China’s Big Steal on Steel

Since it entered the WTO in late 2001, more than a quarter of U.S. steelworkers have lost their jobs

Business is booming for America’s outsourcing-happy economics establishment. Thanks to the unprecedented attacks on U.S. trade policy by outsider presidential hopefuls Donald Trump and Bernie Sanders, the Establishment Media market can’t showcase enough of its claims that creating the freest possible trade is always a terrific idea for the nation’s economy.

What these professors and think tankers never mention, though, is how trade liberalization done wrong can backfire disastrously – a lesson now painfully clear to steel companies and workers in America and around the world. The blunder they’re paying for is Washington’s bipartisan enthusiasm for breakneck trade expansion with China – whose rulers have long viewed international commerce as a “heads we win, tails you lose” proposition.

The result has been an unprecedented, Chinese-fueled global steel glut that, contrary to trade dogma’s promises, keeps rewarding waste, punishing efficiency, and wreaking havoc in a sector crucial to the United States and scores of other economies. Worse, the U.S. government’s determination to stay the trade course with China could put other major American industries at risk, too.

Who Started It? Hillary’s Husband
The story starts with President Clinton’s decision to shepherd China into the World Trade Organization (WTO). The policy was touted as a way to use international law to pry open China’s explosively growing — but heavily protected — markets to U.S.-based businesses and their employees.

But the multinational companies and their Wall Street financiers, who also led the charge for admission, had another agenda entirely. Mindful of rock-bottom Chinese incomes, they valued China overwhelmingly as a super-low cost production site for supplying the lucrative U.S. market – which would supercharge American imports, not exports. WTO membership for China was needed to weaken America’s legal authority to use tariffs to prevent the multinationals’ future Chinese output from flooding the country and decimating firms still producing domestically and employing their fellow citizens.

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Congressional Republican leaders echoed the Clinton/multinationals’ claims, and Beijing joined the WTO in late 2001. Once safely inside, China as planned became a powerful magnet for manufacturing investment, most of it focused on directly or indirectly exporting — with consumption-dominated America the prime target.

U.S.-based industries could still profit from China’s industrial growth if they made products — chiefly production equipment and materials — the Chinese hadn’t yet mastered. And although steel wasn’t one of these, textbook economics held that American firms could sell robustly to China, too, thanks to superior efficiency and quality.

China Knows Better, Buys Chinese
But having already spent massively to create their own inefficient but gigantic state-controlled steel sector, Beijing was determined to keep Buying Chinese. Moreover, the Chinese industrial construction boom set off by WTO membership — which also included massive infrastructure build-outs and modernization — created an irresistible temptation for Chinese local and provincial governments. With their economies always hungry for new tax revenues and their leaders always eager to impress Beijing with dazzling production performances, new steel mills were an ideal way to meet both needs – especially since the central government was always to provide cheap financing.

The result was by far the strongest – and most successful – set of government carrots for steel-building in human history. The numbers are simply jaw-dropping. Between 2002 – the year after China’s WTO entry – and 2014, global steel production increased by just under 84 percent in terms of tonnage. China’s output jumped by more than 350 percent. Indeed, between 2004 and 2014, China accounted for fully 91 percent of the world’s total steel output growth. Consequently, the Chinese share of the world’s steel output nearly doubled – to just under 50 percent.

Crude steel

More important, so much steel was made in China that not even the country’s skyrocketing industrial growth could absorb it all. Indeed, China’s steel use during this period increased by “only” some 270 percent. Thus, whereas in 2002 China consumed about nine and a half million tons more steel than it produced, in 2014, it produced about 112 million tons more than it consumed.

The real scale of Chinese steel overcapacity, however, is actually much greater. For the country is full of mills that are currently partly or largely idle. When this production potential is included — and as often the case with China, the statistics might be dicey — estimates of its overcapacity can jump to 500 million tons.

Even a highly conservative estimate of Chinese overcapacity — at 180 million tons — pegs it as fully half the global total.

China Stomps on the Tundra
But soon American and other foreign steelmakers faced a problem much bigger than being shut out of China’s rapidly growing steel market. Once oversupply began appearing, Beijing, not surprisingly, decided that selling the surplus overseas was much more appealing than closing mills and laying off workers. Between 2004 and 2013, its steel exports tripled — and then really took off. In 2014 alone, they surged by another 51 percent and jumped another 20 percent in 2015.

The United States wasn’t the only victim – steel sectors all over the world suffered from plummeting prices, cratering profits, and the resulting obstacles to continued investment in plant and equipment. But Chinese steel exports to America soared by nearly 493 percent in dollar terms between 2002 and 2015 – much faster than the global increase, thanks to the U.S. failure to support its industry and its decision to keep its market generally wide open.

Because Washington’s endorsement of free trade enabled Chinese and other foreign protectionism, the U.S. steel sector paid an unusually heavy price. 

That strategy might have pleased the China Lobby and steel-using industries, which enjoyed prices artificially manipulated by Beijing for a key input. But because Washington’s endorsement of free trade enabled Chinese and other foreign protectionism, the U.S. steel sector paid an unusually heavy price. Although China grabbed most new world market share, most other countries’ steel producers managed to keep output growing or stable. But between 2004 and 2013, output in the North American — mainly U.S. — steel industry dropped by 11 percent. And since China joined the WTO, 27 percent of American steelworkers have lost their jobs, versus 21 percent of total U.S. manufacturing workers.

In the ultimate irony, however, the Chinese government-fueled steel glut might now be biting China, too. Beijing’s rhetoric at least recognizes the mammoth waste involved in subsidizing ever more zombie steel mills and their employees, and China has vowed to start cutting capacity. But that’s a risky strategy, since its overall economy is slowing, and political unrest is brewing. As long as the United States keeps rewarding China’s capacity building by buying its dumped steel, expect Chinese leaders to keep taking the easy way out. And since so many other Chinese industries have built way too much capacity, too — including aluminum, flat glass, paper, chemicals and possibly autos,look for many more domestic American manufacturers to be victimized by Washington’s free trade extremism, too.

Alan Tonelson, who blogs on economic and security policy at RealityChek [www.alantonelson.wordpress.com] is the author of “The Race to the Bottom” (Westview Press, 2002).

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