Can Anti-China Tariffs Revive American Steel?

 

Sure, Donald Trump mused about returning to the gold standard during the campaign. But as president, he’s really more of a steel bug than a gold bug. “American steel” to be specific. To Trump, the decline in steel production and steel worker’s jobs are emblematic of lost American greatness. And when Big Steel is back, so will be America. As Trump put it last summer: “We are going to put American-produced steel back into the backbone of our country. This alone will create massive numbers of jobs.”

So with his First 100 Days almost complete, Trump is looking to make a down-payment on his American steel promise. Reuters reports:

President Donald Trump launched an investigation on Thursday to determine whether Chinese and other foreign-made steel threatens U.S. national security, raising the possibility of new tariffs and triggering a rally in U.S. steel stocks. U.S. Commerce Secretary Wilbur Ross cast the decision to initiate the probe as a response to Chinese exports of steel into the United States reaching the point where they now have 26 percent of the market. Chinese steel imports are up nearly 20 percent in the early months of this year alone, he said. … Trump signed a directive asking for a speedy probe under Section 232 of the Trade Expansion Act of 1962 at a White House event that included chief executives of several U.S. steel companies. The law allows the president to impose restrictions on imports for reasons of national security. … The Commerce Department will have 270 days to complete the probe. Ross said he expected it to be done much sooner. Trump’s directive asked that the investigation be conducted with all deliberate speed. Ross, a former steel executive, said the investigation was “self-initiated.”

Guys, it’s called supply chains. And steel is an intermediate good moving through those chains. As Douglas Irwin writes the new Foreign Affairs: “Any import restriction that helps some upstream producers by raising the prices of the goods they sell will hurt downstream industries that use those goods in production. If a tariff raises the price of steel to help U.S. Steel, it will hurt steel consumers such as John Deere and Caterpillar by raising their costs relative to those of foreign competitors.”

I mean, just compare the producers and users of steel. As I have written:

Now the entire US steel industry directly employs just 142,000 American workers, according to the American Iron and Steel Institute. … Which is not to say it is an insignificant industry. Indeed, the total value-added output of the entire US metal manufacturing industry is some $60 billion, employing some 400,000 workers. … But here’s the thing: the manufacturers that use steel generate nearly $1 trillion in value-added output, according to the Cato Institute, using government data. And they employ some 6.5 million people.

Attempts to temporarily help some workers will end up hurting others, Many others. And it is unlikely even to create many blue-collar domestic jobs in what has really become a technologically advanced industry. But still there remains the issue of Chinese state subsidies for its steel industry and its dumping of surplus steel. Again, Irwin:

So how should the United States respond to, for example, Chinese steel subsidies? Imposing antidumping duties is not the answer, since they would fail to solve the underlying problem of excess capacity and would punish steel-consuming industries in the United States. Paradoxically, however, threatening reprisals of some sort may be the answer; politely asking China to cut back its steel subsidies would accomplish nothing. Confronting unfair trade practices with the threat of retaliation is not protectionism in the usual sense. Instead, it represents an attempt to free world markets from distortions. In order to return trade to a market basis, Washington may have to threaten trade sanctions, some of which might have to be carried out for the threats to gain credibility. This process will no doubt be disruptive and controversial, but if handled skillfully, the end result could make it worthwhile. … Once again, the 1980s offers useful lessons. In 1985, Reagan used the power granted to him under a provision of U.S. trade law known as Section 301 to attack unfair foreign trade practices, such as the barring of U.S. products from certain markets. Although the U.S. action prompted bitter foreign protests, Arthur Dunkel, the Swiss director general of the General Agreement on Tariffs and Trade (the predecessor to the WTO), later admitted that it was one of the best things the United States had ever done for the multilateral trading system: it helped unite the world behind an effort to strengthen the rules-based system in the 1986–94 Uruguay Round of international trade negotiations. The WTO’s dispute-settlement system has proved remarkably successful and should be supported, but it may not be capable of handling every type of trade disagreement.

But even if what we are seeing from Trump is a negotiating tactic rather than an economic strategy, it’s important to think out the end game and to have realistic expectations of what can be achieved.

Published in Economics
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Members have made 10 comments.

  1. Profile photo of I Walton Member

    This is the kind of economic insanity we feared. I hope it’s just posturing because tariffs on steel would be the administrative corporate state crony capitalism to put Democrats to shame. Since he can’t deliver on health care and taxes is he going to deliver on the one thing he should avoid? Hopefully just talk.

