Should the US Drop Steel Quotas? YES: They're unneeded and fuel inflation [ cf. NO: Not with continued foreign dumping ]

By , Paul A. London, a Washington-based economist, recently studied the impact of steel quotas on US manufacturers for the Stern Group, an international trade-advisory firm.

PRESIDENT BUSH faces a trade-policy issue in the next few months that will have a major effect on his campaign promise to slow inflation and trim the budget deficit. Steel quotas, known as Voluntary Restraint Agreements, are scheduled to expire in September. Allowing the VRAs to expire would help prevent steel prices paid by United States manufacturers from rising above those of their foreign competitors. This would be a major step in the fight against inflation, since steel prices are important in and of themselves, and steel is a trend-setting industry.

If President Bush yields to pressure from US steel producers to extend VRAs, American steel-using industries - which include producers of home appliances, construction and farm machinery, industrial equipment and components, oil-field equipment, auto parts, food equipment, wire, ships, trucks, etc. - could face a cost squeeze that forced them to raise prices and lose markets both at home and overseas.

A recent study by the Stern Group shows that from 1969 through 1985, while steel was protected by a variety of special arrangements, US steel users paid 20 to 25 percent more for steel than their competitors in Germany and Japan. This $5 billion annual private subsidy from US steel users to US steel producers resulted in more inflationary pressure each year, constant pressure to raise interest rates, slower economic growth, and a decline in US competitiveness.

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The decline in the dollar has made United States steel prices more competitive in the past two years, but this could end quickly. Steel prices for US customers rose 15 percent overall in 1987 and '88. Prices of several important steel products have risen 30 to 40 percent or more.

Direct steel-price increases are not the only way VRAs have contributed to inflation. Serious shortages of some steel products covered by VRAs have interrupted delivery schedules, increased inventory costs, and cut export sales. Shortages have added to US manufacturing costs and discouraged the return of business and jobs to this country.

As US steel producers raise prices at home, steel producers overseas are lowering prices for their domestic users. Japanese domestic steel prices have fallen 24 percent in yen since 1984. This has meant lower inflation in Japan and helped its industries expand and modernize faster than in the US. Despite the fall of the dollar, by 1990 US steel producers could be the world's highest-cost steelmakers again.

Steel accounts for 15 to 25 percent of the cost of US manufactured products. If steel prices continue to spiral, America's steel-using manufacturers and their 5 million employees will pay a big price - lost opportunities and a lower standard of living. American consumers will pay higher prices for goods like stoves, refrigerators, microwaves.

Today, the steel industry does not need protection. It is earning billions of dollars in profits and operating at full capacity.

VRAs are bad trade policy, and they threaten Mr. Bush's anti-inflation and pro-competitiveness goals. The administration and Congress must let the VRAs expire in September.

All Americans want lower inflation. President Bush must realize that the best way to get it is through competitive pricing in industries like steel. A steel policy that means lower prices for America's manufacturers and exporters is right for the nation.

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