U.S. Representative Rick Nolan Deceiving Voters on Costs of Steel Ban
By Marvin Pirila
U.S. Representative Rick Nolan is at it again, introducing legislation to ban foreign steel imports from coming into the country for five years. He blames illegalized subsidized steel imports for the steepest decline in America’s steel industry for decades.
Nolan stated “To be clear, there is plenty of demand for steel in the United States.” “Domestic steel consumption rose by 11.7 percent in 2014 alone. Unfortunately, foreign steel imports jumped by 36 percent last year, capturing the highest share of the U.S. market on record – and limiting growth in our domestic industry to just 3 percent. So the simple fact is, increased U.S. consumption is being supplied by illegal, subsidized steel.”
Nolan suggests that all imported steel is illegal, subsidized steel. He also implies that in the absence of imported steel the domestic demand would have been the same. The fact is that higher priced domestic steel due to less competition and supply would have led to less demand for steel. While Nolan panders for votes, he is doing the Iron Range and the country a disservice with misleading information on the troubles plaguing the steel industry.
Nolan doesn’t specify who is dumping steel on the open market, but the guess is that China and Korea are implied. China is known for its currency manipulation and excess steel production, but are they the real problem with the domestic steel industry? According to the U.S. Department of Commerce, International Trade Administration, in its November 2015 Steel Industry Executive Summary, China provides only 6.8% of our steel mill imports. They are the sixth leading provider behind Canada (14.4%), Brazil (13.4%), Korea (12.8%), Turkey (7.1%), and Mexico (7.1%). Other countries provide the remaining 38.4%.
Fast forward form Nolan’s figures to 2015. The November 2015 report states, “September 2015 steel imports were down 27.3% from September 2014 and down 23.3% from the 2014 average monthly volume of 3.4 million metric tons.” As of September imports from China were down 56% from one year ago and down 45.8% from the 2014 average. The United States received the 16th largest share of Chinese steel exports at 2%, or 1.7 million metric tons, in YTD 2015, a decrease of 26.3% over YTD 2014.
China’s share (51%) of the world steel production is larger than the combined production of the U.S. (5%), the European Union (10%), Russia (4%), and Japan (7%), which historically were the largest producers of steel. These figures show why overproduction in China is a much bigger deal than the much lower production capabilities of other countries.
Illegal dumping occurs when a foreign producer of a good intentionally exports their product at a lower price than it cost to produce the good during the ordinary course of trade. Source: See generally Nigal Grimwade, International Trade Policy 96-149 (1996). The economic theory behind dumping is to create long-term dominance while taking short-term losses. This theory is the only case in which the World Trade Organization (WTO) would approve a safeguard measure. Source: Michael J. Trebilcock & Robert Howsem, The Regulation of International Trade 177-189 (2d ed. 1999)
The U.S. lacks sufficient steel capacity and has relied on imports for decades. The U.S. consumes about 108 million tons a year, of which about 75% is made by U.S. producers. The rest, about 25%, is made by foreign steelmakers and imports. Banning imports would restrict supply and lead to higher prices for steel, leading to smaller demand. The steel dependent sectors would be harmed significantly. Any tariffs would lead to a tariff war with the affected countries. Tariffs on exports would reduce demand on other products and lead to job losses at home.
The domestic issues that rep. Nolan and other Democrats won’t address are overreaching regulations, government policies that are killing coal (climate change ideologies) creating higher electricity costs, and ineffective economic policies. The high cost of labor and producing excess are also issues plaguing the industry. Unless a foreign country engages in shipping products below cost, there are no grounds for action.
The American Iron and Steel speaks to the regulatory harm in its 2015 Public Policy Agenda dated February 5, 2015. It stated, “EPA regulation of GHG [Greenhouse gas] emissions from industrial and electric utility sources under the Clean Air Act will likely harm the competitiveness of domestic manufacturing, shifting American jobs and emissions to unregulated nations. The Clean Air Act statute was not intended for the regulation of GHGs, and is not the proper statutory scheme for seeking reductions in GHG emissions because of its localized methods of regulation and enforcement and disregard for competitive economic impacts.” U.S. manufacturers are burdened with more regulations than necessary and it has an adverse impact on their ability to deliver goods at the best price.
The World Steel Association estimates that steel demand in North America is expected to decline by 0.9% for the full year 2015. The current capacity utilization ratio of steel plants in the U.S. is about 66%. A ratio of 80% is generally regarded as a healthy sign for the industry. A lower capacity utilization ratio negatively impacts the profitability of steel companies. The capacity utilization ratio represents the actual production as a percentage of total installed production capacity.
Nolan’s claim that President George W. Bush imposed tariffs needs greater clarification. The Bush administration levied tariffs in March 2002, in his own plan to pander to votes, only to roll them back by late August just five months later. The more than 700 exclusions killed any effectiveness of the short term tariffs imposed. The dumping claims boiled down to an excess capacity situation more than anything else and was not covered by the WTO.
