November, 2003: Player

By Greg Rushford

Published in the Rushford Report

How to spin the Bush steel plan?

            Informed street talk says that U.S. Trade Representative Robert Zoellick has told visitors to his office that the Bush steel tariffs are “toast.” It seems that the entire Bush economic team — including Treasury Secretary John Snow and even Commerce Secretary Don Evans — is recommending that the president terminate his steel plan.

            The economic case for dropping the protectionist tariffs up to 30 percent that President Bush announced in March, 2002 is straightforward. The tariffs have cost more jobs than they have saved. The World Trade Organization’s Appellate Body is expected soon to affirm a dispute panel finding that the Bush steel plan is WTO-inconsistent. Then the European Union could hit the United States with $2.2 billion worth of retaliatory tariffs. The EU’s plan is cleverly crafted politically to cause the president harm in key electoral states — targeting a lot of steel products in the Ohio Valley, textiles and clothing in the South, and citrus in Florida.

            As usual in Washington, it’s the politics that are tough. How does the president explain terminating his steel plan? One idea is that he could simply declare victory. The president could announce that temporary steel tariffs have worked, and that the domestic industry has taken advantage of the protection to consolidate. That proposition is certainly debatable — the tariffs may have, in fact, delayed restructuring by helping some uncompetitive mills remain on protectionist life support. But hey, this isn’t an economics seminar. By claiming victory, Bush could cut his losses and walk away from what the Wall Street Journal has called the biggest economic mistake of his presidency.

            At this point, Bush doesn’t owe anything more to the United Steelworkers of America, which is supporting Richard Gephardt for president. The ungrateful USW issued a venomous press release in August attacking Bush as a reactionary. This is the same USW that had only weeks before testified before the U.S. International Trade Commission that the Bush steel plan had been essential for the industry’s survival. 

            Inside the White House, the decision on whether to lift the tariffs seems to turn on how to spin it. Remember, the political bottom line is that the Bush steel plan is a jobs program aimed at the 2004 presidential race — and the number one job is the one in the Oval Office.  

            People who have had contact with White House political strategist Karl Rove report that Rove is said to like the idea of having the president campaign for votes in the Ohio Valley by (truthfully) telling audiences that he did more for steel than predecessor Bill Clinton. But the problem is, the Stand Up for Steel crowd and members of the congressional Steel Caucus like Sen. Jay Rockefeller (D-W.VA.) will likely react with fury, blaming Bush for caving to foreign lobbyists and selling American jobs down the river. What if the steel guys marched angrily on Washington? What if audiences in steel country stage loud protests when Bush hits the hustings in 2004? How badly would a firestorm in steel towns hurt the president?

            As this issue went to press, Rove was thought not to have figured out how to spin a Bush decision to abandon the tariffs. Accordingly, despite the vibes that have been emanating from the administration, nobody really could say with confidence that the Bush steel plan really is “toast.”         

Wilbur Ross: Let consumers finance my steel company

            Wilbur Ross is chairman of the Cleveland-based International Steel Group, which was formed early last year and has rapidly become the nation’s second largest integrated steel producer. But Ross isn’t really a steel executive. Nor is he a banker, or a textile executive. Ross specializes in buying bankrupt companies at fire-sale prices, from failed banks in Japan to failed textile manufacturers like Burlington Industries in the southern United States. Then he aims at turning dross into gold by demanding labor concessions, management efficiencies, and by instituting productivity reforms to turn the losers around — for a handsome profit. That’s what ISG has been trying to do with the crusty old steel mills that it has rescued from liquidation, beginning in early 2002 with LTV Corp., and subsequently with Acme Steel, and Bethlehem Steel.

            Ross has now filed an Initial Public Offering registration statement with the U.S. Securities and Exchange Commission, aiming for a stock offering to take ISG public. He is lobbying hard for President Bush to stick with his steel plan, arguing that the high tariffs have been crucial to ISG’s success in getting the old mills up-and-running. The protective tariffs are essential to ISG’s future ability to compete with foreign steelmakers, Ross argues.

            Hold on. Ross bought LTV in bankruptcy proceedings in February, 2002 — before President Bush announced his tariffs on March 5. He hadn’t known if the president was going to institute the tariffs, nor how high they might be. It turned out to be “a happy coincidence” that just after he bought LTV, the Bush steel plan had come along, Ross told columnist Terry Savage of the Chicago Sun-Times on March 17.  “We actually tried to get LTV to postpone the [bankruptcy] auction till after the [tariff] announcement, but they chose not to, so we took a shot,” Ross admitted.

            If tariffs were not the determining factor for buying LTV, what was? Well, first there was the rock-bottom price of $325 million. Basically, Ross was buying LTV’s remaining assets for around $11-per-ton, when the going price was said to be around $200-per ton.

            When Ross took over LTV, he didn’t much talk about tariffs. Instead, he talked about turning around the conditions that had driven LTV’s uncompetitive steel mills into bankruptcy. He spoke of changing entrenched union “feather-bedding work rules.” He talked about the necessity of changing a management culture that bred failure.  “LTV uses 2.8 man hours per ton of steel

produced,” Ross told Sun-Times columnist Savage. “Nucor [a low-cost domestic mini-mill] uses only 0.9 man hours per ton. Most Asian steel companies are also under one man hour per ton,” the ISG chairman added. “The old LTV had an all-in cost of around $400 a ton. But its products sell for $350 a ton. So old LTV was a hopeless proposition,” Ross explained.

            It was much the same story when Ross subsequently bought Acme and Bethlehem out of bankruptcy: management reforms (firing 90 percent of top-heavy management), union concessions (reducing the number of job classifications from more than 30 to only five), and other productivity reforms. The Bush steel tariffs aimed at putting foreign steelmakers at competitive disadvantage were just frosting.             

            I’m a Ross fan. If it weren’t for so-called bankruptcy vultures like him willing to risk their own money in acquiring assets that otherwise would have been liquidated, the International Steel Group wouldn’t have been able to save 11,000 steel jobs in a declining industry. Long live “corporate greed.”

            The point: Ross has risked his own money — at least up to now.

            But is it right for Ross now to ask the government to give companies like his special tariff breaks as ISG prepares to go public? Why drive up the costs of the raw materials that steel-consuming manufacturers like General Motors, General Electric, and Caterpillar need to make cars, refrigerators, and tractors? Why should American consumers who buy cars, refrigerators and tractors pay higher prices for such products? Why should American consumers help finance this IPO on Wall Street?       

            “What bothers me is that Ross now is demanding tariffs that force his customers to keep up the price of steel for trade protection, thus increasing the value of his acquired assets, not through any competitive advantage, but simply by government fiat,” says David Phelps, the president of the American Institute for International Steel. “I would call that corporate welfare.”

TOP