Trigger Prices Protect the U.S. Steel Industry

Date February, 1978

The trigger price mechanism provided temporary assistance to the U.S. steel industry as steelmakers attempted to withstand challenges from foreign steel suppliers.

Locale Washington, D.C.

Key Figures

• Anthony M. Solomon (b. 1919), head of an interagency task force that recommended establishment of a trigger price mechanism
• Edgar B. Speer (b. 1916), head of U.S. Steel and chairman of the American Iron and Steel Institute
• Jimmy Carter (b. 1924), president of the United States, 1977-1981

Summary of Event

After nearly eighty years of global preeminence, the American steel industry began to lose its competitive strength in the 1950’s as serious structural problems and heightened international competition threatened both profits and market share. Over the next two decades, internal problems further weakened the U.S. steel manufacturers. As important penetration into the U.S. steel market deepened, calls for increased protection of the once-mighty industry naturally increased. Thus, in February, 1978, following a report by an interagency task force, the administration of President Jimmy Carter introduced the trigger price mechanism (TPM) as a systematic protection device for the U.S. steel industry.

Termed an antidumping measure, the TPM pegged a reference price to 5 percent of the cost of production of the most efficient international steel supplier (Japan), plus 8 percent as a nominal profit plus transportation costs. Imported steel sold below the reference price was presumed to be “dumped” (sold at a price less than fair value) and would automatically trigger antidumping investigations that could lead to fines or increased tariffs. The increased risk faced by shippers and importers deterred low-priced steel imports in general and caused prices of steel that was imported into the United States to rise by as much as 10 percent, thereby allowing domestic steel firms to temporarily raise their own prices without risking further loss of market share.

The U.S. steel industry, once highly profitable and competitive, had deteriorated to a point at which its survival was threatened by imports. The industry’s global dominance had been based on the existence of a large domestic and export market, international technological leadership, low-cost raw materials, plentiful skilled labor, capital adequacy, and significant economies of scale. During the 1950’s and 1960’s, such advantages began to slip away as a result of both the growing post-World War II global economy and actions by the U.S. government, U.S. steel manufacturers, and steelworkers.

One of the key factors in the decline of the U.S. steel manufacturers was the manner in which labor relations changed beginning in the 1960’s. Prior to 1960, U.S. steelworkers were generally regarded as the most productive in the world. Because steel companies were able to easily institute price increases in order to raise wages, there was little cause for discontent on either part. As the steel industry began to encounter an increasingly competitive global environment, steelmakers became more reluctant (and, in fact, unable) to further raise steelworker compensation. In reaction, the United Steelworkers of America initiated the largest industrial strike in U.S. history in July of 1959. As a direct consequence of the strike, annual steel imports into the United States were greater than U.S. exports for the first time. The situation never reversed itself.

Eventually, the union and the steel industry reached a labor contract, but the damage had already been inflicted. The industry and its workers had entered into an adversarial relationship, leaving steel manufacturers to face compensation costs that were rising dramatically while the threat from foreign suppliers grew. In the 1950’s, for example, average hourly earnings in the industry were only slightly above the average for all U.S. manufacturing employment, but by 1967 they stood at 128 percent of the manufacturing average. By 1978, they had reached 157 percent of average wages in manufacturing. Moreover, while wages rose steadily, value added per production worker failed to keep pace. Labor productivity in the U.S. steel industry rose 27 percent between 1970 and 1980, compared with about 85 percent in Japan.

Traditionally, the U.S. steel industry was able to survive such conditions simply by boosting prices. As modern steelmaking technology became available internationally, raising prices became increasingly untenable, since more and more steelmakers across the globe were acquiring the technology to manufacture quality steel cheaply. In addition, mismanagement and unwieldy corporate structures made it increasingly difficult for U.S. steel companies to attract debt and equity capital. Money to invest in research and development and in updated manufacturing facilities therefore was in short supply.

