Steel, China, And The Free Market

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.

6 thoughts on “Steel, China, And The Free Market

  1. First of all, it’s in the interest of “groups of industry analysts” to spin things as favorably as possible and be effective cheerleaders for the people signing their paychecks. But if I see chicken feathers everywhere, I’m gonna be worried about my chickens even if the fox guarding the henhouse tells me not to have any worries.

    I suppose the nature of the marketplace ensures that steel demand will rise even after a hard fall, and that a brief upswing in domestic steel production is still possible at some point in this decade before the inevitably industry collapse. However, the steady plunge downwards has been going on since the 1950s. The industry plunged into a deep abyss in the 1980s, but had a slight recovery in the 1990s before another deep painful recession in the last few years. The trend is obvious. A industry graph that resembles a downward flight of stairs with steep declines occasionally offset by slight increases. The overall downward direction is obvious to even the casual observer however, and the increased global competition is likely to be the final straw that breaks the camel’s back.

    The concept of China overproducing steel yet still importing more than it exports doesn’t make alot of sense, but I’ll give the benefit of the doubt to the claim and still dispute its long-term significance. This is obviously something that the fledgling Chinese steel industry will be able to correct as they increase the efficiency of their steel production. Given that China possesses so much of the global manufacturing capacity that relies on steel as a raw material, they will have an incentive to use their own steel rather than imports for their manufacturing. Thus, whatever extent that China’s steel industry is currently not self-sufficient, it’s in their economic interest to become that way….and to take advantage of America’s narrow-minded greed to decapitate their own steel industry.

  2. China is overproducing yet still needs imports of steel because the Chinese government mandates how much steel should be produced. Which means that China produces too much steel in slow economic times and too little to meet growth. It’s a classic example of why the free market which send signals to producers in the form of prices will always be more efficient than centralized regulation.

    Even if everything you say is true, despite the fact that every bit of evidence says it is not, the net gain of jobs is still positive. Even if Chinese steel is cheaper, it means more sales of raw materials and foundry technology to China, as well as more sales of technology and other products to Chinese workers who can now afford them.

    The steel industry is being effected by technological change more than any other factor. Manufacturers are using lightweight aluminum or composites for many traditional steel products. However, the primary use of steel is construction, and it still makes little sense to buy a bunch of steel beams from China and pay to have them brought halfway across the world when there’s an abundant source far closer.

    Furthermore, without the raw materials, China cannot become self-sufficient on steel. They are still reliant on imports, which opens up more opportunities for American steel.

    Again, despite the rote repetition of protectionist talking points, the facts remain the same on the issue of free trade. Free trade benefits American workers.

  3. I’m always amazed how conservative ideologues can stare right in the face of numbers that refute their theories, yet still insist the information is bad. A colossal 20-year slump in the steel industry and you tell us that indicators are all positive. Two and a half million lost manufacturing jobs in the last three years and you insist that free trade benefits American workers. Rising unemployment, a declining stock market and diminishing consumer confidence and leading economic indicators, yet you tell us the economy is on the rebound…as you did in July 2001, July 2002 and every other of the 30 months where George Bush has lived in the White House.

    Last year at this time, I may have believed the premise that free trade would create a net surplus in American jobs, but I don’t anymore. Even the white-collar VIP soccer moms and dads of suburbia are being shown they are expendable these days. Increasing accessibility to third-world labor pools will make suburbanite Americans with the most inflated sense of self-importance irrelevant due to their high-priced labor. Now that the global economy is starting to close in on “mainstream” America’s livelihood rather than just the “working stiff across the tracks”, expect trade policy decisions to be placed under greater scrutiny.

    But even last year, when I was under the assumption that we would experience a net surplus of employment due to free trade, my argument would still have been relevant, particularly in a wartime scenario where we lack manufacturing capacity after exporting it away years earlier. An increase in retail, fast food and technology jobs would do little to maintain a level of self-sufficiency necessary to avoid vulnerability in a world that almost universally despises us.

    The one point you make that I wasn’t aware of is that China lacks the raw material (which I assume means the iron ore that is turned into steel) to have a self-sufficient steel industry. As I understood it, China had no shortage of iron ore deposits. If you’re correct that they lack this raw material, then the American steel industry probably does have a single ace in the hole to avoid total collapse. Unfortunately for you, that has everything to do with the luck of geography and nothing to do with “free trade values”.

