Firing up US steel
The American steel industry is in serious trouble for the second time in three years. Once again, government help is needed. The country's biggest producer, US Steel, offers a prime example of the wrenching economic problems confronting the industry. It reported a record loss of $561.7 million in the last three months of 1979, believed to be the biggest quarterly deficit in US corporate history. Much of that loss was the result of steel mills being shut down. Smaller companies, too, have been forced to close mills, with thousands of workers laid off.
Despite efforts at streamlining, the industry continues to fight an uphill battle against reduced worldwide demand for steel products and against increasingly fierce foreign competition. And some US companies are trying to do so with outdated plants and equipment. One estimate is that 25 percent of America's steel facilities are not technologically up to date and competitive by world standards.
Federal help is called for. But first, let's look at some things Washington shouldn't do to help the industry. The government should not suspend environmental regulations. It should not impose stiffer import barriers. Both measures have been requested by the steel industry. Relaxing environmental rules would be a stop-gap solution at best. Over the long run, Americans will understandably insist that the air they breathe and the water they drink be given priority. Hiking tariffs on foreign imports would only invite retaliation by other countries. European Common Market officials already have warned that the recent suit filed by US steelmakers aimed at requiring dumping duties on imported steel will prompt them to impose retaliatory tariff hikes on US exports. The trouble is that steel is not the only segment of the US economy with stiff competition abroad; protective measures that benefit steel alone could produce harmful consequences for US exporters of soybeans, synthetic fibers, and a host of other products.
If the trigger pricing mechanism created in 1977 to boost the price of steel imports had been sufficiently enforced, the White House might have avoided the current embarrassment posed by the US steelmakers' antidumping suit against America's European trading partners. As it is, the Carter administration will have to share the blame if a finding against Europe's steelmakers unhinges the informal network of quotas and controls which the major steel-producing countries have developed to bolster their struggling steel industries.
The US industry's primary need now is for better tax incentives to help companies raise the money to build the kind of efficient plants they must have to compete with foreign government-subsidized steel operations. Worldwide demand for steel is expected to go up in the mid-1980s. Without further modernization, US companies will be in no position to take advantage of it.
Current tax laws, low profits, and inflation are making it difficult for US steel companies to increase their annual capital expenditures from the present $ 2.9 billion level to the estimated $6.9 billion (in 1978 dollars) required to make them competitive. Tax depreciation allowances, by which companies write off capital investments against profits over a period of years, put the steel industry at a disadvantage. Steel's 15-year depreciation schedule is one of the longest for any industry. The tax law bases capital recovery on historical costs, not on replacement costs, which means only part of the cost of replacing worn-out facilities can be recovered. With inflation almost doubling plant and equipment costs in the past ten years, $100 in 1978 dollars would replace only half of a piece of equipment bought for $100 in 1968.
Proposals currently before Congress to speed up depreciation ought to be given careful consideration. One bill with wide backing on Capitol Hill would shorten the depreciation schedule to ten years on buildings, five years on machinery and equipment, and three years on vehicles. But Congress should tie any such tax breaks to further industry steps to improve efficiency and productivity.
Steel's labor costs, for instance, need to be looked at. They are considerably higher than those of most other US industries. Steelworkers earn $ 10.96 an hour, 59 percent above the average hourly wages of all manufacturing industries. Steelworkers also get generous fringe benefits, including a 13-week vacation every five years in addition to regular annual vacations. The severity of some jobs in steel mills may justify somewhat above-average wages and benefits -- but not to this degree. The industry has purchased more than 20 years of labor peace with such settlements. There has been no nationwide steel strike since 1959. But the question that must be asked is whether an industry struggling to survive in today's inflationary economy can still afford that price.
The steel industry is too important to the nation's military and economic security for Congress to allow it to go under. The US cannot afford to become totally dependent on foreign sources to supply a commodity as basic as steel. In the final analysis, Uncle Sam has no other real choice but to pitch in and help put some fire under the steel industry.