A final problem for the U.S. steel industry was the fact that the U.S. government, unlike most other national governments, had been only indirectly involved in individual business decisions affecting the steel sector. It did, however, play a significant role in setting prices and wages in the industry as a whole, beginning with the administration’s threats to nationalize all steel firms under President Harry S. Truman and continuing with pressure on prices in the early 1960’s. Furthermore, strict governmental enforcement of environmental and worker health and safety standards dramatically increased costs for the steelmakers, while U.S. foreign aid helped Japan and Europe build modern, efficient steel industries. Essentially, the U.S. steelmakers suffered the hardships of government interference in economic decisions without having the benefit of access to public funds, as did many foreign competitors.

Thus, with a weakened U.S. industry needing to raise prices in order to survive, and with steel demand extremely price sensitive because of a weak global economy, foreign competitors in the 1960’s and 1970’s were able to grab a growing share of the U.S. market. Steel imports had remained under 5 percent of the U.S. market in the 1950’s. Prices of U.S. suppliers rose significantly above those of Japanese and European suppliers during the 1960’s and 1970’s, allowing steel imports to rise to 16.7 percent of the U.S. market in 1968 and reach a high of 18.1 percent in 1978.

Under such conditions, protection-seeking behavior in the United States intensified. In 1967, the major firms in the industry and the United Steelworkers of America forged an alliance to work on trade matters. Shortly thereafter, in 1968, Congress began considering legislation that would establish import quotas on steel. Considering the likely passage of such protectionist legislation, President Lyndon B. Johnson negotiated “voluntary export restraint” agreements, or VERs, with Japanese and European suppliers, effective through 1974. The agreements, which represented the first significant U.S. trade policy measure regarding steel, provided for import limits of 5.75 million tons in 1969 and increases of 5 percent in 1970 and 1971. The agreements eventually were seen as unnecessary and were allowed to lapse in 1974, during a world steel shortage.

In 1976, a substantial increase in foreign penetration of a depressed U.S. market prompted the U.S. industry to once again seek forms of protection. The Carter administration, which was confronted with a substantial amount of pressure to deal with the situation, could not come up with a clear vision of how to aid the domestic suppliers without resorting to quantitative import restraints. In response, the American Iron and Steel Institute, led by U.S. Steel Corporation head Edgar B. Speer, first sought protection through a petition filed with the Office of the Special Trade Representative. Soon, however, steelmakers began to file individual antidumping lawsuits with the Treasury Department. In September, 1977, U.S. Steel brought an antidumping action against six Japanese suppliers in the largest antidumping action to that time. As it became apparent that European mills also were dumping on a widespread scale, more than a dozen additional actions were filed by the end of the year.

The numerous actions effectively swamped the Treasury Department’s ability to deal with the time-consuming and complex antidumping investigations. With five import-restriction bills pending in Congress, President Carter established a task force, headed by Undersecretary of the Treasury Anthony M. Solomon, to develop a solution. In December, 1977, the task force released the Solomon Report, which concluded that antidumping laws were too arcane to provide effective protection to the domestic industry. It proposed to rectify the problem with the trigger price mechanism, ostensibly an antidumping measure rather than a protectionist trade restriction.

Significance

Pressured by President Carter, the U.S. steel industry accepted the TPM in February, 1978, and agreed to withdraw antidumping cases. Because U.S. producers thought they could compete successfully with Japanese mills if Japanese steel prices reflected true costs, the reference price was pegged to Japanese production cost. It was generally acknowledged that this would enable the less efficient European producers to sell in the United States at prices below their own production costs, but it was believed that such a development would not harm the U.S. producers.

By the spring of 1978, the TPM was in place. It was initially successful both in deterring imports and in forcing price increases on imported steel. Imports of steel, which had reached a high of 21.2 million tons (18.1 percent of the U.S. market) in 1978, immediately declined to 17.5 million tons in 1979. With U.S. producers operating at 91 percent of capacity, the domestic industry saw operating profits reach the highest levels in years.

Nevertheless, the TPM did not succeed in providing relief for long. Since imported and domestically produced steel could not be used interchangeably, the TPM caused average domestic steel prices to rise by only about 1 percent in 1979, not enough of an increase to provide the U.S. industry with a complete recovery. Moreover, the Japan-based reference price gave European firms more of an advantage than anticipated and eroded both the Japanese and the domestic share of the U.S. market.