In the international arena, the Bush steel tariffs alienated trade partners, provided WTO critics support for their case against free trade and diminished U.S. trade negotiation credibility, and domestically, it failed to address the plight facing displaced steel workers.
The Reagan administration railed for voluntary restraints from other countries and then imposed a 18.5% quota on steel imports. The absence of quotas on steel from Canada and a number of smaller steel-producing nations made it possible for steel customers to shop around for cheap foreign steel not covered by the Reagan program. These absent quotas, along with growing violations by importers, allowed thousands of extra tons of steel to continue to pour through. Like the Bush tariffs, Reagan’s quotas accomplished nothing.
The membership in the WTO entails lower tariffs and requires countries to refrain from using discriminatory trade practices like voluntary trade exports and dumping of artificially cheap products upon each other’s markets. Source: See generally, The General Agreement on Tariffs and Trade (GATT 1947) Articles I-XVII, at http://www.wto.org/english/docs?e/legal?e/gatt47_01)e.htm. Once a member, submission to WTO dispute settlement is mandatory in order to secure those benefits. These member states would face group-sanctioned retaliation and damage awards if they did not abide by WTO-sponsored dispute settlement.
The article, ‘Nolan introduces steel-ban bill’ in the Mesabi Daily News (12/3/15), admits that other factors such as the strong dollar and oversupply are hurting steel prices – neither mentioned by Nolan. Neither are covered by the terms of the WTO.
Steel imports have been boosted by the strengthening of the U.S. Dollar against global currencies, which has made these imports cheaper in dollar terms. If the dollar was weaker, imports would be more expensive to consumers and imports would likely decline. The Yuan, the Chinese currency, on the other hand, is weak at the time being, making their steel even more affordable.
Adding to the problem is the overproduction of steel in China as its economy cools. Its excess steel continues to flow into the world market. When supply exceeds demand it acts to lower the price. In accordance with excess supply, iron ore and recycled steel prices have plummeted. The big spread in prices between steel in the U.S. and China makes their steel exports grow. This spread is attributed to global oversupply and strong demand.
The domestic steel industry pays far more in wages than its counterparts around the world, faces more regulatory requirements, and is incurring the cost of climate-change policies that greatly expand the cost of electricity. Likewise, the slowdown in the energy sector is hurting demand. Rep. Rick Nolan fails to mention any of these, likely due to the fact that Democratic leadership is largely behind these non-competitive costs.
The positives for the domestic steel industry in 2015 has been strong auto sales and a stronger housing market.
Why should the domestic steel industry give up its advantages to abundant coal resources because our leadership is killing it in the name of climate change policies of no benefit? What about sensible regulations that don’t stifle business? It’s time for unions to allow new employees to be hired outside of a closed shop at lower wages, offsetting some labor costs that have now become a risk to the industry. The only option isn’t only to file dumping charges, but also to look inward to what is plaguing the industry outside of imports.
The whole issue is moot from a consumer’s perspective. If you are buying steel, you are looking for the best cost, and if it comes in cheaper from overseas, you don’t care how it became cheaper, you want it. If China for example wants to cut the price below what it takes to produce it (subsidize), this cost goes to their taxpayers, and offers our domestic consumers a substantial savings. Let them do it as long as they will as it’s a losing proposition for them and a winning one for us.
Conservative scholars, John McGinnis and Mark Movsesian, claim that “special interests can and do assert a disproportionate amount of influence at the expense of general welfare.” “Increased free trade will displace workers who lack the competitive skills vis-à-vis workers in countries with comparative economic advantage and cheaper wages. Affected and displaced workers lack job mobility as their skills have been too specialized to be applied to other sectors of the market; thus they stand to lose the most under free trade.” Source: McGinnis & Movsesian, supra note 80 at 522.
“Rather than cost the greater economy more money via trade restrictions, they suggest that “direct transfer payments offer a solution that both checks protectionist measures and gives special interests compensation.” “Trade restrictions secured by protectionist interest groups are particularly deleterious to social welfare. It is well established in economic theory that the most effective way to increase the income of disadvantaged groups is through direct transfer payments...For example, instead of pressuring the Japanese automobile industry to adopt voluntary export restraints in the 1980s, the United States could have paid cash compensations to American autoworkers. This strategy would have cost far less than the $3 billion that American consumers ultimately spent in higher car prices.” Source: citing work done by Jim Chen, Globalization and Its Losers, 9 Minn. J. Global Trade 157, 212 (2000).
Simply stated, McGinnis and Movsesian suggest we should gladly accept cheaper imports, avoid trade conflicts, and pay the affected party or parties for their losses. This way more people win, while no one loses.