March 5, 2002 Tuesday

Transcript # 030502cb.254

SECTION: News; International

LENGTH: 1260 words

HEADLINE: Interview With Peter Morici

GUESTS: Peter Morici

BYLINE: Brit Hume



HUME: President Bush has attempted, as presidents before him have, to come to the rescue of the troubled U.S. steel industry. He has, as we noted earlier, decided to impose tariffs on foreign steel, billed, as such policies in the past have been, as a temporary measure to give the U.S. industry time to restructure.

For analysis of the economics and politics of the decision, we turn to Peter Morici, professor of business and management at the University of Maryland. Welcome to you, sir.

PETER MORICI, UNIVERSITY OF MARYLAND: Good afternoon. Actually, good evening.

HUME: Good evening, indeed.

The president said, Professor, in his comments we just heard a short time ago that he was -- had to obey the law. What law is he talking about?

MORICI: Well, as you know, all trade agreements have provisions for emergency relief when imports seriously damage an industry, and the steel industry has been devastated by low-priced imports over the last four years. So this was well within the law and well within our WTO obligations.

HUME: Now this is -- the law is Section 301 of what? The?

MORICI: Of the trade agree -- of the Trade Act of the United States.

HUME: I see. Which is the basic law that governs these...

MORICI: Basically, it's the basic trade law, yes.

HUME: All right. Now you said -- when I hear this and I see the steel decision, it -- to me, it sounds a little bit like deja vu all over again, as, I guess, Yogi Berra famously said.

It seems to me the steel industry has been hurting for a long time in this country and that it -- that there have been sectors of it which were new and modern and small that did OK, but the big, old smokestack steel companies have had a hard -- have had trouble for a long time.

Why should people not think this is a replay of an old and kind of failed experiment?

MORICI: Well, the reality is the industry's changed a great deal. The larger part of the industry are those small mills that you talked about, the mini mills. They're expanding what they can make. They're now getting into broad products, like sheet steel, and they're well capable of replacing a lot of what the integrateds do. But they've been...

HUME: Integrateds being the big, old ones?

MORICI: Correct. And the real problem is that steel has been coming in the country at an unrealistically low price. It doesn't reflect its cost even where it's made. There are heavy government subsidies. There's a cartel in Japan. There's economic distress in Russia and Korea and Thailand. So the steel comes here having no relationship to the cost.

HUME: So what's happened is that this is a -- this is a classic case of what they call dumping? Is that right?

MORICI; You might call it that, but it's much more profound than that. We have a cartel in Japan that the government there won't act on and things of that nature.

HUME: Right.

MORICI: We have government subsidies around the world.

HUME: So what happens when there's a government subsidy? Is it the government basically puts up the money to make up the difference between the price of the steel at which it's being offered on the international market and what it really would need to be to be profitable, correct?

MORICI: It's something like that. For example, they can subsidize the construction of the mill. They can arrange for a loan in a system where credit is allocated in ways that it is not credited in the United States.

HUME: All right. So this happens, and the steel industry is able to get a little bit of relief because the price goes up for foreign steel. Why do we believe that after a few years of this temporary measure things will be any different when the measure ends?

MORICI: Well, there's been a lot of restructuring going on in the steel industry and a lot of growth in the mini mills. The mini mills, as I said earlier, have been expanding the scope of products they make. They do this from scrap steel, and they do it very efficiently, very high productivity. They have different labor contracts. They don't have the legacy costs.

HUME: Legacy costs are?

MORICI: The costs of pensions of retired workers. There's something like three or four workers retired in the old integrateds for every one that's working in the mill.

HUME: So you have this overhang of added costs that these companies must bear, which makes them -- their the cost basis for every bit of steel they produce all the more, correct?

MORICI: That's right. The cost really doesn't reflect the marginal cost of making the steel. It reflects the cost today plus yesterday's cost.

HUME: I got you. So what -- so now what -- if this allows steel a little breathing room, what about the argument you hear made by these other industries -- automobiles, others, all steel consumers -- that this hurts them and ultimately hurts the people who buy their products.

MORICI: Well, we don't expect a lot on the increased tariff to be passed through in price increases. I expect on the 30 percent on a hot roll (ph), 20 percent will be absorbed by the foreign producers.

Of the 10 percent that comes in -- excuse me. Of the 10 percent remaining on the tariff, I expect there's so much excess capacity in the United States that essentially what will happen is domestic steel will replace foreign steel, but prices won't rise that much.

HUME: But prices will rise some.

MORICI: Suppose they rise 5 percent --

HUME: Is that going to be enough to save the U.S. steel industry?

MORICI; It's going to be enough to give it some breathing space because it will get more of the market than it did before.

Let's take an automobile. It costs -- a Taurus costs $20,000. If there's half a ton of steel in the car, that's only $150 worth of steel. And if you get a 5-percent increase, you're talking about $7.50. On an appliance, you're talking about pocket change. And on a can of beans, you're talking about a fraction of a penny.

HUME: Right. Well...

MORICI: So I don't believe that we're going to see dramatic price increases. Most of these tariffs are going to be borne by the foreign producers.

HUME: Now -- so they -- so -- but what will happen is it will just reduce their profit margin.

MORICI: It will reduce their profit margin and give them some incentive to cede market share to the U.S. producers.

HUME: Now if this conduct on their part is uneconomical and amounts to government subsidies that interfere with the marketplace, why would the U.S. not simply go to the World Trade Organization and get a ruling against these companies -- I mean, against these countries ordering this practice to stop?

MORICI: That's a really fair question. You know, if three guys are speeding on 95, the police can track them down if they're doing 90 miles an hour. But if two-thirds of the drivers are doing 90 miles on Route 95, it's impossible to do it that way. To go out and do a dumping case on every single producer in every country is so laborious. It's a very...

HUME: And it takes so long.

MORICI: And then there's the issue of the cartels.

HUME: Right. That's something that WTO...

MORICI: You cannot get at.

HUME: Got you.

Professor Morici, thank you very much for coming.

MORICI: You're quite welcome.

HUME: We have to take a break here. Other headlines coming up from New York.

When we come -- return, though, find out which congressional leaders had been offered briefings on what Senator Daschle called the secret government.

The grapevine is next.