Arguing that steel and aluminum imports were harming the national security of the United States by weakening domestic industries, the Trump Administration has raised import tariffs under Section 232 of the Trade Expansion Act of 1962. These unilateral import restrictions outside the framework of World Trade Organization (WTO) rules threaten to spark a potential trade war, while protection of steel and aluminum industries from the pressures of international competition risks adversely affecting the economy and jobs.
In this article I would like to consider the present status of trade policy and the problems associated with import restrictions in light of the unique nature of the steel and aluminum industries.
For more than half a century, the United States government has resorted repeatedly to varied means to restrict imports by requesting voluntary export restraints, implementing anti-dumping measures, imposing trigger price mechanisms to restrict imports priced below certain price criteria, or resorting to countervailing duties to offset subsidies.
But unlike the safeguards used in the past, the question now arises as to why Washington has targeted steel and aluminum for import restrictions on grounds of national security. It is recognized around the world that the exceptions of WTO rules can be applied when measures are necessary to protect important national security interests of the home country, but these exceptions are interpreted to be very limited. Allowances so far made for application of Section 232 of the US Trade Expansion Act have been limited to only eight cases involving oil.
Even from a reading of the recent Department of Commerce research report, it is difficult to see why, within production networks stretching around the world, steel and aluminum should be regarded as special from a national security standpoint. The risk is that restrictive measures on grounds of national security will be expanded to other goods and services and spread among other countries, leading to expanding import restrictions which spark retaliatory measures by yet more countries.
This threat is all the more real if the aim is to create conditions making it possible to conduct trade negotiations with other countries from a more advantageous position. The initial purpose of the 1930 Smoot-Hawley Tariff Act was to protect agricultural workers, but it was soon expanded to apply to the industrial sector and precipitated retaliatory tariff hikes from Canada and European countries, leading ultimately to a tragic collapse in global trade. This mistake must not be repeated.
The goal of these recent import restrictions has been to reduce the pressure of international competition in steel and aluminum, and it would be a mistake to think they could lead to industrial revitalization. The US steel industry has long been protected from the pressures of international competition by import restrictions. According to research published by Princeton University professor Gene Grossman in 1986, job losses in the steel industry were mainly caused by structural changes, including the redistribution of resources to user and growth industries, and the impact of rising imports was marginal. Research by Portland State University Professor Roger Ahlbrandt et al concluded that the only way to revitalize the steel industry was to improve productivity and rectify high costs through efficient use of technology and superior management. If the reduction of international competition pressures is the goal, the result will surely be higher prices and further delays in revitalizing the US steel and aluminum industries.
Even if the higher prices for steel and aluminum benefit manufacturers, they will unavoidably harm industries which use those materials as intermediate goods.
President Trump has stated in effect that raising tariffs on imported washing machines will increase the number of factories in the United States. In the case of washing machines, it is the consumers who will suffer from the higher prices since they will have to resign themselves to either paying more or going without. In the case of steel and aluminum, however, the users are not ordinary consumers wanting to buy washing machines but manufacturers such as automakers.
Higher prices for intermediate goods will raise marginal costs for user industries, thus undermining their international competitiveness and causing job losses. Companies in these industries might well move production offshore in a bid to avoid the high prices of intermediary goods. Protection of the steel and aluminum industries will thus burden user industries and end in job losses. The more competition there is in the user industries, the greater the adverse impact will be, heightening the risk that user industries might themselves call for import restrictions.
If the goal is to revitalize the steel and aluminum industries, the best recourse is not import tariffs, which adversely impact user industries, but domestic policies which narrowly target producers. These policies could include measures designed to encourage capital investment, promote research and development, train workers and improve infrastructure to enhance productivity in the manufacturing belt.
The steel and aluminum industries are characterized by economies of scale unique in the materials industry. Competitiveness in these industries depends heavily on supply capacity, and one hallmark of the industry is that Chinese companies, which include a large number of state owned enterprises (SOEs), account for half the world’s supply.
