* Figures for 1969 through 1972 do not include imports from the United Kingdom. Source: American Institute for Imported Steel.

Recognition of the fact that there is an international market for steel is long overdue. Steel should be shipped to those areas where consumers require it. The parochial stand against imports taken by certain labor unions and industries may temporarily provide benefits for those in the particular industry, but in the long run must work against them. Clearly, such restraints work against the welfare of the entire nation. This is likely to be true for the next decade or longer, as experts are unanimous in foreseeing a short supply of steel which can be met only by tremendous investment in new plants around the world.

Steelmakers should be allowed to raise prices to levels which will produce the capital needed for investment in new steelmaking capacity. The U.S. government's current price controls do not encourage investments, and are, therefore, counterproductive. By artificially depressing prices, demand for steel and steel products has soared sharply outstripping supply.

Furthermore, the combination of price and import controls has resulted in an odd turn of events. Consider this paradox: Bethlehem Steel, the nation's second largest steelmaker, has indicated it will be forced to produce abroad where costs are lower if the government does not drop its controls; at the same time, certain European and Japanese interests have begun producing steel in this country became of fears of further U.S. import curbs.

The case for free international trade can be stated just as convincingly on a theoretical level as well. The prices Americans pay for steel have always depended on supply and demand conditions in the world. Although transport costs and government controls raise prices of imported steel, international price movements suggest that neither factor stands in the way of harmony between prices in different countries.

"The Economist" of London recently published comparisons of international price movements which clearly point to a single world market for steel and other basic commodities. Transport costs and other obstacles to trade seem to have had only a minor effect on the harmony of international price movements. What is more, such harmony, according to the publication's chart prevails under both fixed and flexible exchange rates.

The lesson to be learned is one incontestable fact. Import quotas and other official hurdles to free trade, such as "Buy American" regulations, as well as export subsidies, are at the base of price inequalities among trading nations. The choking off of partial foreign supplies is bound to cause prices everywhere to rise. On the supply side, it is clear that if you interrupt shipments at one point, things begin to happen all along the line.

The basic-steel industry, for example, suddenly finds itself with a huge backlog of orders that is taxing the capacity of mills. This adds to supply problems for the manufacturers of automobiles, electrical appliances, farm equipment, heavy machinery, office equipment and industrial construction. A leading U.S. magazine recently concluded that when the major materials industries reach their capacity, production is slowed down in all other industries because not enough raw materials are being churned out for them to process.

Of course, the recent shortage of, and steep rise in prices for, oil may have some as yet difficult to predict effects on the economies of various nations. The United States, which is nearly self-sufficient in energy resources, can cope with the fall-off of Arab oil supplies with some consumer economies. There is no need for any U.S. industry to suffer unduly in the foreseeable future once the government takes the necessary steps to allocate oil where it is most needed to keep our economy boom.

The situation is likely to be otherwise for the Western European nations and for Japan. There unless the Arab nations reverse their present policies of restricting oil exports and increasing their prices as though there were no ceiling, severe economic repercussions are inevitable.

Thus, we may find in 1974 a temporary setback to the demands for steel. Yet, the obvious remedies to the current energy shortage the search for more oil by way of off-shore drilling, the mining of more coal, the development of more mass transportation facilities-all require huge tonnages of steel. We may find imbalances in the economies of various nations which will require larger amounts of steel for some, and smaller amounts for others. The need for the international steel trade will then become even more apparent than ever.

It is too soon to say now whether the shortage of oil will affect steel consumers or steel producers more adversely. It is possible that they will be affected roughly in proportion. Thus, although the longrange view is for steel shortages for the next decade, the shortrange view is obscure.

METALS THE STEEL SURPLUS THAT ISN'T THERE

To desperate buyers, the situation in steel this week was rapidly escalating from a bad dream into a nightmare. Because the auto industry is reducing its purchases of steel by as much as 30% this year, there should be some 9-million tons available for other users. But there isn't.

Thanks to declining imports, rising exports, and the inability of U.S. mills to ship as much steel as they did last year, the supply of steel will probably be down by at least as much as the decline in steel shipments to Detroit-or about 10-million tons. And coal strikes will probably reduce production still further.

