More often than not, design determines the success or failure of any system.
Engineers – charged with creating physical and digital tools – are taught to embed redundancy and resilience within them.
Similarly, when economists look at market design, they are educated to see robust competition among firms as being central to driving economic dynamism.
Yet, after decades of short-termism in business and the government greenlighting of almost every merger that came before it, competition as a feature of American capitalism is in stark decline.
As the White House noted in its 2021 Executive Order on Promoting Competition, “(i)n over 75% of U.S. industries, a smaller number of large companies now control more of the business than they did twenty years ago.”
The pernicious effects of declining competition are many. Excessive market concentration drives up prices for consumers. For example, the cost of flying has risen along with airline mergers. The top four U.S. airlines now garner 2/3 of industry revenues, up from 41% just a decade ago. They also make twice as much per customer as their European counterparts.
In addition, lower levels of competition drive down wages as fewer firms compete for workers. A recent study estimated that excessive market concentration has lowered U.S. wages by as much as 17%. At the same time, the level of new business formation in the United States is down 50% since the 1970s.
Just this week we got news that will aim to introduce more competition in a vital industry. In a major deal, Nippon Steel Corporation announced that it will purchase U.S. steel for $14.9 billion.
U.S. steel will retain its name and headquarters in Pittsburgh, PA while also honoring all collective bargaining agreements made with U.S. steelworkers. This deal comes as a surprise to some but given the alternative options available a lively debate is likely to follow.
This proposed deal will prevent additional consolidation in the steel industry since over the summer a U.S. competitor, Cleveland-Cliffs made an unsolicited offer to buy U.S. Steel.
That combined company would have taken control of 100% of America’s iron-ore deposits. First off, monopolies are known to hike prices. Secondly, if a serious disruption were to hit the combined firm similar, for example, to the 2021 Colonial Pipeline cyberattack, downstream producers that use these inputs would grind to a halt. In short, the merger would have created a single point of failure.
The combined company would have controlled over 50% of the steel sold to the U.S. auto industry. America’s vehicle producers can ill-afford quasi-monopolistic price increases at a time when they are investing heavily in the transition to electric vehicles.
Moreover, steel is not just any industry – it is the backbone of America’s industrial economy and its military. Think about the high-profile military systems, from main battle tanks to ships, and less famous components, such as control cables for aircraft. All of these are made of steel.
In 2018, the Trump Administration literally declared that most steel imports into the United States constituted a threat to national security under Section 232 of the Trade Expansion Act of 1962. Consequently, the Administration imposed a 25% steel tariff on most countries globally. These tariffs have been tweaked by both the Trump and Biden Administrations, but largely remain in place.
The stated purpose of the Trump and now Biden steel import restrictions is, in the words of the Department of Commerce, “to enable U.S. steel mills to operate 80 percent or more of their rated production capacity.”
American producers cannot compete against dumped steel from state directed and subsidized competitors. That is why tariffs were imposed. So, having made these efforts to create the conditions for revitalizing the U.S. steel production base, time will tell if the Biden administration approves this deal to keep that same effort alive.
