International Business: Competing in the Global Marketplace Fourth Edition Cases

PROTECTING U. S. STEEL

SYNOPSIS

Because it is so basic to the development of industry, few issues have prompted so much debate as the protection of the U.S. steel industries. Because US steel has fallen from being a global leader, its decline is more remarkable and the result is more damaging. One of the reasons that American steel has become largely uncompetitive, is that the U.S. has excess capacity and high costs.

While world steel making capacity has been steadily increasing, certain governments, particularly in Europe, have given national steel companies subsidies for many years. The American steel industry has also received protection in the form of antidumping action and imposition of duties. The argument is clearly whether the US government should continue to subsidize steel, or whether it should allow the forces of free trade to prevail, effectively allowing foreign steel companies to control the US market.

TEACHING OBJECTIVES

The main teaching objectives of the case are:

1.To understand the complexities that accompany the protection of a commodity like steel.

2.To illustrate how protectionist governmental policies can often hurt the very country they are designed to help.

3.To show that government intervention is usually ineffective and counterproductive.

This case can be most effective when used after Chapter 8, describing the issues of governmental intervention in international business.

STRATEGIC ISSUES AND DISCUSSION QUESTIONS

1.What are the reasons for persistent excess capacity in the global steel industry? What would it take for this capacity to be eradicated?

There are three reasons for excess capacity in the global steel industry. First, although capacity has been reduced in the U.S. and Western Europe, new steel markers in Korea, Brazil and eastern Europe have entered the global market, more than making up for reductions elsewhere. Second, steel mini-mills have expanded and improved their efficiency, growing capacity. Third, government intervention has prevented or slowed the ability of some firms to decrease capacity. Because these firms are covering their variable production costs, they continue to operate, hoping that economic conditions will improve. Additional government subsidies, especially in the U.S. have allowed uncompetitive steel makers to remain in business, protected from foreign competition.

2.Do you think that the steel industry is vital to the national security interests of the Unites States? If so, is it important to protect this industry from low cost foreign producers?

If there is any industry that is vital to the security of national interests, it is the steel industry. Because steel is used in heavy equipment, tanks, and other military items, the U.S. military simply cannot be held hostage to foreign sources of supply. What would happen to the U.S. supply of steel, if the U.S. were solely reliant on South Korea for steel, and that country suddenly was under attack from foreign enemies? Given that our security is dependent on steel used in the military, it would certainly seem that the industry deserves protection from foreign producers.

3.Do you think it’s correct to assert, as advocates of free trade do, that protectionism is self-defeating and harms consumers?

Because protectionism protects those industries that are uncompetitive in the global economy, it helps to maintain industries that are largely inefficient. Primarily because of that protection, the industry has little incentive to find ways to cut costs and become globally competitive. Additionally, such protectionism drains moneys away from more startup industries that have greater potential but need help in getting started in the global economy. Who pays? In all instances, either through higher tariffs that create more expensive products or in the form of tariffs imposed on cheaper products, it is the consumer who is always hurt.

  1. What do you think would happen to American steel makers if the U.S. government would unilaterally remove all barriers to foreign steel imports? Would the U.S. steel industry become extinct?

It is not clear whether the industry would become extinct. Clearly it would have to retrench, and only the more efficient steel makers would survive. Foreign steel imports would appear more attractive, and U.S. steel makers would have to slash costs dramatically, either by reducing or eliminating pensions and other hidden costs or by closing inefficient manufacturing operations.

5. What do you think President Bush should do in this case? Why?

President Bush should encourage foreign governments to remove their subsidies and allow the steel industry to compete on a level playing field. It is only through free trade that the economy is fully served and that the best and most competitive companies can survive and prosper. Depending on the politics of your students, you may want to suggest that President Bush should applaud those foreign governments who want to subsidize the U.S. steel consumption, but be prepared for a heated discussion. Clearly, the best alternative is free trade, so President Bush should be working to remove all government support of steel (and other industries). Supply of steel into the U.S. comes from many sources, and it is not clear whether even if our entire consumption of steel was from foreign sources, whether the U.S. would be at a severe strategic disadvantage. Certainly, President Bush needs to stand up to the powerful lobbies in Washington that have a vested interest in maintaining the status quo of U.S. steel. He should seek the best information available, and then make the difficult decisions, especially if the decisions are in favor of unrestricted free trade throughout the world.

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