    • #1
    • April 21, 2017 at 10:53 am
    • Like3 likes
  2. Profile photo of barbara lydick Member

    James Pethokoukis: Although the U.S. action prompted bitter foreign protests, Arthur Dunkel, the Swiss director general of the General Agreement on Tariffs and Trade (the predecessor to the WTO), later admitted that it was one of the best things the United States had ever done for the multilateral trading system: it helped unite the world behind an effort to strengthen the rules-based system in the 1986–94 Uruguay Round of international trade negotiations.

    Let us hope it is the long game Trump is playing…

    • #2
    • April 21, 2017 at 12:51 pm
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  3. Profile photo of ModEcon Member

    I don’t understand why so many people are so happy to outsource. Sure, we would “hurt” downstream industries that use steel, but if the real price is higher than what it is now due to government interference, shouldn’t we attempt to remedy that? Just because something is a good deal for the consumer doesn’t make it a good thing.

    I would argue that it is not viable to depend on foreign subsidies. If the price of a good is higher, we should be honest about that fact. Don’t pretend that “Americans are just too expensive” but “other counties industries have the correct price which is lower” and “there is no downside to having entire industries depend on government subsidies in order to work”. I believe that there does exist true negative consequences of having distorted markets whether by government or others.

    Also, I have never understood why people don’t consider the other negative consequences. When we drive prices lower and depend on substandard manufacturing processes (think about smog/pollution in China), we contribute to the problem to our own benefit and to the detriment of others. If you are willing to let the people of China suffer for your own cheep steel, then why don’t you let the steel/energy industry in America have such lax standards. You may have to live with some pollution, some very low income workers, but you will get your cheep steel all the same.

    On the other hand, if feel the need to restrict local industry due to your desire to live without pollution, then how does getting another country’s citizens to bare the burden make it okay? I believe that anything that we restrict in our country, we should also restrict in our trade. Take Ivory and diamonds. I think that they are restricted for various reasons. Just as we restrict our own people, so we attempt to restrict practices elsewhere or at least our collective support through financial gain by our consumption. Why would unsafe worker conditions or rampant pollution be any different?

    • #3
    • April 21, 2017 at 5:44 pm
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  4. Profile photo of Henry Castaigne Member

    George F. Will explains everything

    The government guarantees up to 85 percent of the U.S. sugar market for U.S.-produced sugar. The remaining portion is allocated for imports from particular countries at a preferential tariff rate. Minimum prices are guaranteed for sugar from cane and beets. Surplus sugar — meaning that which U.S. producers cannot profitably sell — is bought by the government and sold at a loss to producers of ethanol, another program whose irrationalities are ubiquitous.

    All this probably means $3.7 billion in higher sugar costs. It also means scores of thousands of lost jobs as manufacturers of candy and products with significant sugar content move jobs to countries where they can pay the much-lower world price for sugar. The big companies like Mars and Hershey can locate plants around the world. The hundreds of family-owned American candy companies cannot. In the last four years, the U.S. sugar price has averaged between 64 percent to 92 percent higher than the world price. The costs are dispersed to hundreds of millions. The benefits accrue primarily to 4,700 sugar beet and sugar cane farms.

    Safety standards have a cost to them. The costs are less health-care and education because the increased costs of safety and reduced pollution.

    • #4
    • April 22, 2017 at 12:40 am
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  5. Profile photo of ModEcon Member

    Henry Castaigne (View Comment):
    Safety standards have a cost to them. The costs are less health-care and education because the increased costs of safety and reduced pollution.

    So, shouldn’t we either lower standards in America or accept the higher costs. Why is it good to let others bear our burdens while distorting the market in favor of foreign markets?

    • #5
    • April 22, 2017 at 1:18 am
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  6. Profile photo of I Walton Member

    I’m not sure about some of the exchange here. Neither regulators or Congress look at the costs and benefits of these standards. Cleaner and safer technology tends to be cheaper than the older more dangerous and dirtier technology. That happens to technology over time because it’s in producers’ interests to have fewer accidents, to not get sued and to have good PR in local communities. China uses dirtier technology because it’s old and uses more labor and less technology and capital. Most of our regulations are costly to small new companies and help the large old companies limit competition, that is part of the reason the big old companies help regulators write the regulations. The big old companies however are also the ones who can extract protectionism from Washington. Government interference will always be distorting and corrupt because that’s what it does. Protection is even worse because it snow balls through the economy, companies that use steel, or simpler fabricated or assembled products lose competitiveness. It is impossible in this global interrelated economy to pick and choose who should get protection because all the connections and interrelations are simply unknowable, so Congress and Administrations just protect people who are big enough to get it. What we can do is reduce red tape, spur domestic competition by removing the difficulties to start ups, reduce business taxes and burdensome regulations. The left will charge us of wanting dirty air and water, but they do that anyway and isn’t true. On the contrary. When things are more expensive it is also because they use more resources.