That is the picture facing frustrated steel buyers, many of whom are puzzled and angry over the fact that they cannot get more steel. "Despite auto cutbacks, our allocations have not been increased," says a steel buyer for a barge manufacturer. "In fact, U.S. Steel and Bethlehem have cut some of our allocations." Adds a buyer for a major oil company: "There is absolutely no improvement in the supply at all."

A GLOOMY FORECAST

There is no way that steelmakers can equal the 111-million tons of steel shipped last year, they maintain, even though the 1973 selling boom did not really get under way until the second quarter. The most U.S. steelmakers can ship, they say, is about 105-million tons. The chief reason is that the mills sold 5-million to 6-millions tons of steel out of inventory last year, and they have no extra supplies to dip into now. Moreover, maintenance problems, as well as trucking and coal industry strikes, are reducing steel production.

In addition, steel imports are expectel to decline by 3-million tons to a total of about 12-million tons this year because of higher prices and strong demand overseas. For the same reason, exports are expected to rise by at least 1-million tons to a total of 5-million tons. That adds up to 10-million tons less steel than was available last year.

In fact, the supply will probably drop much lower because a major coal strike appears increasingly likely (page 23). Already this week, a three-week-old wildcat strike of some 27.500 coal miners in Southern West Virginia had forced Indand Steel Co. and U.S. Steel Corp. to cut iron production 20% because of coking coal shortages. And coking coal was a problem even before the walkout started (BW-Feb. 16).

TWO-TIER PRICING

Steel shortages are the big worry of industrial buyers. But the combination of shortages and price control is also causing chaos in pricing. For example, the auto industry is in the unenviable position of having to pay higher prices for steel even when it is sharply reducing its purchase orders. On Feb. 28, the Cost of Living Council said that the steel industry could raise prices by some $750-million. U.S. Steel and Bethlehem Steel Corp. then announced a round of price increases but did not raise hot and cold rolled sheet, which account for about 40% of all steel industry shipments. Auto companies, faced with their own cost-price squeeze (page 28), have been pressuring suppliers to defer price increases on sheet.

National Steel Corp., which is more dependent on sheet shipments, could not wait. "With costs of steel production continuing to mount sharply, we are no longer in a posiiton to absorb these increases," said National's Chairman George A. Stinson when the company announced a $10-a-ton increase on both hot and cold sheet. Other major sheet manufacturers followed suit.

Now it appears that the higher sheet price will stick even though Bethlehem and U.S. Steel have not raised their sheet prices and now are at least temporarily blocked by price controls from doing so.

"Steel supply is so tight that the higher price wil hold," concedes a steel buyer for one of the Big Three auto companies. Adds William G. Sutter of Budd Co., a maker of automotive stampings, "I am resisting, but I can't get any more steel at the lower price from U.S. Steel or Bethlehem. They say they do not have any more."

A SELLER MARKET

In the gloom that is rapidly enveloping the steel situation, a few companies claim to see some light. Inland Steel's sales to the automobile industry will be down 15% in the first four months of 1974, says Derrick L. Brewster, viceresident for sales. This is enabling the company to ship more sheet steel to distributors, who are handling more of the small orders that the big mills do not want, and to manufacturers of appliances, electric motors, and oil goods, such as line pipe and welded tubing. "The market is so strong," says Brewster, "that we wouldn't have any problem selling 100,000 tons of sheet in an hour and a half on the telephone."

The shortages have raised suspicions on both side, however, Buyers suspect that producers are exporting large quantities of steel, and producers suspect that buyers are hoarding. Both sides deny it. But both are also beginning to see the seriousness of steel shortages, which are clearly limiting the ability of the economy to expand and to become self-sufficient in energy.

Steelmen are still maintaining that the steel industry needs higher prices and tax incentives to stimulate capital expansion. "But even if we started today, it would take four or five years to make any major expansion," concedes Brewster. Says Alex Greten, president of the American Institute for Imported Steel: "It may sound pessimistic, but the time of unlimited steel availability, like unlimited fuels, is over."

