X

Why We Need Tariffs on Steel

February 28, 2018

By Jeff Ferry, CPA Research Director

The Department of Commerce report on steel imports and national security asks Americans a fundamental question:

Are we going to defend the US steel industry from the decline caused by the growth of uneconomic foreign competition? Or, are we going to allow the industry to fade away and become dependent on other countries for this ubiquitous product, vital to our military and civilian economy?

We believe the answer has to be an effort in favor of defending America’s steel industry. Too much is at stake. America’s national security depends on a reliable supply of steel. America’s infrastructure, much of it urgently in need of renewal, depends on steel. Great American industries, including automobiles, aerospace, and many others, depend on a reliable supply of high-quality, low-cost steel. Thousands of jobs also depend on the steel industry.

Equally important, the international rule of law depends on the US taking a strong stand today. In the last nine years, China has increased its steel production 65% and now accounts for 50% of world production and 23% of world steel exports. Some believe it is the Chinese government’s deliberate intention to weaken the US steel industry; others say they are simply subsidizing their loss-making steel industry with billions of dollars of government money as a huge employment program, and taking advantage of the US market as the only major nation willing to accept large-scale imports.

National Security

The January report from the Commerce Department explains that the US military depends on steel for weapon systems, ships, planes, and land vehicles. Although critics have argued that only 3% of US steel production is required for defense needs, this ignores the broad range of types of steel needed by the military and the way a complex industry really works. As Commerce spells out in its report, the military needs not just thousands of tons of common steel plate, it also needs specialty steels including high-carbon forged steel, high-tensile strength steel, high-carbon steel laminate, steel forgings, and other steel alloys that deliver greater strength at lower weight than ordinary steel.

All these steel variations can only be produced by a healthy commercial industry deriving the majority of its revenue from civilian customers. The report cites (Appendix H, pg. 3) two cases where the Defense Department (i.e. the US taxpayer) has had to provide funds to the industry to ensure a supply of specific steel variations: one for the high-purity, low-alloy, iron-based steel used in MRAP vehicles widely deployed in war zones to protect troops from mines, and another steel variation for Navy-grade, heavy-alloy steel plate used in submarines, helicopter landing decks, and other military vehicles.

A robust steel industry is required to meet these needs. Yet despite the economic recovery since 2009, US steel production has declined, down 12% since 2012 to 78.5 million tons in 2016. The US has lost 11,000 steel jobs since 2012 to reach a new low of 81,400 employees, according to BLS data. Continued decline of the industry threatens our defense needs, including our ability to respond quickly in times of crisis. As the Commerce report (pg. 26) puts it: “A continued loss of viable commercial production capabilities and related skilled workforce will jeopardize the US steel industry’s ability to meet the full spectrum of defense requirements.”

A healthy industry is also important for the civilian economy. Steel is one of the most widely used materials in the world. Innovations in steel capability often play a substantial role in new opportunities and the competitiveness of industries like automobile and aerospace production. The view that steel is a mature, unchanging, dirty “old” industry is a facile presumption of those who don’t understand modern manufacturing. Research and development plays a role in every manufacturing industry. Steel and steel alloys evolve and change. As the World Steel Association points out, 75% of the steels in use today did not exist 20 years ago. Thanks to technological progress, the Golden Gate Bridge, which required 83,000 tons of steel when it was built in 1937, could today be built with only half that amount of steel. Our largest steel company, Nucor, has developed an innovative technique, known as Castrip, to use rollers to produce steel sheet as thin as 1 millimeter directly from the steelmaking furnace. The process is cheaper, more space-efficient, and more energy-efficient.

Imports and China

Capacity (or plant) utilization is the most important barometer of the health of our steel industry. At 80% or higher plant utilization, the industry is healthy. Below that level, it struggles. Between 1990 and 2008, the industry was healthy, with utilization rates averaging around 85%.

However, around the year 2000, China embarked on its monumental drive for economic growth. Chinese steel production has increased six-fold since 2000, rising from 127 million tons to last year’s 808 million tons. China now accounts for 50% of global production. Industry experts agree that global demand is only about 1,100-1,200 million tons, so some 400 million tons needs to be removed from the market to restore the world industry to health. China has recognized that it is overproducing. According to the Commerce report (Appendix L, pg. 4), the Chinese government has been urging its steelmakers to cut capacity at least since 2006, with little result. In a 2016 Reuters article, Shiheng Special Steel Group CEO Zhang Wuzong said the government’s plan to cut capacity by around 100 million tons was insufficient. “Getting rid of 100 million or 150 million isn’t any good—300 million or 400 million is more appropriate,” he told Reuters. Unusually outspoken for a Chinese executive, he went onto criticize the government’s planned $15 billion fund to take care of layoffs and debt write-offs for so-called “zombie” steel companies as insufficient to solve the problem. Speaking in early 2016, he forecast that Chinese steel production would fall by 40 million tons a year. Instead, in 2016, it rose by 4.5 million tons. China now produces more steel than the US, Japan, Russia, and the European Union combined.

