The Real Steel Deal

Paul Veryser's steel-parts company, Stampings Inc., is in big trouble. Tariffs on steel imports, imposed by President George W. Bush in March, have pushed the cost of steel up by more than half on the American spot market, and this has added a whopping 25 percent to the cost of the air-bag, seat-belt and steering-wheel assembly parts his company makes.

The higher costs wouldn't be so bad if the Fraser, Mich.-based company could pass them on to its customers, mainly the big automakers and their top suppliers. But most of these companies refuse to pay, Veryser says. Whenever he dares ask, he's told there are plenty of alternative suppliers overseas, in places such as China and Mexico and Thailand. Labor is a lot cheaper in those countries, and now the steel is, too. "I'm the one who has to eat the extra cost," says Veryser. "And I just can't do it anymore." In September he shut Stamping Inc.'s plant in Harlingen, Texas, and laid off the 15 workers there. Without relief soon, he says, he'll also have to shut the Fraser plant, which his father opened in 1960; that would eliminate another 35 jobs.

Veryser has been a Republican all his voting life, and he says one of the worst things about the tariffs is the sense of betrayal. "Why would a president whom we all supported do something so hurtful to us? ... There has to be another way."

Indeed, there are many ways besides tariffs by which the U.S. government could help U.S. steel companies and steelworkers survive -- the avowed purpose of the tariffs -- in a world glutted with lower-cost, foreign-made steel, just as there are many different ways to design a tariff regime. The Bush administration chose the particular approach it did because, first, it doesn't cost taxpayers anything up front and therefore seemed cheap, and second, the approach seemed to promise a big near-term political boost in steel-manufacturing states.

Unfortunately, the administration's plan didn't account for the radical new realities of manufacturing in a global age. The tariffs are indeed diverting dollars to America's most hard-pressed steel manufacturers. But unlike what would have occurred in an earlier era, the burden is falling mainly on the thousands of small, often family-owned manufacturing companies in America that use steel in their products. And the owners of these small companies, clustered heavily in the Midwest but found everywhere from New England to California, have long been among the strongest supporters of the Republican Party.

From the first, the administration's decision to impose steel tariffs was viewed by both labor and industry as mainly political. How else to explain why a professed free trader such as Bush would erect America's most aggressive industrial protection policy in decades, an action that severely strained relations with key allies in Europe and Asia in the midst of the war on terrorism?

By late summer, all the pieces seemed to be falling into place, and Karl Rove and his team were further buffing their reputation for political cunning. The White House's main target -- the tens of thousands of steelworkers in Pennsylvania, Ohio and West Virginia and the hundreds of thousands of steelworker retirees there and in Florida -- were still openly thankful for this unexpected aid. Meanwhile, a number of press reports credited the tariffs with helping the administration win the contentious "fast-track" trade vote in the House in late July. The tariffs, so the argument went, provided just enough cover for steel-state Republicans to vote to grant the president special powers to conclude trade deals. Finally, the administration seemed at last to be repairing relations with France, Japan and Russia, buying peace with a series of carefully crafted "exclusions" from the tariffs.

But a closer look throws every one of these political achievements into doubt.

First, the closest midwestern House races turned on other issues. "I can't think of any in which steel was a deciding factor," says Bill Klinefelter, legislative director at the United Steelworkers of America, whose members are employed by both steelmaking and steel-using companies. "I mean, we also care about health care, unemployment insurance, pensions, bankruptcy legislation."

For the fast-track vote, the story is much the same. "The administration had more than enough votes to pass the bill even without the steel state congressmen," says Thea Lee, assistant director of international economics at the AFL-CIO. "The Republican leadership can always get a bill they really want passed. They open up the pork barrel, promise golf games with the president, twist arms."

Finally, European steel exporters may indeed have dropped their threats to impose new duties on U.S. companies, opting instead to let the World Trade Organization rule on the issue next year. Yet their governments are still smarting at what they view as further proof of American unilateralism.

So if the tariffs aren't yielding the hoped-for political results, what are they doing?

One answer is that, at least for now, they are funneling a lot more money to U.S. steelmakers, which is what Bush said was needed if the U.S. companies were "to compete on a level playing field" with foreign steelmakers subsidized by their home countries. What's still not clear, though, is whether the U.S. companies will actually use the money to modernize their operations, especially given the magnitude of their other ills; many, for instance, still carry more pensioners on their books than active employees. Nor is it obvious, even if the companies do buy new equipment, that this will mean more jobs for workers.

At many of the companies that consume steel, on the other hand, the effects of the tariffs are much more obvious.

At GR Spring & Stamping in Grand Rapids, Mich., President Jim Zawacki says he has lost three big automotive contracts since the tariffs took effect in March, which forced him to lay off 20 people (out of his total workforce of some 200).

At Ataco Steel Products Corporation in Cedarburg, Wis., President Bill Jens says he has cut 35 out of 110 jobs at the company, which makes parts for lawn mowers, electric motors and off-road vehicles.

At A.J. Rose Manufacturing in Avon, Ohio, CEO Dave Pritchard says he has cut back hard on hours for his 400 employees. To trim costs, he is shifting much of his own parts purchasing from American companies to Chinese suppliers.

These companies are anything but anomalies, says Craig Fitzgerald, a partner at Plante & Moran LLP, a management-consulting firm in Michigan and Ohio. "Without big changes in the tariff," he says, "we think 30 percent plus of the U.S. metal stampers could go out of business by next September."

Tariffs didn't work this way in the past. But in an era of global production networks, what a tariff on raw materials does is create an island of high prices in one place -- in this case, for raw steel in the United States -- while leaving untouched the global market for the finished goods that contain that material.

Say, for instance, that General Motors is told by one of its U.S. suppliers that the tariffs leave it no choice but to raise the price of the springs it manufactures. GM has two options: It either passes the extra cost on to the consumer or it buys the same component abroad. The foreign-made part may contain the exact same steel that the U.S. manufacturer uses but it may cost 15 percent to 20 percent less because the U.S. government charges no special tariffs on steel imported in a finished product.

For many of America's steel-consuming manufacturers, their worst fears were realized in late September when Ford announced plans to buy $10 billion per year of Chinese-made components by the middle of the decade. This is more than 50 times what Ford now buys. "And Ford's only the first volley," says Fitzgerald. "GM and Chrysler will now have to weigh in soon with similar announcements."

Among the owners of steel-consuming businesses, money and sentiment already appear to be swinging away from Bush and the GOP. Chris Howell is the government-relations manager at the Precision Metalforming Association, which he says is rethinking which politicians to support with political action committee money. Workers at these companies are also growing angry, and here the votes can add up fast. Fewer than a quarter-million Americans work in steel manufacturing, but companies that consume steel employ 13 million Americans, according to the Consuming Industries Trade Action Coalition. Robert Herrman, a technician at A.J. Rose, captures the sentiment perfectly. "Why is my unionized job," he wonders, "less important than their unionized jobs?"

For the administration, there's no easy way out. Abandoning the tariffs now would rile the steelmakers and steelworkers more than before. Keeping the tariffs in place will only further anger small-business owners and their employees.

Worst of all, perhaps, is that not even the steelmakers are likely to benefit over the long term, especially when the medicine they were prescribed is killing their home market.