Considering all of the tumultuous events that have occurred during George W. Bush's presidency, one wonders for what the brash Texan will be most-often remembered. Will it be for being the country's CEO during the heinous Sept. 11 attacks? For his singular determination to eliminate Saddam Hussein? For turning around or failing to turn around a virulent economic downturn? Despite the significance of all of these events, in manufacturing circles Bush most likely will be remembered for his March 2002 decision to impose substantial tariffs on imported steel, a maneuver intended to reverse the rapid decline of an industry so ubiquitous to American culture that Lee Strasberg tells Al Pacino, "We're bigger than U.S. Steel!" while celebrating a lucrative Mafia score in "The Godfather II." Known as "the steel safeguard program" or "Section 201," (a reference to the 1974 Trade Act), the tariffs-and-trade-reform program has been supremely controversial during a time of rapid restructuring in U.S. manufacturing. It's pitted steel makers against steel consumers and further riled foreign countries already angered by other trade issues. Following reception of a report from the U.S. International Trade Commission (ITC) this month, Bush is expected to make one of the most significant decisions regarding manufacturing in his presidency. A decision to keep the Section 201 tariffs until 2005 would greatly benefit the U.S. steel industry but result in an exodus of auto-component manufacturing overseas and continued job losses in steel-consuming sectors, according to some manufacturers. A decision to reduce or eliminate the tariffs would please steel-consuming industries but would wipe out gains made in the past 18 months by the steel industry, including at least $3.6 billion in major consolidations alone. Vocal members of both groups claim a decision not in their favor will irrevocably harm the future of their industries in the United States. The debate has drawn unprecedented politicking and debate at associations such as the National Association of Manufacturers (NAM) and borderline name-calling in testimony and press releases. Indeed, some say no matter what decision Bush makes, the Section 201 tariffs have already altered long-standing supply-chain relationships, forced some production out of the country permanently and angered key trading partners. "In two or three years, you will really see the fallout from what's happening now," says Ana Lopes, director of government relations for the Motor & Equipment Manufacturers Association (MEMA), Washington, D.C. "And what we're trying to do is staunch that. We can't bring back what's already been lost. That's an unfortunate consequence of this. But we're trying to prevent there from being further loss in our industry." Leading the charge to preserve the Section 201 tariffs is the American Iron and Steel Institute (AISI), a trade organization that represents some of the country's largest steel makers. Both Tom Usher, CEO of U.S. Steel Corp. and former AISI chairman, and Daniel DiMicco, CEO of Nucor Corp. and current AISI chairman, are vigorous defenders of the tariffs and encouraged Bush to order them. The steel industry's plea followed skyrocketing imports of cheap steel and ensuing depressed prices just after the turn of the century. The industry's contention was that the foreign steel was being "dumped" or sold on the U.S. market for less than it cost to produce; and that the practice of some foreign governments of subsidizing their steel industries was unfair. While this was happening, the industry's legacy costs from union promises to pay for retiree health care and pensions became "an anchor on finances," as one steel CEO put it. Capacity utilization was down, and a spate of bankruptcies of major steel producers started with the shocking December 2001 closure of LTV Corp., a major producer. The tariffs, steel makers argued, would keep unfairly traded steel out of the country and give the industry a chance to recover and consolidate. Indeed, 18 months into the program, steel prices have increased, overall imports are down, and several major consolidations have taken place. The program is working, AISI says, but it must run until 2005 for real reform to take root. "It was intended to be a three-year program. It was a commitment," says Andrew Sharkey, AISI CEO and president. "The industry's got a great track record in what it's been able to do in the first 18 months alone. If you look at what ISG, U.S. Steel and Nucor [the largest producers] alone have invested, it's roughly $3.6 billion in this process. That investment would be jeopardized and the prospects of additional consolidation and restructuring and investment in the industry would be substantially if not totally eliminated." To charges that the tariffs unfairly put the load on steel-consumers at the expense of producers, Sharkey points out that more than 1,000 product exclusions have been granted, and AISI estimates that just 17% to 18% of steel imports are affected. And, yes, at first the tariffs caused a blip in prices and a somewhat rocky domestic supply, but those issues are long passed, and the market has stabilized, he says. "Nobody can reasonably make the case that steel is not available at a reasonable price [today]." Indeed, steel producers do have some consumers on their side. A group of them compose the American Steel Coalition (ASC). Doug Ruggles, owner of Alabama-based Martin Supply Co. and a member of ASC, says the Section 201 program helped his company because it allowed Nucor to take over a former LTV mill. Ruggles had laid off workers when LTV shut the mill, but now that the mill is running, he's hiring again. "Hundreds of people are back to work," he says, "and the president's decision enabled Nucor to invest monies sooner and faster than they would have had they not had this window to get things up and running." Still, many consumers have been extremely vocal in their protests of the tariffs, saying they have already rendered irreversible damage and that their customer and supply-chain relationships will never be the same. "The total affect on Dura in 2002 [was] conservatively $10 million in direct pricing actions," Lawrence A. Denton, president and CEO of $2.4 billion Dura Automotive Systems Inc. told the ITC in June. "About an equal amount [lost] in disruption and efficiency loss, but the most important and a more long-term effect is our customers' perception that those American manufacturers who buy steel domestically are not as competitive based on our current steel cost. . . .The business relationship between Dura and its steel supply base has been damaged . . . severely damaged." The clash between the two factions played out in an unusual sub-committee declaration at NAM, which normally does not take stands on sectoral trade issues. The International Economic Policy Committee declared in December 2002 that NAM should ask the ITC to gather information on the affects of the tariffs on consumers and producers. The group supporting the