This excess supply has led to a surge of imports into the US. In spite of over 100 individual tariffs on specific types of steel from specific countries, imports took 33.8% of US consumption last year according to Commerce Department estimates, up from an average of 30% over the preceding five years. Excess supply depresses prices in the US market, causing the industry to shrink. According to the Commerce Department report (pgs. 33-34), 10 steelmaking facilities have closed since 2000, in Ohio, Indiana, West Virginia, Delaware, Maryland, South Carolina, Alabama, and Oklahoma. Last year, ArcelorMittal announced the closure of a steel mill in Conshohocken, Pennsylvania. That list does not include other steel mills that have been “temporarily” closed while awaiting an upturn in the market—which may or may not come.

The net result for American steelmakers can be seen in Figure 1. The industry has been unable to earn a decent profit since 2008. The fundamentals of a capital-intensive business like steel require companies to earn a return well in excess of their cost of capital; otherwise they are not creating value and shareholders will not provide the funds necessary to maintain and renew the heavy capital investment required. A Coalition for a Prosperous America (CPA) analysis of the last nine years of steel industry financial data shows that the industry’s return on invested capital (the broadest measure of profitability) ranged from 5.65% for industry leader Nucor to a negative 11.76% for the struggling industry laggard US Steel. Yet the cost of capital for these companies ranged from 11.27% for Nucor to 22.37% for US Steel. Despite an uptick in profits in 2017 (partly driven by anticipation of tariffs), these companies are not generating enough profit to attract the capital they need to invest in their own businesses. Further shrinkage and decline would be inevitable without a remedy.

 

Figure 1: US steel companies have suffered losses or negligible profits since 2009.

 

The Commerce Department has recommended three possible remedies to President Trump (see pg. 8).

  • “Alternative 1A” calls for an import quota requiring a 37% reduction on 2017 levels for shipments into the US for each country sending steel.
  • “Alternative 1B” calls for a global 24% tariff on all steel imports into the US.
  • “Alternative 2” is for a 53% tariff on steel from those nations that are not close allies of the US, including Brazil, China, South Korea, Russia, Vietnam, and several others. Canada and the European Union are notably absent from this list.

All three alternatives are aimed at restoring the US steel industry to plant utilization levels of 80%. Alternative 2 has been designed to meet international considerations.

In its Feb. 23rd memo to Commerce Secretary Wilbur Ross, the Defense Department said it agreed that steel imports were endangering national security but added that it was concerned about the impact of action against steel from our allies. It asked Commerce to “create incentives for trade partners to work with the US on addressing the underlying issue of Chinese transshipment.” The idea of imposing steep tariffs only on certain nations could create an incentive for nations to resist Chinese transshipment. It also could mark a start for building an international coalition to pressure China to cut back on its production and exports. International conflict over steel can only be resolved if China is convinced that it cannot export its overproduction to the rest of the world. Our allies need to move away from the view that they can be unharmed bystanders as the bulk of overproduction ends up in the US. The entire international community has a shared interest in compelling China to act as a good global citizen instead of a rogue nation that pays lip service to “free trade” while relentlessly expanding its civilian and military capabilities.

The Commerce Department’s tariff recommendations have been criticized by many “free trade” economists. They claim that tariffs will raise prices, hit consumers, and reduce American gross domestic product. They fail to recognize that American consumers are also American producers. While a tariff on steel will lead to small price increases in steel-using goods, it will also lead to more jobs and economic growth in the steel industry. Over time, that growth will spread to other industries. We know from bitter experience that the majority of folks pushed out of manufacturing jobs end up working in service industries with lower pay and worse benefits. That’s if they can find any work at all. With its critical importance to so much of the military and civilian economy, steel is an excellent place to begin a major pushback in favor of good jobs, US productive capacity, economic rebuilding, and the struggle for a more realistic international dialogue on economic relations.

 


Showing 2 reactions

Please check your e-mail for a link to activate your account.
  • The EU, Canada, and Mexico has proposed tariffs on U.S. products and we need to show how stupid they are:
    They said -Jeans these are manufactured in Mexico and other 3rd world countries,not in the US since the late 80’s.
    Whiskey – we only manufacture Bourbon and 95% of total consumed, the others are made in Canada or EU.
    Fruits and other eatables are mostly imported from places other than the US.
    When the gov talks about trade imbalances with Mexico we don’t consider the products we ship to them that come back as cars and parts. These are considered as US exports.
    Go into any Walmart, Home Depot, hardware or electronics store and try to buy an American made product.
    The government changed the requirements for determining what was considered “made in the USA” now an automobile only needs 50% to be considered made in the USA and this now states "north American content.
  • Jeff,

    Great research and analysis.

    The question that has been bothering me lately though concerns how a path can be constructed for actually bringing our trade deficit into balance.

    The “national security” argument is a good one, but it has a very limited range. And the steel industry should also fall under a general argument with a very broad scope.

    Should everything that does not fit into the national security framework just have to wait for the wonders of macroeconomic tinkering to reverse their fortunes?