Parade to Oblivion

When employees at the steel manufacturer LTV cheered the
resignation last November of the corporation's chief executive--he had been
brought in only a year earlier to save the company--it was a telling sign.
Steelworkers, who bristled at CEO William Bricker's continuing campaign to slash
their wages and cut off health insurance for retirees, had become convinced that
he was purposefully scuttling the operations with his wastefulness and wild
threats.

Clashes between union workers and corporate executives are nothing new, but
this was more significant than the standard wage dispute. Steelworkers are
worried about the future of their livelihood--and with good reason: Since 1998
the industry has been in a crisis deep enough to undermine even the best
managers and steel mills. Over the past four years, 32 percent of the nation's
steel producers--that's 29 companies, including the third and fourth
largest--have gone into bankruptcy. Thirteen have stopped operating altogether.
Several others teeter on the edge of bankruptcy or closure. If LTV doesn't find
a buyer by February 28, its still-warm furnaces will be turned off and the
company's assets auctioned. Few steel companies are earning enough to cover
operating expenses; virtually none are covering their financing costs.

Since the early 1980s, the formerly stodgy steel industry has spent many
millions of dollars painfully overhauling itself, to the point that by the early
1990s it was even prospering. So what happened to American steel? And can
anything be done to save it?

An Industry in Crisis

Bad management at some companies, like LTV, still plagues the steel
industry. But its current problems are rooted in the federal government's
counterproductive policies and the ripples of the global economy. The Asian
economic crisis of 1997-1998, which spread to Russia and Brazil, produced a
sudden surge of steel exports to the United States, especially from Korea, Japan,
Brazil, and Russia. As Asian economies tanked, their markets for steel dried up
and their currencies depreciated (so their export price to this country dropped).
Thus, we became the world's dumping ground for the metal: Steel imports, which
had dropped to 18 percent of the U.S. market in 1990, shot up to nearly 32
percent in 1998. The price of steel collapsed.

What made this sadly ironic was that the very growth in demand that made the
United States such a ready dumping ground for cheap imports should have generated
substantial revenues for domestic steel companies--income that could have
been reinvested in technology and research. Instead, the influx of cheap foreign
steel drove prices far below the costs of production. Losses at U.S. steel
companies mounted, financing dried up, and mills shut down.

The crisis underscored structural problems in the global steel industry.
Rather than cut back when markets weaken, steel companies everywhere have an
incentive to keep producing, even at a loss, in order to pay at least some of
their high fixed costs and to avoid the big expenses of idling a blast furnace.
But here's the bigger problem: Even during the recent economic boom, the global
steel industry had the capacity to produce 30 percent more steel than the world
could use--a surplus of 300 million tons a year. Japan, for instance, can produce
more than twice what it needs, and Russia more than four times. In fact, the
United States is one of the few industrial countries in the world that
cannot produce all the steel that it consumes. What's more, according to
industry analyst Michael Locker, with 40 percent of steel now globally exchanged
through new trading, world steel-market prices are more volatile than ever. Thus,
even though the volume of steel imported to this country has begun to decline,
the threat that traders will suddenly dump cheap steel imports keeps U.S. prices
at 20-year lows.

As a commerce department study concluded two years ago, the steel
industry in the United States gets hit particularly hard by the current global
surplus because it is at a strategic disadvantage relative to steelmaking
operations abroad. Foreign governments often see a vital steel industry as
essential to industrial economies. European and Asian economies have benefited
from decades of public ownership, government subsidies, overt and covert import
protection, and cooperation among producers. Meanwhile, the U.S. government has
intervened with a hodgepodge of penalties for steel dumping (that is, for selling
below the cost of production). The problem is, not only are these sanctions
usually too limited, too temporary, and too belated, but the federal government's
broader policies have often worked against the steel industry.

