steel

Steel Yourself as Trump Cuts Off Trade to Spite His Face

Various news outlets are reporting that, at midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. This action stems (incongruously and capriciously) from two nearly yearlong investigations conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962, which found that imports of steel and aluminum “threaten to impair the national security” of the United States.

Under the Guise of Security, Trump Sets a Protectionist Fire

Protecting citizens from threats domestic and foreign is the most important function of government.  Among those very threats is a government willing to concoct and aggrandize dangers in order to rationalize abuses of power, which Americans have seen in spades since 9/11. Justifying garden variety protectionism as an imperative of national security is the latest manifestation of this kind of abuse, and it will lead inexorably to a weakening of U.S. security.

The tariffs on imported steel and aluminum that President Trump formalized this afternoon derive, technically, from an investigation conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962.  The statute authorizes the president to respond to perceived national security threats with trade restrictions. While the theoretical argument to equip government with tools to mitigate or eliminate national security threats by way of trade policy may be reasonable, this specific statute does little to ensure the president conducts a rigorous threat analysis or applies remedies that are proportionate to any identified threat.  There are no benchmarks for what constitutes a national security threat and no limits to how the president can respond. 

In delegating this authority to the president, Congress in 1962 (and subsequently) simply assumed the president would act apolitically and in the best interest of the United States.  The consequences of this defiance of the wisdom of the Founders—this failure to imagine the likes of a President Trump—could be grave.

Antidumping 101: Everything You Need to Know about the Steel Industry’s Favorite Protectionist Bludgeon

Last week, invoking a seldom-used provision of a 1962 law, President Trump launched an investigation to determine whether steel imports present a threat to U.S. national security. An affirmative finding by the Commerce Department would permit the president to impose trade restrictions in response to the threat. But the real threat to U.S. national security is not an abundant supply of cheap imported steel. The real threat is a hyper-litigious steel industry intent on isolating the U.S. economy at enormous cost to downstream U.S. industries, exporters, and consumers. 

With the Trump administration full of steel executives and their lawyers one needn’t ponder too long to get the gist: U.S. trade policy is in the hands of an industry that accounts for 0.3 percent of U.S. GDP, has never had much interest in cultivating foreign demand for its products, has limited stakes in the global trading system, and is monothematic in its demand for aggressive trade law enforcement.

The wall of tariff’s protecting U.S. steel interests is already much higher than the walls erected to insulate virtually any other industry from foreign competition. Currently, there are 151 antidumping and countervailing duty (anti-subsidy) measures in force against most types of steel from most major exporters. And that severely impairs the competitiveness of America’s far more numerous, far more economically significant downstream, steel-using companies.

Under U.S. trade remedy laws, the authorities are prohibited by statute (on account of steel industry lobbying) from even considering the impact of prospective antidumping and countervailing duties on the operations of downstream companies. Absurd self-flagellation, right? The absurdity is magnified when you grasp that the duties paid by U.S. importers (i.e., the steel users), which are big enough deterrents to doing business with foreign suppliers in the first place, aren’t even the biggest concern. Under the seriously corrupted, capriciously-administered U.S. trade remedy laws, the importers don’t even know what their final duty liability is going to be until about one year (on average) after the product is imported.  The amount of duty paid upon entry of the product is an estimate of the duties that ultimately will be owed when Commerce gets around to “calculating” the actual incidence of dumping or subsidization next year.  Imagine getting a supplemental bill today for the groceries you purchased last April.  Would you even buy those groceries in the first place, without knowing the final price tag? Of course not. And that’s the intention of the retrospective nature of the U.S. trade remedy laws.

Carrier Revisited

President-elect Donald Trump has claimed victory in his effort to preserve employment for Carrier workers in Indiana.  Assisted by $7 million in tax incentives provided by the State of Indiana, Mr. Trump persuaded the company not to move 800 furnace manufacturing jobs to Monterrey, Mexico.  This works out to a taxpayer-funded subsidy of $8750 per job. 

