Much has been made about how Chinese steel imports would "price the US out of the market" and that "steel mills and iron ore mines are closing left and right in America". The argument then goes that America needs more protectionist tariffs to keep the American steel industry afloat. This theory has been shot full of holes numerous times, but I’m not above a few whacks at a dead horse from time to time. So, without further ado, let’s take a look at the facts:
A Google News search for the term ‘steel industry’ brings up a whole host of interesting information. For one, despite the previous falling prices in the steel industry due to a global economic slowdown it appears as though the steel industry in the US is on the rebound. Said a group of industry analysts:
Although China remains a question mark, the two managing partners of World Steel Dynamics said there have been a number of recent surprises that lead them to be upbeat about the steel industry’s future. They presented a list of those surprises at the opening session of the Steel Success Strategies conference being sponsored by their Englewood Cliffs, N.J.-based company, which supplies data to the industry and steel industry trade publication American Metals Markets.
The first surprise is that spot steel prices are recovering after falling since last summer. They are $50 per ton above 2001 lows because of low imports resulting from Bethlehem Steel Corp. and National Steel Corp. no longer being independent. More surprises: the Canadian dollar is up sharply and costs are up by $35 a ton; steel scrap and raw material prices are higher; natural gas costs are up; and three steelmakers — Nucor, International Steel Group and U.S. Steel — are instituting a list price type of system in which they are selling at a set price.
Another surprise is that the price of hot-rolled steel ban bottomed out only four months after the so-called "death spiral" of falling prices began rather than in the traditional 12 months.
Okay, things are looking up, but China remains a question mark. Let’s see what the analysts say about that:
"We think the Chinese steel industry will lose its favored industry status in the 2004-2006 time frame," Marcus said.
He predicted profit margins in China will eventually fall because the number of producers will increase from 13 to 28, adding 50 million tons of hot strip capacity, Chinese producers are dependent on foreign ore imports and they are straining the country’s transportation system and there will be an increase in costs.
But let’s not take their word for it, instead we’ll look at other economic figures to see what the trade situation between China and the United States really is. What one finds is that China actually imports more than it exports. In fact, let’s see what China is importing:
The report says cars, steel and digital cameras were among the imported commodities that registered higher growth since early this year. (Emphasis mine)
So not only is the balance of trade with China tilted towards imports rather than exports, blowing a major hole in the idea that China can harm the US economically, but they’re actually importing steel from other countries, despite their own overproduction. If anything, the Chinese steel industry’s overproduction will harm their economy long before it can have an effect on the US economy. Furthermore, even if China’s steel industry got its act together, the inflow of high-tech goods provides jobs for US companies, especially high technology firms, as they find new business in China’s huge market. A prosperous China means the United States has a pool of 1 billion consumers to sell to – a certain recipe for job creation and economic development for both China and the United States.
In fact, some are going so far as to say that China is the savior of the steel industry because China relies on foreign technology and raw materials to power their own steel industry.
The industry has been watching China’s change from a communist to a capital market with some trepidation because of its vastness, availability of resources and its huge population, which earns relatively low wages.
China has been unleased, but everyone should be the beneficiary, said John Rothschild, executive vice president of Cometals Inc
"There doesn’t need to be any losers," he said. "We all benefit when the world’s population has a higher standard of living."
Free trade benefits everyone by creating new opportunities for internation industry – including steel:
"There is a rapid production of infrastructure: roads, bridges, high-speed rail, and so on," he said. "The steel market will be shared at home and by imports. There will be fierce competition."
Steel is a "roaring industry" in China, Rothschild said, adding that the industry’s growth is causing tremendous demands for raw materials. Steel consumption is growing exponentially. It was 114 million tons in 2000, 182 million tons in 2002 and is expected to top 210 million tons in 2003 and 260 million tons by 2005.
"Demand is so strong and great there is room and a need for imported steel," Rothschild said.
So, what have we learned here? So far we’ve found that free trade opens new opportunities for job creation, helps keep the economy stable, and makes for a more peaceful and productive China. On the other hand, tariffs encourage industries to become less competitive, raise prices domestically, retard economic growth, and harm developing nations like China. The correlation is clear, both in statistics and in observation – free trade benefits everyone.