PREPARED STATEMENT OF DR. WALTER ADAMS (MICHIGAN STATE UNIVERSITY) AND DR. JOEL B. DIRLAM (UNIVERSITY OF RHODE ISLAND)

This is a joint statement presented by Walter Adams and Joel B. Dirlam, speaking in their capacity as individual scholars. Walter Adams is Distinguished University Professor, Professor of Economics, and President Emeritus of Michigan State University. He is also director of the University's Program for the Comparative Study of Industrial Structures in the Atlantic Community which has received grants for unrestricted research from the American Institute of Imported Steel. Joel B. Dirlam is Professor of Economics at the University of Rhode Island and Director of the University's Institute for the Study of International Competition which has also received grants for unrestricted research from the American Institute of Imported Steel.

1. In commenting on H.R. 10710, we are drawing on our studies of the economies of the steel and petroleum industries, and of the effect of import restrictions in these industries. This experience may be taken as representative of domestic industries liable to be affected by the Bill. In both industries, the United States has moved from a position of an exporting nation to that of a net importer; both industries have been protected by quotas; both are substantial from the point of view of employment; both are strategic, to some extent, for the maintenance of national security. Our conclusions regarding the impact of H.R. 10710 on the national economic interest in steel and oil would probably extend, a fortiori, to other, economically less significant industries.

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THE CASE OF STEEL

Little, if any unemployment can be attributed to imports of either steel or oil products. Careful analysis of unemployment data shows that during the years when imports were rising to unprecedent proportions of domestic steel consumption, the unemployment rate in steel continued at rates no higher than

the national average.' Only in 1971 did the rate in steel move above the national average for either manufacturing generally, or durable goods manufacturing, and this temporary peak appears to have been primarily due to the decreased level of general business activity. By 1972, when recovery got underway, the steel industry was suffering from a labor shortage. Indeed the mills have had to resort to novel strategems including the acceptance of women as production workers to secure and retain a minimum labor force. By 1973, the unemployment rate in steel had fallen to 2.5 per cent, or only 60% of the prevailing rate in manufacturing.3

3. There is no question that average employment in the steel industry has shrunk since 1959, the year when imports first became an issue. But this decline is attributable largely to two factors. First, as the union itself recognizes, and has attempted to overcome by agreeing to outlaw strikes, is the stockpiling by customers fearing a strike at the expiration of a contract. Stockpiling is inevitably followed by a period of inactivity and layoffs, cutting average employment for the year. The pattern has been so marked that the union has given up the right to strike and will accept binding arbitration rather than perpetuate this form of instability.

Second, the industry has invested vast amounts in new equipment, the basic oxygen process has replaced the open hearth, and output per manhour has risen steadily. The decline in employment, therefore, over the long term reflects the rising efficiency of the industry in using this input. Production of 99.3 million tons in 1960 compares with 150.4 million tons in 1973. Labor productivity

1 A. F. Shorrocks, "Measuring the Imaginary: The Employment Effect of Imported Steel," Industrial and Labor Relations Review, January, 1971, pp. 203-215. (Submitted for the record.)

2 "In recent years, steel productivity has suffered because of labor market conditions in a number of the major steel producing areas, most notable Chicago, Detroit and Cleveland, where a rapid increase in turnover rates has required expanded training programs for new employees," Rev. William T. Hogan, S.J., "Productivity in the Steel Industry," Center Lines. Vol. VII, Jan. 1972, p. 8. See also "Women in Steel: First in a Generation," New York Times, Dec. 28, 1969, Sec. 3, p. 1.

While the labor situation eased somewhat between 1971 and 1973, volume continued well in excess of shipping capacity, lead times lengthened, and backlogs continued to rise. See Wall Street Journal, April 2, 1973.

3 The following table shows the volume and rate of unemployment in basic steel compared with the unemployment rate in manufacturing and in durable goods manufacturing: UNEMPLOYMENT: BLAST FURNACES, STEEL ROLLING AND FINISHING MILLS

Source: Monthly Labor Review, March 1973, and communication from John E. Bregger, Division of Employment and Unemployment Analysis, Bureau of Labor Statistics, U.S. Department of Labor, Mar. 14, 1974.

usually rises when activity moves up from recession to a period of prosperity. Thus, the raw steel output per man increased over 7% from 1972 to 1973. But the improvement in productivity registered between 1971 and 1973 of more than 20%, would appear to be attributable to something more than the business upturn. Apparently, the revival coincided with the realization of economies made possible by investments undertaken over a period of time," the shutdown of obsolescent mills, and perhaps the improvement of management. Bethlehem, for instance, found it possible to increase output of raw steel by 30% from 1972 to 1973, with only a 9% increase in employment."

