Clashes between union workers and corporate executives are nothing new, butthis was more significant than the standard wage dispute. Steelworkers areworried about the future of their livelihood--and with good reason: Since 1998the industry has been in a crisis deep enough to undermine even the bestmanagers and steel mills. Over the past four years, 32 percent of the nation'ssteel producers--that's 29 companies, including the third and fourthlargest--have gone into bankruptcy. Thirteen have stopped operating altogether.Several others teeter on the edge of bankruptcy or closure. If LTV doesn't finda buyer by February 28, its still-warm furnaces will be turned off and thecompany's assets auctioned. Few steel companies are earning enough to coveroperating expenses; virtually none are covering their financing costs.
Since the early 1980s, the formerly stodgy steel industry has spent manymillions of dollars painfully overhauling itself, to the point that by the early1990s it was even prospering. So what happened to American steel? And cananything be done to save it?
An Industry in Crisis
Bad management at some companies, like LTV, still plagues the steelindustry. But its current problems are rooted in the federal government'scounterproductive policies and the ripples of the global economy. The Asianeconomic crisis of 1997-1998, which spread to Russia and Brazil, produced asudden surge of steel exports to the United States, especially from Korea, Japan,Brazil, and Russia. As Asian economies tanked, their markets for steel dried upand their currencies depreciated (so their export price to this country dropped).Thus, we became the world's dumping ground for the metal: Steel imports, whichhad dropped to 18 percent of the U.S. market in 1990, shot up to nearly 32percent in 1998. The price of steel collapsed.
What made this sadly ironic was that the very growth in demand that made theUnited States such a ready dumping ground for cheap imports should have generatedsubstantial revenues for domestic steel companies--income that could havebeen reinvested in technology and research. Instead, the influx of cheap foreignsteel drove prices far below the costs of production. Losses at U.S. steelcompanies 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 anincentive to keep producing, even at a loss, in order to pay at least some oftheir 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 globalsteel industry had the capacity to produce 30 percent more steel than the worldcould use--a surplus of 300 million tons a year. Japan, for instance, can producemore than twice what it needs, and Russia more than four times. In fact, theUnited States is one of the few industrial countries in the world thatcannot produce all the steel that it consumes. What's more, according toindustry analyst Michael Locker, with 40 percent of steel now globally exchangedthrough 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. pricesat 20-year lows.
As a commerce department study concluded two years ago, the steelindustry in the United States gets hit particularly hard by the current globalsurplus because it is at a strategic disadvantage relative to steelmakingoperations abroad. Foreign governments often see a vital steel industry asessential to industrial economies. European and Asian economies have benefitedfrom decades of public ownership, government subsidies, overt and covert importprotection, and cooperation among producers. Meanwhile, the U.S. government hasintervened with a hodgepodge of penalties for steel dumping (that is, for sellingbelow the cost of production). The problem is, not only are these sanctionsusually too limited, too temporary, and too belated, but the federal government'sbroader policies have often worked against the steel industry.
For example, nearly every other industrial country has national healthinsurance. Here at home, however, steel companies have to bear the cost of suchinsurance. What's more, when old mills close or increase efficiency, thesteelworkers' union insists that retirees and displaced workers be guaranteedhealth benefits. As a result, about 150,000 active steelworkers support around600,000 retirees and spouses. Individual steel manufacturers in other countriesare not burdened with these "legacy costs" carried by U.S. companies--an expensethat on average boosts the price of steel $9 per ton. Throughout Europe a tax oncoal and steel dating back to 1951 also funds retraining, early retirement, andwage support for displaced workers. The United States has no such program. U.S.steel companies thus have higher costs of production than Europeancompetitors--even at comparable levels of efficiency--because of flawed publicpolicy.
The United States also undermines the international steel industry throughits influence on global economic policy. Debt burdens and austerity policies ofthe International Monetary Fund depress developing countries' growth. Liberalizedglobal finance creates crises and contributes to an overvalued dollar, therebymaking steel imports cheaper. The Export-Import Bank of the United States evenoffered loan guarantees to a Chinese steel mill guilty of dumping its product inthis country.
Faced with these obstacles, LTV managers gave up. They were "hell-bent onshutting these mills down," United Steelworkers Assistant Director Jim Robinsonlamented in November. They had driven away major customers with constant talkabout closing the mills and "wasted money to the point we think they did itdeliberately," 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 UnitedSteelworkers Union has taken a leading role in trying to impose some rationality.It has doggedly fought managers who try to impose financial concessions or breakthe union. At the same time, it has cooperated on productivity and trainingprograms, aggressively pushed companies to modernize even at the expense of unionjobs, and negotiated employee ownership and representation on company boards. Onthe theory that, as Robinson puts it, "management is too important to leave tothe managers," the union has gone beyond traditional collective bargaining toshape corporate strategies and preserve a domestic steel industry when manysteelmakers were seeking their own narrow, short-term advantage at a cost to theindustry as a whole.
The union was also quicker than most steel companies were to identify thethreat posed by a surge of low-priced imports after the 1997-1998 Asian economiccrisis. Since 1998 the union has put its formidable grass-roots political networkbehind a plan that now includes four points: restraining imports; establishing afund to pay for "legacy" retiree health insurance; increasing industry access tocapital (by improving a loan-guarantee program); and consolidating a fragmentedindustry to preserve steelmaking capacity and jobs. The industry has slowly cometo agree on many of these points.
