South-Western College Publishing - Economics  
Industry and Labor Steel Themselves Against Imports
Subject Comparative Statics
Topic Perfect Competition
Key Words Price, Import Duties, Tariffs, Imports, Demand, Production
News Story

The price of hot-rolled steel fell 18 percent to $200 a ton in 1998. The market share of lower-priced imports grew from 23 to 35 percent. As a result, industry and union leaders are campaigning for import duties on the grounds that foreign companies are exporting steel to the U.S. at prices below cost.

Not all are sympathetic. Lower prices are seen as a result of fierce global competition. Steel imports help some countries suffering from the global financial crisis, and ultimately increase their demand for U.S. goods. Cheap steel benefits the competitive position of those industries using steel inputs. U.S. producers also miscalculated in increasing the price of steel in the Spring of 1998 as the price of imported steel fell. They also failed to reduce production when demand softened in the GM strike. Moreover, even if tariffs are imposed on a few countries, there is so much oversupply in the world that steel prices will remain low.

The steel industry counters that it has modernized and has reduced the size of its labor force. It also argues that its missteps were understandable because of ignorance about future market developments.

(Updated March 1, 1999)

Questions
1. Assume that the world steel industry is perfectly competitive.
  a) Draw a supply and demand diagram of the world steel industry. Mark the equilibrium price and quantity of steel. To the right of the diagram draw two diagrams, one showing the average total and marginal cost curves of a high-cost U.S. producer, and the other the corresponding curves of a low-cost foreign producer. Show the market price and the amount of profit earned by each company.
  b) The global financial crisis reduced the world demand for steel. Illustrate the short-run effects on the equilibrium world price and output of steel, and on the equilibrium output and profit of the U.S. and foreign producers.
2. In the long run, what will happen in the absence of government intervention? Illustrate on your set of diagrams.
3. The U.S. steel industry would like to see tariffs placed on steel imports to make them more expensive.
  a) How would that help the U.S. producer? Refer to your diagram.
  b) Why might it be too little too late?
Source Leslie Wayne, "American Steel at the Barricades", The New York Times, December 10, 1998.

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