In any event, while steel production was 30 million tons higher in 1973 than in 1971 or by 25%, employment increased by only 22,000, or 4.1%. Coincidentally, unemployment fell much more, by 40,000, indicating that thousands had retired, or found jobs in other industries.

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4. Allegations of unemployment resulting from imports of steel have sometimes been couched in terms of the number of workers who would have been required to produce the imported steel, had it been made in the United States. We submit that this is a misleading, and indeed, fundamentally erroneous approach to analyzing the effects of imports.

(a) Any imported product that could also be made in the United States would, by this argument, cause unemployment; and the more expensive it is to make in terms of U.S. manpower, the more unemployment such imports would generate. If this were to be a standard for protecting domestic production we would be pushed into specializing in the production of these labor-intensive items that we make less efficiently than anyone else.

(b) The argument ignores the fact that imports generate the buying power to purchase exports; by cutting down imports of steel on the ground that this will expand domestic employment of steel workers, we curtail jobs for workers in the export industries-so that the increase in steel employment would have to be netted out against the unemployment caused elsewhere in the U.S. economy. According to quantitative studies by the Brookings Institute, there would be no gain in employment from substituting domestic production for use of imports." (c) Estimates of unemployment caused by steel imports are made by a mechanical multiplication of the imported tonnage by the average number of workers required to make a ton of steel. Not only does this average change with the stage of the business cycle, but the procedure assumes that if the steel had not been imported it could have been produced and sold in the U.S. at costs and prices close to the current levels. Actually, as the steel industry has finally admitted, such a large part of what had been formerly classified as steel capacity was obsolete that the imports would not have been replaced by domestic mills, except at prohibitive price increases. Either the additional steel could not have been sold, or it would have greatly accelerated the switch to steel substitutes. Moreover, given the tightening steel labor market, it seems highly unlikely that the steel industry could have found the personnel to produce the volume of steel being imported in recent years at prevailing or even premium wages, even if it had the capacity to do so in modern non-polluting plants.'

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5. To summarize, therefore, the steel industry has encountered a long-term decline in the demand for labor, attributable on the one hand to a secular drop in the importance of steel in the national economy, as cement, aluminum and plastics have taken over parts of its markets, and to the gradual, but neverthe

From 1961 to 1972, expenditures for steel plant and equipment totalled $18.1 billion. It would be unlikely that such a magnitude of investment would not be reflected, eventually, In rising output per employee. AISI, Annual Statistical Report, Table 4.

In this connection, the recent shift in management personnel and philosophy at U.S. Steel, which still accounts for 23% of the U.S. market, is of some significance. Mr. Spear, chairman of the Board and chief executive began "revitalizing" the company in 1973, "to attack problems that critics both in and out of the company had been citing for years: USS was too slow to make decisions, too slow to respond to changing conditions, and too slow to make thrusts into profitable new markets. The company rarely was among the first to modernize plants, to respond to imports, or to attack the pollution problems." "A Steelman Steps Up the Pace at U.S. Steel," Business Week, March 9, 1974, p. 155.

7 Bethlehem Steel Co., Annual Report, 1973.

* Data from AISI, Annual Statistical Report, Table IA.

W. Salant and B. Vaccara, Import Liberalization and Employment, Washington: Brookings, 1961; and L. B. Krause (Assisted by J. A. Mathieson), "How Much of the Current Unemployment Did We Import?", Brookings Papers on Economic Activity, No. 2, 1971, pp. 417-28.

According to H. R. Riesen, chairman of Jones and Laughlin Steel Corp., production drring the first half of 1973 should show what steel capacity really is, because the industrs is now producing at capacity levels. Moreover, "the steel industry is already lobbying for federal assistance both direct and indirect-to finance the capacity gap industry officials say is looming." Wall Street Journal, February 28, 1973.

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