For example, nearly every other industrial country has national health
insurance. Here at home, however, steel companies have to bear the cost of such
insurance. What's more, when old mills close or increase efficiency, the
steelworkers' union insists that retirees and displaced workers be guaranteed
health benefits. As a result, about 150,000 active steelworkers support around
600,000 retirees and spouses. Individual steel manufacturers in other countries
are not burdened with these "legacy costs" carried by U.S. companies--an expense
that on average boosts the price of steel $9 per ton. Throughout Europe a tax on
coal and steel dating back to 1951 also funds retraining, early retirement, and
wage support for displaced workers. The United States has no such program. U.S.
steel companies thus have higher costs of production than European
competitors--even at comparable levels of efficiency--because of flawed public
policy.

The United States also undermines the international steel industry through
its influence on global economic policy. Debt burdens and austerity policies of
the International Monetary Fund depress developing countries' growth. Liberalized
global finance creates crises and contributes to an overvalued dollar, thereby
making steel imports cheaper. The Export-Import Bank of the United States even
offered loan guarantees to a Chinese steel mill guilty of dumping its product in
this country.

Faced with these obstacles, LTV managers gave up. They were "hell-bent on
shutting these mills down," United Steelworkers Assistant Director Jim Robinson
lamented in November. They had driven away major customers with constant talk
about closing the mills and "wasted money to the point we think they did it
deliberately," he said. "They're crazy. If I understood them, I'd be crazy, too."

Steelworkers to the Rescue

The steel industry has been pretty crazy for years now, but the United
Steelworkers Union has taken a leading role in trying to impose some rationality.
It has doggedly fought managers who try to impose financial concessions or break
the union. At the same time, it has cooperated on productivity and training
programs, aggressively pushed companies to modernize even at the expense of union
jobs, and negotiated employee ownership and representation on company boards. On
the theory that, as Robinson puts it, "management is too important to leave to
the managers," the union has gone beyond traditional collective bargaining to
shape corporate strategies and preserve a domestic steel industry when many
steelmakers were seeking their own narrow, short-term advantage at a cost to the
industry as a whole.

The union was also quicker than most steel companies were to identify the
threat posed by a surge of low-priced imports after the 1997-1998 Asian economic
crisis. Since 1998 the union has put its formidable grass-roots political network
behind a plan that now includes four points: restraining imports; establishing a
fund to pay for "legacy" retiree health insurance; increasing industry access to
capital (by improving a loan-guarantee program); and consolidating a fragmented
industry to preserve steelmaking capacity and jobs. The industry has slowly come
to agree on many of these points.

Though its call for higher tariffs may seem classically protectionist to
ideological free-traders (and even to some foreign metalworker unions), the
Steelworkers believe that they are merely trying to correct the irrationalities
and failures of the global steel market, not to avoid fair competition. And while
the Steelworkers have been among the most vocal critics of contemporary
globalization, they have been among the most internationalist of unions: Besides
forging global union alliances and proposing global bargaining, they have been
fighting for debt relief and international worker rights. "Our enemies in this
fight aren't the workers in these other countries," insists United Steelworkers
President Leo Gerard, "but the system used to exploit them."

In arguing for more joint industry-government-labor management of
international competition, the Steelworkers and other metalworker unions seek to
reduce overcapacity while letting developing countries create their own
industries. Despite their internationalism, the Steelworkers argue that national
action is needed both to deal with market failures and to give urgency to
international cooperation. The union rejects the notion that the market should
determine everything, especially since a crazy market won't generate rational
results.

How to Save American Steel

The federal government has an opportunity right now to help reduce the
craziness and restore the steel industry to international competitiveness.
President George W. Bush has until March 4 to decide whether to impose temporary
tariffs on most foreign steel; and Congress will be under pressure to pass
legislation paying the health-insurance legacy cost of two decades of mill
closings and restructuring. If President Bush and the Congress act on both
fronts, the 75-company steel industry in this country is likely to consolidate
into three or four large corporations that could be effective international
competitors. If they don't, the industry may collapse into chaos. "If there isn't
a strong remedy for legacy costs by the end of March, it will be too late,"
Gerard has warned. "By the end of February, some of these companies will be at
the point of no return... . They're all in the same parade to oblivion. They're
just at different points in the parade."