    • #6
    • April 22, 2017 at 5:15 am
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  7. Profile photo of Henry Castaigne Member

    ModEcon (View Comment):
    So, shouldn’t we either lower standards in America or accept the higher costs. Why is it good to let others bear our burdens while distorting the market in favor of foreign markets?

    Because China (and more importantly, Chinese persons) find it worthwhile to do dangerous jobs because of the cheaper cost of living in China and their relative poverty.

    • #7
    • April 22, 2017 at 12:21 pm
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  8. Profile photo of ModEcon Member

    Henry Castaigne (View Comment):

    ModEcon (View Comment):
    So, shouldn’t we either lower standards in America or accept the higher costs. Why is it good to let others bear our burdens while distorting the market in favor of foreign markets?

    Because China (and more importantly, Chinese persons) find it worthwhile to do dangerous jobs because of the cheaper cost of living in China and their relative poverty.

    Are Americans so different that no one in America would be willing to do the same?

    My point is that it is not the people of America who choose not to make cheep stuff, but rather regulators. Shouldn’t we either protect the industry that the government regulates out of competition, or deregulate so as to become competitive again?

    Also, All things being equal, making steel local should be less expensive as it would save significant transportation costs so the idea that China has an absolute advantage seems misguided. It’s also not like America didn’t have the industry, we have lost production. So it is not like China was better at it than us or had a head start in capital.

    Relative poverty is also a good measure, some in America are relatively poor as well. So won’t they be equally willing to do dangerous jobs? What right does the government have to stop them?

    So I ask. If you took away the benefits of currency manipulation, unregulated energy production, government red tape/regulations, who would have the more competitive market, US or China?

    • #8
    • April 22, 2017 at 12:54 pm
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  9. Profile photo of ModEcon Member

    I Walton (View Comment):
    What we can do is reduce red tape, spur domestic competition by removing the difficulties to start ups, reduce business taxes and burdensome regulations.

    I agree that reducing the red tape is important. However, I disagree that taxes are the problem. Maybe the complexness of taxes, but not the rate. America’s governments, local and federal, create many benefits to companies. It is important that companies pay for those benefits.

    I Walton (View Comment):
    Neither regulators or Congress look at the costs and benefits of these standards.

    I Walton (View Comment):
    Most of our regulations are costly to small new companies and help the large old companies limit competition

    Okay, so lets get rid of these regulations. I just hope that you don’t take too much time such that our industry has already left. My point is that we shouldn’t be happy to outsource. Saying things like China getting more of our production being a good thing is wrong IMO. I would rather us deregulate than protect, but I am willing to protect in order to keep industry stable, avoiding price/supply shocks, while we deregulate. If this decade you tell companies that they will get no help, then next decade there will fewer left for you to bother deregulating.

    • #9
    • April 22, 2017 at 1:04 pm
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  10. Profile photo of I Walton Member

    ModEcon (View Comment):

    I Walton (View Comment):
    What we can do is reduce red tape, spur domestic competition by removing the difficulties to start ups, reduce business taxes and burdensome regulations.

    I agree that reducing the red tape is important. However, I disagree that taxes are the problem. Maybe the complexness of taxes, but not the rate. America’s governments, local and federal, create many benefits to companies. It is important that companies pay for those benefits.

    I Walton (View Comment):
    Neither regulators or Congress look at the costs and benefits of these standards.

    I Walton (View Comment):
    Most of our regulations are costly to small new companies and help the large old companies limit competition

    Okay, so lets get rid of these regulations. I just hope that you don’t take too much time such that our industry has already left. My point is that we shouldn’t be happy to outsource. Saying things like China getting more of our production being a good thing is wrong IMO. I would rather us deregulate than protect, but I am willing to protect in order to keep industry stable, avoiding price/supply shocks, while we deregulate. If this decade you tell companies that they will get no help, then next decade there will fewer left for you to bother deregulating.

    The point is we can’t protect because we wouldn’t know what to protect anymore than we’d know how to centrally manage an economy. And even if some magical commission could know exactly what to protect, Congress would protect the wrong things. When you are the leading economy, the major technology producer the next industry is what we want to grow which is unknowable, not the old dying ones that always get protection. We could impose an across the board uniform tariff or a border adjustable VAT, which would be like a devaluation but we cannot protect.

    • #10
    • April 23, 2017 at 4:16 am
    • Like0 likes