Steel & Economic Policy

Steel Consumption and Imports US apparent consumption of steel declined 3.3 million tons in 2003. The domestic industry shipped 104.1 million net tons of mill products in 2003, an increase of 4.4 million tons from the prior year. Imports were 23.9 million tons, and exports 9 million tons of mill products. Adjusting for 5 million tons of imported semi-finished blooms, billets and slabs, sold in 2003 to domestic mills for further processing, and also for US exports, apparent consumption of finished steel in the US market for 2003 was approximately 114 million net tons, a decline of 3.3 million tons from the prior year. Imports including semi-finished steel accounted for about 21 percent of US consumption in 2003, a welcome decline from 27.6% of consumption the prior year.

Table I – Total Domestic Shipments

Japan, the US, and the EU account for roughly 75% of the world’s $30 trillion of annual gross domestic product. The United States GDP is approximately $10 trillion, or one third of the world’s GDP. Consumer spending in the US, the engine that pulls the world economy, represents about $7.5 trillion. American consumers, therefore, spend about 25% of the world’s GDP on consumer goods. In this context, it is useful to compare the trade in steel of the US with that of the European Union, a comparable economic entity.

Table II – Steel Trade Balance Statistics For The European Union – 1994 – 2003

Steel Trade Balance For The United States – 1994 – 2003

In the ten-year period, 1994 – 2003, the US imported 316.6 million tons of steel mill products. By contrast, the EU, which is a substantially larger steel market than the US, imported 179 million net tons during the same period, approximately 137.6 million tons less than the US. The EU in the same period ran a 42.4 million ton trade balance surplus in its steel trade, while the US incurred a 258 million ton trade balance deficit. The EU manages its steel markets to ensure that steel making will remain an integral component of its industrial structure at whatever level of its comparative advantage. This has been the case since the 1960’s when a EU Commission representative stated that the EU would never abandon its steel industry for the sake of the international divisibility of labor.

US Trade and Current Account Deficits

Heretofore, the EU has benefited from the dollar exchange rate but will be hard-pressed, henceforth, to maintain a formidable exchange rate-related advantage in export markets. This also holds true for the Japanese steel economy.

Notwithstanding this, the US trade and current account balances are still in massive deficit, exacerbated by a huge rapidly growing trade deficit with China. Table three below sets forth the trade and current account balances of the developed countries (The Economist, April 10, 2004.).

Table III - Trade, Exchange Rates and Budgets

Note that through March 2004, the US has incurred a merchandise trade deficit of $552.7 billion over the prior 12 months, phenomenally higher than that of any other nation. The deficit on current account (including trade in goods and services, the balance between inbound and outbound investments, and repatriated profits) was -$540 billion. The European Union, in contrast, ran a surplus of +$87.1 billion in trade and +$32.4 billion on current account.

Effect of Overvalued Dollar on the Steel Industry

The fall in the US dollar has partially reversed the rise in its value since mid-1995. The overvaluation of the dollar caused massive damage to the US manufacturing sector as a whole and was a major cause of the recent import crisis and trade dispute in the steel industry. The level the dollar had reached was clearly unsustainable causing unacceptable trade and current account deficits. The dollar has lost much of the value it gained since 1995 relative to the major currencies (especially the euro and the yen) but the dollar has not yet fallen against the currencies of most of the developing countries that now account for nearly half of US trade.

The primary cause of the dollar’s rise was the relative economic strength of the United States compared with other regions of the world economy. Major US trading partners in Europe, Asia, and Latin America experienced economic difficulties ranging from slow growth to financial crises during the 1990s. Specific factors that contributed to this trend included the Asian financial crisis, Japanese economic stagnation, and the low-growth policies of the European Union.

The overvaluation of the dollar has had the most severe impact on the sectors of the economy that produce internationally trade goods, notably manufacturing. Although US manufacturing firms made massive investments in new technologies and vast improvements in their productivity, they have been unable to make these achievements pay off in the face of foreign products that were roughly 30 percent cheaper as a result of the overvalued dollar. Thus, exports sales slowed down while imports surged, both taking away market share from US producers and strength from US manufacturing.

