Don’t buy the spin.
Proponents of steel protectionism often cite national defense as a reason to except steel from the general principle of free trade. The military needs steel to build ships and tanks, the argument goes, and that production needs to happen domestically, therefore the government should prop up steel companies and block foreign competition.
It isn’t true. Don’t take my word for it, though. Listen to a former deputy undersecretary of defense for industrial policy.
William Greenwalt held that position from 2006 to 2009. Before that, he worked for the Senate Armed Services Committee. He has also worked in the private sector for defense companies. Now, he’s a fellow at the American Enterprise Institute.
He’s seen how this process works from inside and outside of government. He wrote a piece for Breaking Defense that recounts how steel companies have actually behaved in the past.
First, he wrote, “Historically, the Pentagon has bought significantly less than 1 percent of the US steel industry’s output, although the industry believes that number is closer to 3 percent.” Either way, slapping tariffs on all steel when at least 97 percent of domestic steel is not for defense consumption makes little sense.
Greenwalt instead argues that protectionism has harmed national defense: “This is due to the adoption of domestic source restrictions that torture DoD’s supply chain to buy de minimis levels of steel found in products such as casings, fasteners and spare parts, often at higher prices than it could buy from abroad.”
This is the same reason domestic-content requirements are bad for non-defense projects. The compliance costs associated with following such arcane rules swamp out any conceivable benefit.
When the time came for greater steel production for national defense, the industry wasn’t there. During the wars in Iraq and Afghanistan, the Department of Defense needed steel for the Mine-Resistant Ambush Protected (MRAP) program. Greenwalt writes:
The MRAP program’s estimated $50 billion cost likely made it the largest emergency steel-centric defense program that the US has embarked on since the production of Liberty ships in WWII. At the initiation of MRAP production, the US didn’t have enough quality specialty steel to support the program. As Deputy Undersecretary of Defense for Industry Policy during that initial phase, I was tasked to find it.
One would have thought that an industry so heavily invested in its relations with the US government and reliant on protectionist measures for decades would have jumped at the opportunity to show its patriotism and protect American servicemembers from being blown up by roadside bombs. That was not the case. Despite entreaties from DoD, the US steel industry (with the exception of one firm) declined to make the investments to support our men and women in uniform. As a result, after considering its rights to compel production under DPA and finding them lacking, DoD went abroad with cap in hand for steel — to Sweden, Germany, Israel, and Australia.
“When DoD urgently needed more steel, the US industry basically told Uncle Sam to pound sand,” Greenwalt writes. “Our allies then bent over backwards to help us, when our own industry would not.”
And for one U.S. company that did help, compliance still got in the way. Greenwalt writes:
One US company did do something, and that was Oregon Steel. They had a process that could produce the quality of steel that the MRAPs needed but it would require the importation of steel ingot from Mexico to fuel their mills. This would require a waiver from Buy America restrictions that mandated that all steel DoD uses be not only produced, but smelted in the US. US steel industry lobbyists vehemently opposed any such waiver. DoD eventually granted the waiver, thereby increasing MRAP-relevant steel production by 40 percent. The brutalist of ironies: The company was purchased by Russians in 2007.
The domestic-steel industry has been paying big bucks for the best lawyers and lobbyists in Washington (such as Trump’s trade representative, Robert Lighthizer) to convince politicians that it is different from other industries and therefore in unique need of government privileges. Don’t buy the spin.