  4. Again, this recession isn’t related to trade at all. In fact, the years after NAFTA were periods of record growth for the United States, much of it due to increased trade.

    If trade really caused Americans to lose jobs, then the past 40 years would have seen economic growth plummet. The exact opposite has been true – the past 40 years have seen an average of 5% growth per year. It’s clear that at least some of that is do to the increased opportunities for trade.

    Also, again, it costs more to ship steel 15,000 miles to America than possibly could be saved by lower labor costs in China. Even with a substantial volume of trade the costs are still higher than shipping steel domestically.

    There are legitimate concerns with Chinese trade, but even the National Association of Manufacturers admit that the biggest obstacles to manufacturing in the United States isn’t China. The
    National Association of Manufacturers puts it this way:

    In "U.S. Manufacturing: The Engine for Growth in a Global Economy," a book to be published this October, the Manufacturers Alliance will outline ways to help the sector. They include tax reform aimed at encouraging investment, tort reform, streamlining regulations, promoting greater free trade, and reducing the trade deficit.

    Let’s see… what political party stands for tax reform, tort reform, streamlining regulation, promoting free trade, and reducing trade deficits… and I wonder which party stands for higher taxes, trial lawyers, more regulatory overhead, less trade, and would lower competitiveness in comparison for other nations. Exactly what party stands for more opportunities for American workers again?

  5. Imagine that. The U.S. Manufacturers Alliance would like to see their already hyper-declining tax burden lowered further, gutting what few regulations continue to counter the lawlessness of early 21st century commerce, and would like government mandates making them unaccountable for damage done by their defective products, Constitution be damned.

    I guess it’s really that easy. If American workers only agree to foot a perpetually-increasing tax burden so that their bosses can keep getting their taxes cut, willfully dismiss their litigatory rights that allow companies’ defective products to kill their kids, allow their neighbors jobs to be moved to Mexico or China through free trade, and accept that despite Enron and WorldCom-style corporate ripoffs, they and their employers will both be better off unregulated, then the slumping American manufacturing sector would be saved.

    These same arguments, along with the usual claptrap that blue-collar wage cuts=prosperity have been echoed as the saving graces of American jobs for decades. Wages in the manufacturing sector have been plummeting in real dollars for decades as has the tax burden on the manufacturers itself, but it’s never enough to achieve that “prosperity just around the corner” that free-market ideologues have been promising the working-class since their earliest concessions.

    The economy was already growing when NAFTA was passed, meaning that most manufacturers were making money and thus didn’t have any incentive to relocate. As soon as the economic growth engine slowed, however, their loss of profits combined with their lucrative new options to relocate to the third world showed what free trade is capable of in normal conditions. Each economic slump is likely to continue to downward trend comparable to the downward flight of stairs pattern I previously mentioned in regards to steel. As increased technology and transportation makes operating in the third-world easier than ever and accelerate the trend that was slow to start “40 years ago” in the midst of the Cold War.

  6. Life isn’t some Marxist morality play with the evil capitalists exploiting the poor working class. You sit and slander an entire group of people who represent the interests of both large corporations and small machine shops as being some sinister cabal. I’m sure if you’d actually talk to people in business, they’d love to tell you about the regulatory climate that takes money from out of their paychecks when they’re struggling to make payroll. I work for small businesses all the time, and I see the impact these regulations have. I’ve watched good businesses fail because of government interference, putting workers into the unemployment lines.

    The reality is that protectionism hurts American worker. High taxes hurt American workers. Uncontrolled litigation hurts American workers. Unnecessary and onerous legislation hurts American workers. Slow economic growth hurt American workers.

    And what, praytell, is the Democratic solution to economic problems: high taxes, more perks for trial lawyers, more regulation, and a statist economic philosophy that has already failed every time it’s been tried.

    No wonder the Democratic Party is now the party of extremes: the poor who have become serfs to the federal government, and the new feudal urban elite who can afford to foot the bill. The average American gets stuck in between – too "rich" to get on the government gravy train and too "poor" to afford the costs. No wonder the middle class is solidly Republican.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.