When the Levies Break

COMMENTARY

Free-trade advocates and auto suppliers are working feverishly to reduce — or even fully abolish — the tariffs on steel imports instituted by President Bush in early 2002.

Tariff opponents say the duties, intended to shelter the U.S. steel industry during reorganization after a glut of low-priced imports, are causing layoffs and plant closings due to increased steel prices.

Despite already winning numerous tariff exemptions since the levies were rolled out, the opponents stepped up pressure recently when Republican Rep. Joe Knollenberg of Michigan introduced a resolution calling for the International Trade Commission to expand its ongoing review of the duties to include their “unintended consequences.”

Besides the legislation, more exemptions likely will be proposed in March.

However, instead of fighting “protectionism” and steel makers, automotive suppliers should be attacking the real villain: A business model that keeps supplier profit margins so razor thin that any small shift in their cost base can put them out of business.

It is ironic that steel tariffs, which are estimated to add about $100 per vehicle, are causing a firestorm among suppliers, while their auto maker customers are handing out $3,000 incentives to move the metal off dealer lots.

Offering giant spiffs on vehicles may keep sales rolling, but in addition to sapping profits, incentives are accelerating a destructive outsourcing trend that is shifting high-wage jobs at traditional American suppliers overseas.

And the U.S. supply base doesn't need to lose more good-paying jobs. During the last five years, the steel industry alone cut 45,000 jobs, and more than 125,000 steel company retirees lost their benefits because a glut of bargain-basement imports forced U.S. prices to 20-year lows. The pensions for another 500,000 retirees are at risk, and so are the salaries of 125,000 current employees. These are well-paid workers who may soon be unable to buy a new vehicle ever again.

If the U.S. steel industry disappears, engineering and manufacturing jobs from related industries could be next. A recent article in Business Week predicts 3.3 million high-paying white-collar jobs will shift to low-cost countries such as India by 2015, where engineering and other professional jobs pay 60% less.

Considering the venomous reaction to President Bush's actions, you would think tariffs never have done the U.S. auto industry any good. But President Ronald Reagan saved Harley-Davidson with import duties, and legitimate competition from foreign-made motorcycles still survives. So does an American icon that could've been sacrificed for “free trade.”

And when U.S. auto makers were getting pummeled by the Japanese in the 1980s, “voluntary” import restraints helped the Big Three recover. The restrictions also prompted the Japanese to begin building assembly plants here and create more high-paying manufacturing and engineering jobs for tax-paying Americans.

At its core, the steel tariff dispute is about Detroit auto makers focusing too much on price rather than value and squeezing suppliers too hard.

A survey of 279 Tier One suppliers this summer by Planning Perspectives Inc. found that the U.S. operations of Toyota, Honda and Nissan are benchmarks for supplier relations. The survey indicated that cost is more important to the Big Three than its foreign competitors.

But when suppliers try to stand up to price-cut demands, they crumble. In one of the most-publicized battles, many suppliers publicly vowed to resist demands from Chrysler Group two years ago for a unilateral 5% price cut. But most suppliers caved in.

Parts makers should confront their customers about the business practices that are making it nearly impossible for them to jointly prosper. That's the long-term problem. Suppliers likely wouldn't be crying about steel tariffs if not for Big Three cost concerns. After all, “spot” prices for U.S.-made steel are lower in 2003 with tariffs enacted than in 1997 before the import glut began. Suppliers weren't complaining about steel prices in 1997. Buying cut-rate steel helped suppliers cope with yearly cost-savings targets. That crutch is gone now and suppliers are mad.

So they attack the steel industry, seeking a short-term solution by claiming free trade. Interestingly, numerous other countries don't practice free trade. They've supported their steel industries with massive subsidies and regulation. That gives them a big advantage over U.S. producers.

Three years of tariffs on some types of foreign steel is necessary for keeping good-paying jobs in the U.S. President Bush told steel companies to use the time wisely — and they are. Consolidation is under way. The steel industry is tackling its long-term problems. Auto suppliers should, too.