The steel import crisis, which began in 1998, was an especially acute case of the damage done to a US domestic industry by the high dollar. Unlike firms in many other industries, steel producers are unable to shift production to foreign locations and have only a limited ability to outsource products from overseas (mostly semi-finished imports). Consequently, they bore the brunt of artificially cheap imports. The result was massive financial losses that led to 35 bankruptcies affecting roughly one-third of all steel employees; the filing of numerous trade complaints including antidumping, countervailing duty, and escape clause (safeguard) cases; and serious tensions with US trade partners who export steel. All this occurred in the midst of a US booming economy, in which overall demand for steel reached its highest level in US history in the 1998-2000 period and in spite of the fact that the domestic steel industry increased its efficiency dramatically, with rapid productivity growth and falling unit labor costs throughout the 1990s.

There were other causes of the steel crisis, including foreign government policies that maintained excess capacity and protected inefficient firms in other countries. Excess capacity outside the US (including Japan, other Asian countries, Russia and other former Soviet bloc countries, western Europe, and Latin America) led to a glut of excess supply in the global steel market which depressed world steel prices and led to last-resort exporting to the US market.

The countries that complained loudly about US steel 201 tariffs forget that their own policies depressed domestic demand in their economics and caused their currencies to depreciate. They were largely responsible for the excess supplies of steel they sold at artificially depressed prices into the US market. If they had instituted domestic economic stimuli, and allowed their currencies to rise against the dollar, much of the steel crisis would have been immediately solved.

Assessing the dollar’s fall in 2002/2003, it is now clear that the dollar had reached unsustainable levels and there is recognition that it needs to fall further. In this environment, it is important for US economic officials to abandon the flawed policy of supporting a high dollar and to accept the need for a lower dollar to remedy the problems that the overvalued dollar has created, both for the US manufacturing sector and for the US economy as a whole (including the large trade deficit, dependence on massive capital inflows, and growing foreign debt). The US government should announce its desire for a further orderly decline in the dollar. Monetary policy (i.e. the Fed’s interest rate targets) and occasional foreign exchange market intervention (coordinated with other major countries) should be used to nudge the dollar down and then to maintain it at a more stable and sustainable level. Efforts by other countries to intervene by maintaining fixed or managed rates to prevent the dollar’s fall should be strongly opposed.

The Problem with China’s Currency Value

China’s government continues to maintain the value of the Chinese currency within a narrow band. The band has not been adjusted over time for changes in relative inflation and the national surpluses China has achieved. China’s under-valuation of its currency distorts allocation of resources and artificially inflates the competitiveness of Chinese producers. Some estimates put the total under-valuation as high as 40%. US companies cannot compete against gross subsidies caused by such currency manipulation. The three graphs below from International Monetary Fund clearly show the problems.

The SMA urges the US Congress and the Administration to employ their leverage, i.e. China’s extraordinary access to the US market, to negotiate a more realistic relationship of the Yuan to the Dollar.

Multilateral Steel Agreement

The Steel Manufacturers Association, on behalf of US minimills, has consistently opposed the accordance of subsidies to steel companies by other governments or by the US government to its own domestic steel companies. Trade in steel, whether domestic or international, should be based upon comparative advantage, not government support for otherwise laudable social goals, including environmental cleanup, retraining, pension protection, technological and research support, etc. Any sovereign nation should be able to engage in and support these activities generically, but not in the context of providing financial advantage to one steel company over another in the world steel market. The basic problem is that there is no way to subsidize an operating steel company in one country without distorting the natural comparative advantage of a non-recipient steel company either in that country or another country.

Thus we have strongly opposed steel subsidies accorded anywhere, but continue to support the establishment of a Multilateral Steel Agreement (MSA), which unequivocally bans subsidies in steel making.

Nonetheless, an MSA short of this objective may be somewhat useful if it deters some subsidies, so long as the US does not have to surrender any of its rights under US and WTO-consistent trade law.