Lessons from the 2002 Bush Steel Tariffs
March 12, 2018
In 2002, the George W. Bush Administration placed tariffs on imports of certain steel products in an attempt to protect the domestic U.S. steel industry from foreign dumping. The failure of these tariffs to work as designed and the economic harm they caused provide a foreboding tale of what we should expect to see result from the Trump Administration’s new tariffs on steel and aluminum. A research paper titled “The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002” found that in 2002, more American workers lost their jobs due to higher steel prices than the total number employed by the U.S. steel industry itself.
If this last round of steel tariffs has anything to teach us, it is that the long-term impact of tariffs are higher prices and smaller quantities for U.S. businesses and consumers that result in lost business, reduced employment, and slower economic growth.
President George W. Bush imposed tariffs on a variety of steel products beginning in March 2002 and lasting for three years and one day. The rates ranged from 8 percent to 30 percent on certain steel product imports from all countries except Canada, Israel, Jordan, and Mexico. These tariffs affected products used by U.S. steel-consuming manufacturers, including: producers of fabricated metal, machinery, equipment, transportation equipment, and parts; chemical manufacturers; petroleum refiners and contractors; tire manufacturers; and nonresidential construction companies. This definition of steel consumers is conservative, as many other industries are also consumers of steel.
The vast majority of the manufacturers that use steel in their business processes are small businesses. Ninety-eight percent of the 193,000 U.S. firms in steel-consuming sectors, at the time of the Bush steel tariffs, employed less than 500 workers, according to the above study. The economic implication of such small firm size meant that these businesses were “price takers.” In other words, the firms were too small to have the market power to influence prices and instead had to accept the higher input costs caused by tariffs.
The effects of higher steel prices, largely a result of the steel tariffs, led to a loss of nearly 200,000 jobs in the steel-consuming sector, a loss larger than the total employment of 187,500 in the steel-producing sector at the time. The study warns:
In making policy for the revitalization of manufacturing, including the steel industry, our conclusions suggest that the effects across the full industrial spectrum should be considered. The lessons of the impact of higher steel costs should counsel a good deal of caution when import barriers are considered.
The tariffs not only led to domestic pressure characterized by supply shortages and higher prices, but also international pressure. U.S. steel market prices were generally higher than steel prices paid by competitors abroad. This gave foreign producers of steel-containing products a cost advantage over U.S. producers of steel-containing products. In response, customers began shifting orders from U.S. manufacturers to foreign manufacturers.
In total, the benefit of using protectionist policies to save very few steel-making jobs in the short run was significantly outweighed by the unintended consequences of higher prices and job losses in other industries. The outcome of the 2002 Bush steel tariffs is not unique, and we should expect to see similar effects from the new tariffs on steel and aluminum products under President Trump.