Since 2000, the supply capacity of the Chinese steel industry has risen dramatically in tandem with that country’s rapid economic growth, ultimately accounting for three fourths of the increase in global supply capacity. Owing to the slump in growth which followed the global financial crisis of 2008, the Chinese domestic market became saturated. As it did, China increasingly used its increased supply capacity to sell in global markets, until Chinese exports ultimately eclipsed the demand volume of the United States (see Figures).
These developments may be understood in the context of China’s entry into the WTO, through which China gained free access to world markets. This rapid increase of China’s supply capacity within such a short period resulted in excess supply and slumping prices in world markets and did indeed give rise to friction with China’s trading partners.
WTO data show that investigations of China for alleged dumping of steel and other metals account for 20% of the world total. The situation in the aluminum industry is similar to that in the steel industry. Since 2000, Chinese production capacity has ballooned more than ten-fold. China already accounts for more than half of world production capacity, and its exports to global markets are rising fast.
The Chinese steel industry includes SEOs under the administration of the central government, such as the Ansteel Group and the China Baowu Steel Group, and also includes a large number of SEOs under the administration of provincial governments. The Chinese aluminum industry also includes SEOs, such as the Aluminum Corporation of China (CHINALCO), which is administered by the central government.
Since these SEOs receive subsidies from the central and provincial governments, they are relatively free of budgetary constraints and tend to maintain excess production capacity even while operating in the red. According to research conducted in 2017 by Gakushuin University Professor Watanabe Mariko, this trend is especially pronounced among mid- to small-sized SEOs under the administration of provincial governments. The non-market factors associated with these SEOs distort global markets and result in increased exports and slumping prices.
US steel imports provide over 30% of domestic demand, but imports from China do not even make up 1%. It may not be appropriate to apply to steel imports from China WTO rules the application of which requires that domestic industries incur material injury from dumping or rapid increases in subsidized imports by trading partners. It is undeniable, however, that the excess supply capacity of China has caused a slump in prices in global markets and that American industries have been exposed to the pressure of international competition through imports from a number of other countries.
If supplies to global markets continue to expand owing to non-market factors associated with SOEs, giving rise to market distortions, they should be corrected.
The question of excess steel supply capacity has been discussed at Organization for Economic Co-operation and Development (OECD) international forums and taken up by the G20 as well. The US Department of Commerce has argued that market distorting subsidies and government support measures should be abolished, that terms of fair competition in the steel industry should be promoted, and that structural adjustments should be encouraged through market-based gains. However, adequate action cannot be taken under present trade rules, and it is possible that the same sort of problems may arise in industries other than steel and aluminum.
The Trans-Pacific Partnership (TPP), which the Trump Administration announced it was backing out of, recognized that providing unfair profits to SOEs harmed fair and open trade and investment, so the TPP incorporated rules requiring that actions by SOEs conform with commercial practices. The party that played the leading role in furthering this rule was the United States. The proper way to resolve the steel and aluminum problem is not to attempt a solution through power using the leverage of import restrictions in bilateral negotiations conducted without a referee. Rather, it is by establishing multilateral rules for verifying and eliminating non-market factors which give rise to distortions of the global market.
It is not just the United States but all trading nations that, instead of turning their backs on free trade, should make effort to eliminate non-market measures such as subsidies and government support that harms fair and free trade and to build a framework to restore market functionality.
Translated by The Japan Journal, Ltd. The article first appeared in the “Keizai kyoshitsu” column of The Nikkeinewspaper on April 5 2018 under the title, “Bei yunyuuseigen no heigai (I): Hinmoku kakudai, kaigaino hofuku maneku—Jikoku sangyo no saisei nimo omoni (Harmful impact of US import restrictions (I): Contagion to other trade items, retaliation by trade partners, hindering revitalization of domestic industries).” The Nikkei, 5 April 2018. (Courtesy of the author)