Though its call for higher tariffs may seem classically protectionist toideological free-traders (and even to some foreign metalworker unions), theSteelworkers believe that they are merely trying to correct the irrationalitiesand failures of the global steel market, not to avoid fair competition. And whilethe Steelworkers have been among the most vocal critics of contemporaryglobalization, they have been among the most internationalist of unions: Besidesforging global union alliances and proposing global bargaining, they have beenfighting for debt relief and international worker rights. "Our enemies in thisfight aren't the workers in these other countries," insists United SteelworkersPresident Leo Gerard, "but the system used to exploit them."
In arguing for more joint industry-government-labor management ofinternational competition, the Steelworkers and other metalworker unions seek toreduce overcapacity while letting developing countries create their ownindustries. Despite their internationalism, the Steelworkers argue that national action is needed both to deal with market failures and to give urgency tointernational cooperation. The union rejects the notion that the market shoulddetermine everything, especially since a crazy market won't generate rationalresults.
How to Save American Steel
The federal government has an opportunity right now to help reduce thecraziness and restore the steel industry to international competitiveness.President George W. Bush has until March 4 to decide whether to impose temporarytariffs on most foreign steel; and Congress will be under pressure to passlegislation paying the health-insurance legacy cost of two decades of millclosings and restructuring. If President Bush and the Congress act on bothfronts, the 75-company steel industry in this country is likely to consolidateinto three or four large corporations that could be effective internationalcompetitors. If they don't, the industry may collapse into chaos. "If there isn'ta 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 atthe point of no return... . They're all in the same parade to oblivion. They'rejust at different points in the parade."
Bush has the evidence that should help him make the right decision. In Octoberthe U.S. International Trade Commission (ITC) concluded an investigation that thepresident requested under Section 201 of U.S. trade law and reported that the domestic steel industry has been injured by imports. In December, ITCcommissioners recommended that the government impose tariffs of 20 to 40 percenton nearly four-fifths of finished-steel imports, with rates declining over fouryears.
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 unionand the companies can agree on terms, there's also a good chance thatCongress--where a majority of the House endorsed earlier union-backedlegislation--will approve a fund to cover the $13 billion in retireehealth-insurance obligations. Companies rejected the union's proposal for fundingthrough an excise tax on all steel; tariff revenue may be proposed instead.
Although the itc concluded that tariffs of even 50 percent wouldraise steel prices no more than 10 percent, free-traders and big steel consumersstill ask why anyone should pay higher prices to save this industry. One answeris that if this country wants to retain any kind of serious manufacturingbase--with skilled, well-paid jobs--then preserving the steel industry iscrucial. Besides, the steel industry and the union have already done much of whateven the free-trade experts prescribed. Faced with rising imports, steelcompanies plowed $60 billion into modernization from 1980 to 2000 and put theindustry on average in the top rank worldwide for energy efficiency andenvironmental safety. Although domestic demand grew by 39 percent, the industryeliminated 15 percent of its steelmaking capacity and 56 percent of itsworkforce--a loss of 243,600 jobs. While the union reluctantly accepted the jobcuts as essential for modernization, it negotiated protections to save displacedworkers 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 64percent, making the nation's mills virtually as efficient as Europe's andJapan's.
But unions and industry executives alike are now realizing that the key tosurvival may be to consolidate; that is, to follow the example of European andJapanese steelmakers that have merged recently to form companies that dwarf thiscountry's biggest. U.S. Steel recently agreed to acquire a stake in NationalSteel and has reportedly begun discussing takeover of Bethlehem Steel,Wheeling-Pittsburgh Steel, and possibly other bankrupt companies. But how theseconsolidations are achieved--and what becomes of displaced workers--is crucial.If the companies must shoulder the legacy costs themselves, mergers are unlikelyor else won't succeed. But with help on tariffs and health insurance, theindustry will likely undergo its biggest consolidation since J.P. Morgan boughtout Andrew Carnegie in 1901 to form U.S. Steel--and the U.S. steel industry couldemerge as a healthy global competitor.
Nearly everyone--including the Steelworkers--argues that a consolidatedindustry will be more profitable largely because two or three big companies thenwill have the market power that's needed to deal with concentrated suppliers andbig-league customers such as the auto industry. The Bush administration andindustry executives also see consolidation as a means of eliminating"inefficient" capacity--by which they usually mean laying off workers. But eventhe least efficient U.S. steel mill is more efficient than many operatingelsewhere in the world. To compete, we need fewer steel companies, according toGerard, not fewer steelworkers or less capacity: "We need companies that caninvest in research and development to be able to compete through technologicaladvancement. We don't need companies that can compete through producing less andless steel."
Ironically, if they succeed in saving the industry, the Steelworkers arelikely to face combined companies that are much more powerful--giant firms thatmight very well use their new clout against the union, even though a rationalcompany would realize that it will need the cooperation of workers and theirunion to succeed. The industry could also benefit from the cooperation of theinternational metalworker unions in creating a less volatile framework for theindustry and raising global standards for workers. The Steelworkers' plan doesnot settle all issues for the global industry--especially the broader ones ofequitable development. But as one top union official said, it "makes the best ofa bad situation." And at least it increases the likelihood of our steel companiesand workers having a chance to compete in a global industry that is a little lesscrazy.