In an example of politics trumping good economic policy, President Bush last year levied a 30 percent, three-year tariff on imported steel. He acted after a study by the US International Trade Commission (ITC) found evidence that overseas steelmakers were "dumping" - selling cheap steel in the US at below-market prices.
Mr. Bush responded to pleas from Big Steel, which claimed it needed protection from foreign competition in order to restructure and regain its ability to compete globally. Federal Reserve Chairman Alan Greenspan and the president's own economic team opposed the tariff. But the White House calculated that the tariff would bolster the president's support among voters in West Virginia and Pennsylvania - pivotal states for his reelection. The White House was also courting the powerful United Steelworkers of America.
It hasn't worked out quite as planned. Two ITC reports last Friday found that while the US steel industry has successfully restructured, US companies that make goods from steel were hit with steep price increases and shortages of quality supplies. Many of these consumers are small and medium-sized metal-stamping and auto-parts firms in states like Michigan and Tennessee. The resulting job losses may be costing the president voter support in two more states he hopes to win in 2004.
The steelworkers, meanwhile, thanked the president by endorsing Democratic presidential candidate Richard Gephardt, saying any Democrat would be "better than the reactionary policies of the current administration."
In addition, the World Trade Organization has declared that the tariff violates international trade laws, making US goods subject to $2 billion in retaliatory European levies. A US appeal of the WTO ruling is set for November.
Now the White House confronts a problem of its own making. The tariff is subject to review after 18 months, and the president must decide whether to renew, alter, or abolish it. He faces intense lobbying from both sides. If he decides to extend the tariff as it is for another 18 months, he will anger one set of voters; if he does away with it, he will anger many others. Some observers believe he will try to split the difference by lowering the tariff, but not eliminating it.
Except in the most egregious cases, such tariffs are a bad idea. They distort the market, undermine US free-trade policy, and eventually backfire. While some companies and workers will lose out, the economy generally works best when government stays out. (It should and does help retrain workers.) In trying to pick economic winners and losers, the administration may find itself the biggest loser.