declaration was accused of being "a minority . . . dedicated to pursuing its own narrow agenda," by steel producers. This year the debate spawned accusations of lying about statistics and attempting to force affected parties out of the public debate. The AISI and a group called the Consuming Industries Trade Action Coalition Steel Task Force (CITAC STF) often sparred in press releases and public testimony. "The shameful misrepresentation of fact by CITAC and others needs to stop," AISI Chairman DiMicco stated in a February press release regarding CITAC's assertion that the tariffs lead to hundreds of thousands of lost jobs. "This latest attempt to ignore reality continues to drive a wedge between parties that should be dealing with the fundamental problems facing all manufacturing." Timothy Leuliette, president and CEO of Detroit-based Metaldyne Corp., has been on the receiving end of much of AISI's criticism, and in June told the ITC: "This action by AISI is unprecedented in business history whereby a trade group takes on its customers in a public forum." Sharkey says there has been some grounds for the harsh words. "It's unfortunate. I don't think any supplier wants to be fighting with customers, and that's certainly not the intention here. Some of what I think you are seeing here is some of the groups representing some of the consumers are playing pretty fast and loose with the facts." In addition to this domestic debate, the Section 201 tariffs have sparked protest on an international level. In July the World Trade Organization (WTO) ruled that the European Union (EU) could add additional costs to U.S. imported goods because of the steel tariffs. The United States has appealed the ruling. But it's extremely unlikely that the WTO will change its mind, says MEMA's Lopes. That would mean more tariffs against U.S. goods in addition to tariffs the EU could impose in response to the unrelated issue of foreign corporation taxes. So, the EU could have "almost $4.4 billion in sanctions that it could legally sanction against U.S. products, so it's not just the steel industry that's affected," Lopes says "What he [Bush] is at risk of doing with both of these decisions pending is hurting other producers in the United States that don't have anything to do with steel like agricultural producers and clothing/textile producers. So a lot of times the steel industry says this [debate] should be limited to what's happening to them. Our argument has always been that there are a lot more people that are going to be affected by this decision and are being affected by this decision than just them." Much of the Section 201 debate centers on pricing, an issue all manufacturers are dealing with today as China beckons with a labor market paid 5% of what U.S. workers make, and as OEMs continue to demand annual price cuts from suppliers. It was in this atmosphere that steel consumers recounted how the tariffs have affected them to the ITC in June. "The impact was a $4.5 million increase in our domestic flat steel costs during 2002," testified Richard Clayton, president of Textron Fastening Systems, a $1.6 billion unit of $12 billion Textron Inc. "Recurring shortages of material, greatly extended lead times and delays in deliveries put us in a daunting position when it came to meeting customer requirements for on-time delivery. "It forced our company, like many others, to increase the volume of steel we purchased in the spot market at premium pricing that at times was higher than what we experienced from the tariff impact." In response, in fall 2002 the Textron unit imposed 7% flat steel and 2% wire/rod surcharges on non-OEM North American customers. Some customers accepted the surcharge, Clayton said, but many "responded . . . by de-sourcing us on future programs, resulting in lost revenue of more than $14 million and $4 million in net operating profit for fiscal year 2003. The lost business forced us to eliminate more than 100 corresponding production jobs." Other manufacturers told of moving production overseas to be closer to cheaper steel, while others said banks and potential customers now consider them a high risk because of their dependence on an unstable steel market. Lopes says many of her association's auto-parts manufacturers, who bid on work for stretches of years at a time, are locking in contracts with steel producers in Brazil, Argentina, Turkey and elsewhere. It makes sense that production will follow because steel is so costly to transport. "We talked to our constituents in June, and they said they still can't get set delivery and pricing commitments from domestic mills for more than six months in advance," Lopes says. In terms of pricing, Sharkey says prices have gone up, but they were unusually low prior to the 201 tariffs because of the unfair trade practices. Also, AISI statistics show steel prices are below their 21-year average. "U.S. steel prices are among the lowest in the world, much lower than U.S. trading partners," Sharkey says. "They are more competitive today, and you now have emerging a much lower-cost industry that will serve them [steel consumers] well. "It's unfortunate that you get two segments of our economy that both have had serious challenges and are forced into the arena to fight each other." It's the latter point that perhaps is what is really fueling this debate, Sharkey says. He questions whether a temporary blip in steel prices could prompt an otherwise stable manufacturer to move a plant overseas. He thinks some of the testimony steel consumers gave this year reveals "a huge amount a frustration and anger on issues that are impacting both steel suppliers and their customers. Some of those problems are so big and they're so intractable. How do you deal with China? So then, looking at something like steel tariffs becomes manageable. It's something you can target." Sharkey expects Bush to leave the steel safeguard program alone and let the tariffs run until 2005. He also sees a greater alignment among steel consumers and producers as they work on issues that affect all manufacturers. "This is part of the broader crisis that is happening in U.S. and NAFTA-wide manufacturing. Steel prices are not only not the compelling reason for that, they don't even rate in the top 10. There are broader issues that all manufacturers face whether they be steel or auto parts people or OEMs. Currency manipulation, particularly by our Asian trading partners. You've got a tax and regulatory regime here in the U.S. that makes many of companies non-competitive. You've got pressure coming from the OEMs to many of our second and third-tier suppliers to move plants to places like China. I would suggest that we have a lot of common ground with our customers. And if that sounds like an olive branch, it is." Says Lopes: "Overwhelmingly our companies would like to repair those relationships . . . but we really don't know. There's been a lot of friction, and that's something that both sides will have to repair."
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