These developments, together with an increase in the foreign exchange value of the dollar, prompted U.S. Steel to file a massive antidumping suit against European Community (EC) suppliers in March of 1980. In retaliation, the U.S. government immediately suspended the TPM, which had been designed to serve as an alternative to such blanket suits. Stimulated by threats of retaliation by the EC, the U.S. government and steel manufacturers reached an accord in October, 1980, that reinstated the TPM with significantly higher trigger prices as well as special provisions for quantitative import restrictions in the event of future import surges.

Despite the revitalized TPM, after an initial decline imports once again began to rise, influenced in part by a strong U.S. dollar on the foreign exchange markets. The strong dollar made it easier for foreign steel suppliers to sell steel at prices below the reference level. Some European suppliers began to sell steel in the United States at prices below the trigger level on the presumption that they could withstand TPM scrutiny. The domestic industry soon was operating at about 60 percent of capacity. At least ten major plants closed, and industry employment fell to 285,000 in 1981 from 403,000 in 1970. The steel industry’s cries for protection once again arose, and threats of suits aimed at alleged subsidization of the industry in Western Europe and certain other countries reemerged.

Fearing yet another collapse of the TPM, the U.S. government itself initiated seven antidumping and countervailing duty investigations against European mills in November, 1981. At the same time, the government desperately tried to convince foreign suppliers to cut back their shipments and increase prices to the U.S. markets. In February, 1982, the seven largest U.S. steel firms filed 110 charges of unfair trading practices (with three million pages of documentation) against forty-one competitive steel suppliers in eleven countries. Those cases deemed to warrant investigations covered about $2 billion in trade, or about 20 percent of U.S. carbon steel imports in 1981. Once again, the TPM was suspended in retaliation as the investigations were initiated.

The EC reacted angrily, complaining of discrimination and harassment, and Japanese suppliers, no longer restrained by the TPM, immediately increased their shipments to the United States. By this time, it had become clear that the TPM was unable to provide any long-term protection for the domestic industry. Consequently, discussions were initiated in an attempt to reach a compromise with European suppliers. The U.S.-EC Steel Arrangement of 1982 was reached, setting limits for steel imports from the EC and voiding the antidumping investigations.

The collapse of the TPM convinced the U.S. steel industry that government intervention alone would not be enough to ensure survival and profitability. In response, capital spending and plant maintenance budgets were cut, nonsteel assets sold, white-collar staff reduced, nonunion salaries and benefits slashed, and major steelmaking facilities closed. Such moves signaled a substantial structural adjustment and slimming down by the U.S. steel industry, driven in part by the failure of the TPM to provide protection from imports in newly price-sensitive global and domestic markets.

Bibliography

Hogan, William Thomas. Economic History of the Iron and Steel Industry in the United States. Lexington, Mass.: Heath, 1971. Though a bit dated, this book is a good source of background information concerning the development of the steel industry.

Howell, Thomas R., et al. Steel and the State: Government Intervention and Steel’s Structural Crisis. Boulder, Colo.: Westview Press, 1988. Provides an extensive look at the global steel industry and the development of modern trade practices and policies. Chapters on each of the major steel producing nations, as well as developing countries, are especially informative.

Jones, Kent Albert. Impasse and Crisis in Steel Trade Policy. London, England: Trade Policy Research Centre, 1983. An informative discussion of the development and resolution of conflicts in the steel trade. Provides a good look at government trade policy.

Tiffany, Paul A. The Decline of American Steel: How Management, Labor, and Government Went Wrong. New York: Oxford University Press, 1988. An informative and detailed report of the factors behind the decline of the U.S. steel industry. Useful because it provides a fairly balanced look at the many different factors contributing to the economic problems of the industry.

U.S. Federal Trade Commission. Bureau of Economics. The United States Steel Industry and Its International Rivals: Trends and Factors Determining International Competitiveness. Washington, D.C.: Federal Trade Commission, 1977. This staff report by the Bureau of Economics is a technical, in-depth examination of the economic structure of the U.S. steel industry.

Warren, Kenneth. Big Steel: The First Century of the United States Steel Corporation, 1901-2001. Pittsburgh: University of Pittsburgh Press, 2001. A history of U.S. Steel, from its early days as the leading producer of American steel to its weakened position in the latter part of the century.