Another 1300 Carrier jobs still will move to Mexico between now and 2019.  Published reports have indicated that the company anticipated cost savings of some $65 million per year from moving all 2100 positions to Monterrey.  So Carrier is taking at least a partial step toward maintaining its global competiveness, while at least partially appeasing the incoming president.

I wrote an op-ed in Forbes on August 22, 2016, in which I argued that Carrier no doubt had quite good business reasons for planning the move to Mexico.  Carrier’s February 2016 announcement of the decision said that it was due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.”  

Carrier has been manufacturing products in Monterrey for some years.  The company certainly has a clear understanding of why moving production of some air conditioning units makes business sense.  It would not be wise for them to explain their reasoning in public because such proprietary knowledge would be of great interest to their competitors. 

Some commentators have opined that the decision was driven largely by lower labor costs.  Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only around $6 per hour.  It’s possible the move was prompted primarily by labor cost savings, although my analysis of data compiled by The Conference Board suggests otherwise.  The value generated by an hour worked in the United States has risen by 40 percent over the past 22 years of NAFTA.  In Mexico, the gain has been only 10.5 percent.  Productivity has grown faster in the United States, so the incentive to shift production to Mexico today ought to be weaker than it was 10 or 20 years ago.  (Note:  Those figures apply to the productivity of all workers.  If it was possible to analyze just the manufacturing sector, perhaps the findings would change.)

Financial Times Offers Wrong Response to China’s Steel Overcapacity

The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.”  (Link)  The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States.  It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.” 

The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.”  Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare.  It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do.  The country would have been better off simply by doing nothing.  (“Don’t do something, just stand there!”)

There are two easily understood reasons why imposing trade restrictions won’t help the situation.  The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide.  If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey.  Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers. 

The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input.  These downstream users constitute a much larger segment of the economy.  In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014.  Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.

To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries.  These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low.  Still, important portions of the American steel industry have not been sufficiently profitable.  United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion.  So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.

Leveling the Playing Field?

Sen. Sherrod Brown (D-OH) introduced a bill on Wednesday called the “Leveling the Playing Field Act.” According to the accompanying press release, the proposal would “restore strength to antidumping and countervailing duty laws” via a “crack down on unfair foreign competition.” The bill includes several provisions relating to practices used by the Department of Commerce to determine dumping and subsidy margins (i.e., the extent to which imported products are unfairly underpriced). It also contains modest changes to procedures used by the U.S. International Trade Commission (ITC) in deciding whether domestic industries have been “materially injured” by imports.

Since I have had only indirect exposure to the role of Commerce in antidumping and countervailing duty (AD/CVD) investigations, I will leave analysis of those proposed changes to others. However, my 10 years of experience as chairman and commissioner at the ITC provide a reasonable basis for commenting on the bill’s suggested modifications to the injury determination.

The existing AD/CVD statutes instruct the ITC to “evaluate all relevant economic factors” that relate to the effects of imports on the industry under consideration. A number of those factors are specifically mentioned, including the industry’s profits. Not being satisfied with just having the commission examine profits in general, the Brown bill adds, “gross profits, operating profits, net profits, [and] ability to service debt.” As a practical matter, the commission already looks in detail at an industry’s profitability and its ability to repay debts, so this additional wording would contribute nothing of substance.

The Brown bill would add a provision to the effect that an improvement in the industry’s performance over the period of investigation (normally about three years) should not preclude a finding that the industry has been materially injured by imports. Yes, there can be circumstances in which an industry’s results are strengthening, yet it is still being held back by import competition. However, the commission’s existing practice already considers this possibility, so the new language would not really change anything.

The bill also adds a section addressing the possible effects of a recession on the ITC’s injury analysis. It states that the commission may extend its period of investigation to begin at least a year before the recession started, which would allow before and after comparisons of how the domestic industry has performed. The ITC already has authority to adjust the period of investigation under special circumstances, but it relatively seldom does so.

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