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A primary function of trade policy is to restrict imports to benefit the targeted domestic sector. However, a well-established theoretical literature highlights that the form of trade policy (e.g., quotas versus tariffs) can have a significant impact on how much trade policy affects firms' abilities to price above marginal cost (i.e., market power). The US steel industry provides an excellent example to study these issues, as it has received many different types of trade protection over the past decades. We model the US steel market and then use a panel of data on major steel products from 1980 through 2006 to examine the effects of various trade policies on the steel market. We find that the US steel market is very competitive throughout our sample with the exception of the period in which they received comprehensive voluntary restraint agreements (i.e., quotas) and were able to price substantially above marginal cost. All other forms of protection were in tariff form and had little effect on market power, consistent with prior theoretical literature on the nonequivalence of tariffs and quotas. We also find evidence that market power eroded over time in steel products where mini-mill producers gained sizeable market share, highlighting the role of technology in the market as well.
This volume examines the influences of technology and international trade policies on the troubled U.S. steel industry. Does leadership in technology guarantee competitive advantage in industrial markets? Or do the costs of production and the lack of investment capital offset technological gains for the domestic steel industry? Which international trade policies can help this industry, and which may be harming it? With these and other questions in view, The Competitive Status of the U.S. Steel Industry estimates global trends in steel trade, discusses patterns of production and consumption, and analyzes the possible effects of alternative governmental policies on this critically important industry.