Steel war...

If Trump really wants to save American steel, he'd nationalize it

He's right that the industry deserves support. But tariffs aren't the solution.

By TODD TUCKER

Last Friday, the Commerce Department set off an uproar in the trade world when it recommended that President Donald Trump use an obscure law to impose tariffs of up to 53 percent on steel imports. The agency argued that current import levels pose a risk to U.S. national security, potentially leaving the manufacturing workforce without the skills and experience to carry out a major military buildup.

But if Trump wants to address the real national security concerns, stabilize the steel industry and save these high-paying manufacturing jobs, a tariff is a clumsy way of doing so, likely violating international trade rules and infuriating important allies. There is a much simpler, straightforward idea that could work: Nationalize the industry altogether.

That may sound crazy—after all, nationalizations are rare, and political lightning rods. But it would solve the central problem the steel industry faces. No tariff, no matter how high, will reverse China’s domination of the steel industry and put U.S. steel companies onto long-term stable footing. Trying to fix the problem with trade policy creates needless complications and global tensions, all for the sake of a relatively small—though strategically vital—industry. Nationalization, in effect, sidesteps this problem altogether by eliminating the need to turn a profit. If Trump is committed to turning around the steel industry, nationalization is his best option.

This is, admittedly, not a free market solution—and critics, including much of Trump’s own party, will likely recoil at the notion. But the truth is that the free market has already failed the basic metals industry, failing to generate prices that reflect the true long-term social value of the industry. In fact, there’s no such thing as a free market for steel. Internationally, steel production is shot through with political interventions by foreign governments such as China. In the U.S., steel companies are stuck in a cycle of requiring more and more government protection just to buy them another few months or years. In other words, the industry is already totally dependent on the U.S. government to stay alive.

The government isn’t wrong to offer that protection, either. Concern about American steel is well-founded. Over the past 15 years, China has become the world leader in steel, a position it shows no sign of surrendering. It now has as much capacity as the rest of the world combined, going from 128 million metric tons of production in 2000 to 808 million metric tons in 2016. The country’s rising production lowered global prices and boosted overall imports into the U.S., leading to chronic profitability problems in the U.S. The six big domestic producers went from nearly $5 billion in profits in 2008 to an average annual loss of $666 million in the years since. Before China entered the World Trade Organization in 2001, the U.S. steel industry employed over 200,000 workers. By 2016, it dropped to 142,000. To be sure, automation has also contributed to these job losses, but China’s rising dominance in the steel industry played a central role.

This isn’t just, or even primarily, an economic problem for the United States. As the Commerce report argues, it’s also a national security threat. According to the most recent available numbers, roughly half of the steel consumed in the U.S. is by industries deemed critical by Congress, including dams and nuclear production. This is on top of the steel directly consumed by the government. If the domestic steel industry atrophies, the U.S. would be stuck trying to rebuild capacity if or when another military conflict arises just to make the trains run on time, let alone to fight a war.

To address this risk, Commerce recommended invoking an obscure trade statute called Section 232, which dates back to the Eisenhower and Kennedy era and allows the federal government to impose tariffs on foreign imports to protect U.S. national security. The agency argued that the U.S. steel industry needs to be operating at 80 percent capacity to survive, instead of its current 72 percent. By effectively raising the price of foreign steel, tariffs would allow the U.S. steel industry to better compete with foreign suppliers.

At least, that’s the idea. But there are good reasons to be skeptical it would work. For starters, the WTO would almost surely rule against it. Under one option put forward by Commerce, the U.S. would target the 12 countries most responsible for the steel surge with a 53 percent tariff while exempting others like Canada. But this move risks violating the WTO’s most-favored nation rules — something the South Korean government has preemptively promised to challenge legally. Alternatively, if the U.S. applies a lower 24 percent tariff on all imports regardless of origin, it will risk undermining key allies like Canada and Europe while still likely violating WTO rules. Either way, the costs to steel-using industries will go up, perhaps as much as $150 per metric ton.

Moreover, even with a tariff, there’s no guarantee the industry will be able to compete with a Chinese state-directed industry in the future, or that steelworker jobs will be well-paying and sustainable. The steel tariffs imposed by George W. Bush in 2002 — the most recent action of the type Trump is contemplating — were struck down at the WTO and arguably cost more jobs in steel-using industries than they created in steel itself. In other words, while Trump has pinpointed a real problem in our trade and security policy, Commerce’s recommendations are unlikely to work.

Luckily, there’s a better way. The U.S. could simply buy up existing U.S. steel producers and ensure that they are working at 80 percent capacity, regardless of the global price of steel or Chinese competition. It would create a more stable supply of steel, ensure the U.S. has a capable industrial base and save high-paying jobs. Importantly, this plan wouldn’t risk violating trade rules, since there are no WTO rules against nationalization. Steel could be rebuilt without raising costs through tariffs or risking trade conflicts — the two primary concerns of opponents of the Commerce recommendations.

There are other benefits as well. Rather than shedding jobs or pushing for labor concessions in contract negotiations, a public steel industry could support high-paying union jobs. Rather than attempting to cajole private companies to adopt environmentally friendly production methods, Congress could directly require the public industry to adopt cutting edge green technologies. Moreover, any profit the public enterprise did generate could be used to fund infrastructure investments and other public priorities at a time of falling government revenues from other sources. Indeed, a nationalized steel industry could provide even cheaper steel to industries that use it, all while maintaining high labor and other standards.

Nationalization may also be truer to Congress’ intent when it passed Section 232. The statute gives the executive branch broad authority to use trade sanctions to prop up industries for a wide array of problems, from “substantial unemployment” to “loss of skills or investment.” In other words, it basically gives the U.S. a mandate to pursue a forward-looking industrial policy and to determine which industries are indispensable to the nation’s well-being and ensure their longevity. The newly public steel factories would allow the government to maintain and build out centers of manufacturing excellence throughout the country and preserve vital skills — the exact intent of Eisenhower-Kennedy era law.

Of course, nationalization comes with real costs. How much would depend on the specific path taken. An uncompensated nationalization would be free, but would likely be struck down by courts as a violation of Fifth Amendment protections against such takings of private property, as the Supreme Court did when President Harry Truman sought to seize the steel mills during the Korean War. If the government were to obtain congressional agreement to offer compensation to steel company shareholders, the amount could be in the tens of billions of dollars. (Though it would have been cheaper before Commerce released its recommendations, which pumped up share prices of steel companies on the expectation the government would swoop in to help them.) If the price tag seems high, consider that the U.S. spent hundreds of billions bailing out Wall Street and Detroit.

It’s also possible that the government would be a worse manager of the industry, leading to inefficiencies and wasted resources. But while many critics of government often level this charge against public enterprises, economic scholars have found the evidence is mixed, with a number of successful companies run with government ownership. In fact, market failures often plague capital markets, while well-run public bureaucracies can impose political discipline on public entities.

Nationalization of an entire industry may seem like an extreme option for a president who has promised to shrink the government. But throughout his business and political career, Trump has worried about the threat of foreign countries’ trade policies, and advocated for significant government action. With steel, he has now rightly targeted a real problem. But tariffs won’t provide a lasting solution: nationalization will.