Steel: A Rust Belt Case Study
Case Synopsis
This case briefly outlines the consolidation of the North American steel industry and the take-over of Canadian mills in particular by global companies. It provides a wealth of information about the course of the North American steel industry, especially that of Canada. It thereby opens the door to a wealth of economic and management issues for students to research and discuss.
Teaching Plan
Safeguards and US Trade Policy
The defensive posture of North American Steel continued with President Bush’s use of the WTO safeguards clause to briefly raise tariffs in 2002. The WTO Panel that ruled aginst the safeguard action also ruled its discriminatory because it exempted the US NAFTA partners, Mexico and Canada, yet NAFTA is a recognized regional trade area under the WTO accord. Students can inspect that judgement on the WTO website at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds248_e.htm. A good team project would be to review the WTO process and final judgement of the Safeguards action.
What was US trade policy in 2002? Was the President’s safeguard action linked to the passage of the trade promotion authority a few months earlier? Read how Jeffrey Schott, a U.S. trade expert at the Peterson International Institute for Economics analyzed the President’s action and the politics surrounding US trade policy at the time: http://www.petersoninstitute.org/publications/papers/paper.cfm?ResearchID=482. This paper offers an excellent opportunity to discuss the politics of trade, the so-called Presidential Trade Promotion Authority (formerly known as ‘the fast track’) and the impact of regional politics on national policy.
Looking at Subsidies
What are subsidies? Are all subsidies trade-illegal? An interesting project would be to compare US farm subsidies and EU farm subsisides and the impact on the developing world. A good starting point is http://www.ifpri.org/.
The Industrial Policy Debate
If farm policy is essentially about subsidies, what then is industrial policy and shouldn’t industries like steel in Indiana or Pennsylvania or Ontario get the same treatment as farmers in Iowa?
What are the arguments for and against? Why doesn’t it happen that way? (Hint: check out the representation of farm states by population compared to industrial states and provinces). Here is a comprehensive paper by the Congressional Budget Office (December 1983) describing the debate over US industrial policy at that time: http://www.cbo.gov/ftpdoc.cfm?index=5320&type=0.
Basics of Trade Theory
Finally, the steel industry offers an excellent opportunity to review one’s understanding international trade theory. If the US was once the world’s industrial power, what kind of advantage did it have in steel production? How did it lose it? Would time-limited protection help get it back again? Should government always protect heavy industry? What would be the economic consequences and why?
Do single factor theories of comparative advantage explain the fate of North American steel, or two factor models such as Heckscher-Ohlin-Samuelson (HOS)? What if production technology varies between steel producers? How can superior technology affect relative factor abundance? (Hint: what do efficiency and productivity mean?) Check out Wikipedia: http://en.wikipedia.org/wiki/Heckscher-Ohlin_model.
Questions for Discussion
- Why were Canadian steel mill targets instead of predators?
- Is this a continuing process in Canada’s largest companies?
Useful Links from PNA
- AISI Annual Report 2004 – Dawn of the New Steel Industry
- Canada Joins North American Steel Trade Committee
- Joint Statement of NAFTA Governments on the Establishment, Operation and Initial Agenda of a North American Steel Trade Committee
- North American Steel Trade Committee (NASTC): North American Steel Strategy
- Settling Trade Remedy Disputes: When the WTO Forum is Better than the NAFTA
- The NAFTA Steel Industry Pulse – Report to the North American Steel Trade Committee (NASTC) Regarding Steel Developments
- The Problem: Rich Countries Supporting Rich Farmers
- Year-to-date Imports Remain Above Last Year’s – Preservation of Strong Trade Laws Called Key Component of North American Steel Strategy
Suggested Bibliography
Bilous, Jarrett and Kam Hon (2004). North American Steel Industry Study. Toronto, On: DBRS.
Cameron, Dough (2007). "China can't make what I make." Financial Times, October 8, Pg. 2.
Deutsch, Claudia H. (2006). "Steel Tries to Shed Its Smokestack Image." The New York Times, June 27, Pg. 10.
Glader, Paul (2006). "High U.S. Steel Inventories Stir Fears of Falling Prices; Seen as possible omen of weakness in other parts of manufacturing sector." The Globe and Mail, September 28, Pg. B19.
Keenan, Greg (2006). "Cosolidation Fever Grips Steel Industry; Canadian Firms Considered Likely Targets in Global Takeover Frenzy." The Globe and Mail, November 18, Pg. B8.
Stewart, Sinclair and Greg Keenan (2007). "How U.S. Steel Forged its Takeover of Stelco." The Globe and Mail, August 28, Pg. B1.
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