Bush has the evidence that should help him make the right decision. In October
the U.S. International Trade Commission (ITC) concluded an investigation that the
president requested under Section 201 of U.S. trade law and reported that the
domestic steel industry has been injured by imports. In December, ITC
commissioners recommended that the government impose tariffs of 20 to 40 percent
on nearly four-fifths of finished-steel imports, with rates declining over four
years.

There are good political reasons for Bush to follow the ITC recommendations.
Steel communities, after all, are influential in several important swing states,
especially in the Midwest. But with his wartime-inflated public-approval ratings,
the president may be tempted to propose weak measures. Fortunately, if the union
and the companies can agree on terms, there's also a good chance that
Congress--where a majority of the House endorsed earlier union-backed
legislation--will approve a fund to cover the $13 billion in retiree
health-insurance obligations. Companies rejected the union's proposal for funding
through an excise tax on all steel; tariff revenue may be proposed instead.

Although the itc concluded that tariffs of even 50 percent would
raise steel prices no more than 10 percent, free-traders and big steel consumers
still ask why anyone should pay higher prices to save this industry. One answer
is that if this country wants to retain any kind of serious manufacturing
base--with skilled, well-paid jobs--then preserving the steel industry is
crucial. Besides, the steel industry and the union have already done much of what
even the free-trade experts prescribed. Faced with rising imports, steel
companies plowed $60 billion into modernization from 1980 to 2000 and put the
industry on average in the top rank worldwide for energy efficiency and
environmental safety. Although domestic demand grew by 39 percent, the industry
eliminated 15 percent of its steelmaking capacity and 56 percent of its
workforce--a loss of 243,600 jobs. While the union reluctantly accepted the job
cuts as essential for modernization, it negotiated protections to save displaced
workers from paying all the social costs of adjusting to the global economy.
Productivity soared: The hours required to produce a ton of steel dropped by 64
percent, making the nation's mills virtually as efficient as Europe's and
Japan's.

But unions and industry executives alike are now realizing that the key to
survival may be to consolidate; that is, to follow the example of European and
Japanese steelmakers that have merged recently to form companies that dwarf this
country's biggest. U.S. Steel recently agreed to acquire a stake in National
Steel and has reportedly begun discussing takeover of Bethlehem Steel,
Wheeling-Pittsburgh Steel, and possibly other bankrupt companies. But how these
consolidations are achieved--and what becomes of displaced workers--is crucial.
If the companies must shoulder the legacy costs themselves, mergers are unlikely
or else won't succeed. But with help on tariffs and health insurance, the
industry will likely undergo its biggest consolidation since J.P. Morgan bought
out Andrew Carnegie in 1901 to form U.S. Steel--and the U.S. steel industry could
emerge as a healthy global competitor.

Nearly everyone--including the Steelworkers--argues that a consolidated
industry will be more profitable largely because two or three big companies then
will have the market power that's needed to deal with concentrated suppliers and
big-league customers such as the auto industry. The Bush administration and
industry executives also see consolidation as a means of eliminating
"inefficient" capacity--by which they usually mean laying off workers. But even
the least efficient U.S. steel mill is more efficient than many operating
elsewhere in the world. To compete, we need fewer steel companies, according to
Gerard, not fewer steelworkers or less capacity: "We need companies that can
invest in research and development to be able to compete through technological
advancement. We don't need companies that can compete through producing less and
less steel."

Ironically, if they succeed in saving the industry, the Steelworkers are
likely to face combined companies that are much more powerful--giant firms that
might very well use their new clout against the union, even though a rational
company would realize that it will need the cooperation of workers and their
union to succeed. The industry could also benefit from the cooperation of the
international metalworker unions in creating a less volatile framework for the
industry and raising global standards for workers. The Steelworkers' plan does
not settle all issues for the global industry--especially the broader ones of
equitable development. But as one top union official said, it "makes the best of
a bad situation." And at least it increases the likelihood of our steel companies
and workers having a chance to compete in a global industry that is a little less
crazy.

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