
54
,. Excludestradingaccountsecurities.
# Includesitemsnot shownseparately.
Editorialcommentsmaybeaddressed
to theeditor(GregoryTong)or to theauthor.... Freecopiesof this
andotherFederalReserve
publications
canbeobtainedby callingor writingthePublicInfonnationSection,
federal ReserveBankof Sanfrancisco,P.O.80x 7702,Sanfrancisco 94120.Phone(415)974-2246.
@FedFRASER