During the week, signs of recovery in the economy were quickly read by the financial markets, propelling the NYSE and NASDAQ markets to some of their strongest gains of the year.  For economists and steel workers there were a few other newsworthy developments.  Protecting the steel industry may be desirable for many reasons, but the imposition of a 30% tariff on steel imports has the world scratching its head.  It's a political move that the Economist magazine felt so strongly about as to call it "disgraceful." 

     Few had expected such a strong protectionist move from Bush, who has repeatedly preached the merits of freer trade and has long demanded trade promotion authority to pursue this goal.  Steel production in the United States may be important for military as well as economic reasons.  That said, production of steel outside the US is widespread.  As such, it is unlikely that China, the EU, Russia, and Japan would all simply decide not to provide the US with steel were it in need.  In fact, at a time in which steel may be needed for a growing military budget and expanding construction activity in the US, increased demand for imports may be welcomed and certainly may help the floundering global economy.

     To make matters worse, this protectionist tariff will not solve steel's woes.  For starters, the Europeans have already indicated that they will bring the tariffs before the WTO.  Their case would be legitimate, as the US has little backing in trade law for making such a move.  A loss in the courts would lead to either reparations which would certainly cost the American taxpayer, or to retaliatory trade action which has its costs as well.  Preaching free trade and practicing protectionism will certainly not do wonders for America's international reputation either.

     Indeed, failure to cooperate on trade issues coupled with weak environmental policy is not likely to make our current government an international favorite.  The worst case scenario from such actions is the start of trade wars in which other nations take retaliatory trade action.  At a time when the global economy is already suffering, such a move could only do harm. Second, in the war on terrorism, the US is likely to be reliant upon its allies.  Many of these are steel producers which export to the US (such as South Korea).

     At the same time, the action has a direct negative effect on the domestic economy as well.  While it helps to save a number of steel jobs in places like West Virginia and Pennsylvania (and may help gain a few votes), it hurts consumers by raising the cost of domestic steel.  This in turn may cost the economy jobs.  At a time in which the United States is just beginning to recover from recession, rising production costs can only be detrimental.  Arguably more harmful than the higher domestic steel prices will be the effect such tariffs could have on US steel mills.  Indeed, the already out of date production facilities will continue to fall behind competitively with the rest of the world.  Many of the nation's steel companies are already suffering from bankruptcy, and long-term prospects for the industry is bleak. Protectionism has the effect of allowing the mills to coast along, forsaking necessary and desirable investment opportunities which could make them competitive.  It's one thing to criticize policy.  It's another to provide alternatives.  The question then becomes, was there a more appropriate solution?

     As with many political choices, no option is perfectly appealing.  I tend to believe that one more economically desirable solution would have been to provide support for the steel workers themselves rather than to impose a tariff.  The approach of protecting the worker and not the industry has been largely backed over the past few years.  In this case, steel workers are suffering from the loss of jobs and lost pension funds.  Critics might ask why just the steel mills, why not Enron or any other bankrupt industry?  Steel is fundamentally different because it is suffering from trade liberalization and its workers are suffering because their skills are obsolete.  Economists have made this argument with respect to textile workers, and indeed many industries have sought protection for their workers due to structural adjustment from freer trade.  If Bush had sought to provide protection to the workers, perhaps helping to protect their pensions or to provide them with set money for educational purpose to help them obtain more relevant skills, this would have been a potential long-term solution.  Allowing non-competitive industries to fail and competitive ones to flourish is a key to economic growth and always will be.

     Is this solution more appealing to the steel workers?  On the face it certainly doesn't look like it.  No one wants to face uncertainty as to their job or pension.  But provisions to support such workers can only benefit future generations.  It protects them by providing them the resources to move into more competitive industries.   Furthermore, it ensures that they as consumers will benefit from the lower costs and the numerous gains from trade.  One must also not rule out the rest of America which will surely suffer from the tariff and could doubly suffer an added burden from a lost WTO trade ruling.  The benefits from freer trade have been clear for over 200 years.  When will politicians learn that sometimes the best solution isn't the most straightforward or even the most common?