ECONOMIC BOOMERANG

DO QUOTAS WORK? Recent evidence from the steel industry gives every indication that the voluntary restraint agreements governing steel imports are having their intended effect. According to the American Institute for Imported Steel, 4 million tons of steel products will have been transferred from foreign to domestic suppliers in the past year, 5 million tons in the past two years.

Most integrated U.S. producers still had third quarter losses. But, according to the importers, that was not the result of importers driving prices down but of a battle among domes tic producers in the face of weakening overall demand.Prices now are on the way up, largely because of the USX strike, but the importers say that USX's return shouldn't interrupt this trend, and the industry should be profitable again by the middle of next year.

So that means, that because of import quotas the country is better off. Or does it?

To the extent that the steel producers have used their borrowed time to modernize plants, improve productivity and increase competitiveness, the country, without question, is better off. But what is the industry record? The importers, who admittedly have an ax to grind, challenge the 17-year history of voluntary restraint agreements on eight points:

1. Worried by strike threats, domestic steel producers have caved in to union demands, settling for an hourly wage rate 70 percent above the average for U.S. manufacturers. This compares with 30 percent before the government first began to protect the steel industry in 1969. When they haven't bought easy labor peace, the domestic producers have been forced into lengthy strikes, like the current one against USX, already more than four months old.

2. Import quotas make it difficult for U.S. mills to obtain semifinished steel for their own operations. National, Lone Star and California are being prevented from buying continuous-cast slabs overseas, something they need until their own continuous casters come on stream. The "double eagle" galvanizing plant of Ford and USX cannot get sufficient quantities of cold- rolled sheet.

3. Protection, which supports higher than world-market prices, is forcing steel users to turn offshore. And to the economy as a whole, steel users are far more important than steel suppliers, employing 30 times more people and contributing a 20 percent larger share of GNP. The list of major users already forced to buy abroad includes General Electric; Davis Walker, a wire manufacturer; Gulf Marine Fabricators, a builder of offshore drilling rigs; Caterpillar; General Motors; Chrysler and Ford. It even includes American Bridge and Marathon Oil, USX subsidiaries, which from time to time have been forced to buy steel and major components in Asia to stay competitive.

4. Higher than world-market prices are creating a sharp escalation in finished steel imports. Between 1979 and 1985 imports of steel intensive finished products jumped from 5 million tons to 15 million tons.

5. Because the domestic industry has failed to invest in the output of such things as continuous-cast or electrogalvanized sheet, import quotas are depriving users of a full range of products.

6. Because of the high freight rates needed to move domestic steel from Great Lakes mills, import quotas are denying the West and South opportunities for growth in steel-using industries.

7. Import quotas give government, not the market, determination of supply and allocation decisions. This makes business planning cumbersome and

uncertain.

8. Import quotas divert the attention of the domestic industry from what should be its primary concern, improving output, productivity and competitiveness.

Do quotas work? Without question, they do - but in at least eight ways opposite to those intended. Legislators considering quotas, for whatever reason, should ponder carefully whether they want to be the launchers of such a powerful economic boomerang.

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