Nathan Patterson
Michael Jamieson
ENGL 1160
27 November 2018
The Steal Trade
Ohioan Scott Ryan worked as a steelworker in Ohio for over 20 years, until he lost his job. His coworkers weren’t so lucky either, with all of them losing their jobs at the same time. They knew the steel industry hasn’t been doing well in recent years, after all the United States’ share of the steel industry declined from 37% of the world market to only 6% today, but Scott never thought it would happen to him. He was assured the new policies would have no effect on his life, but his working class income and stay at home wife ensured he would lose his home, car, and any sense of economic security. Forget sending his kid to college. It’s easy for the millionaire policy-makers to simply tell these newly unemployed workers to get a new job, but Scott has been honing his skills towards steelmaking for the last 20 years. He can’t simply jump to a new job when he has a family to support. Scott Ryan’s story is only one of many across the entire Rust Belt of the United States. They will never forget what an experience like this does to a family. It’s devastating. Congress must enact steel tariffs on China who holds unfair trade practices to protect steelworkers like Scott Ryan.
As old a concept as taxes on citizenry is taxes on imports, or tariffs. Until the 1774 publication of Adam Smith’s “The Wealth of Nations”, tariffs held an unquestionable status among chief policymakers in regards to the protection of a nation’s wealth. Adam Smith’s book challenged this notion of mercantilism, saying “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have the same advantage”. In other words, Adam Smith said if a foreign country can make the same product cheaper, the domestic country can and should purchase this product, instead of trying to develop its own industry. This radical shift in economic thinking not only disrupted the European mode of thinking but also the American. The south quickly became advocates of free trade to protect their exports, while the north remained protectionist. In 1789, George Washington’s very first year as acting President, the country quickly adopted the Tariff Act of 1789, allowing Congress to impose a fixed tariff of 5% on most imports. Both Washington and Alexander Hamilton went against the advice of Adam Smith, and seeked to stoke the United States manufacturing industries, seeing it as a national security issue. They hoped to hold self-sufficiency, or autarky, in the event of another war. Founding Father Thomas Jefferson also agreed with this sentiment after the war of 1812, saying “experience has taught me that manufactures are now as necessary to our independence as to our comfort”. The tariffs were seen as a temporary way to protect the nation’s national security.
By 1820, the average tariff was around 40 percent, and the national policy of protectionism remained in effect until the Civil War, which was as much about tariffs as it was about slavery. South Carolina first raised the issue of nullification not in respect to slavery, but to tariffs. State legislators blamed the Tariff of 1828 as the cause of economic downturn, and subsequently declared it null and void. The issue was aborted when James K. Polk passed the Walker tariff of 1846, limiting tariffs to only 25%, one of the lowest rates in American history. Although the south won the battle, they never won the war. Abraham Lincoln called himself a “Henry Clay tariff Whig”, and raised the tariff to 44 percent shortly before the Civil War. While tariffs greatly benefited the industrialized North, the agricultural South remained in favor of free trade.
The debate continued into the election of 1886, with Grover Cleveland calling for the abolishment of tariffs. He argued that domestic industry was mature enough to compete with other countries. By 1900 U.S. steel production increased more than 500 times from 22,000 tons to 11,400,000 tons. The London Daily Mail wrote: “We have lost to the American manufacturer electrical machinery, locomotives, steel rails, sugar-producing and agricultural machinery, and latterly even stationary engines, the pride and backbone of the British engineering industry.” Cleveland would go on to lose to his pro-tariff opponent, but nevertheless this shows the tariff issue remaining an important issue within American politics. With new sources of revenue from the Federal Reserve and the income tax, Congress delegated tariff policy to the executive branch with Reciprocal Tariff Act of 1934, and later the General Agreement on Tariffs and Trade (GATT) became the World Trade Organization, setting trade standards among all member countries. In the late 1990s Clinton passed NAFTA and gave China entry into the WTO with “most favored nation” trading status, guaranteeing low tariffs. It wasn’t until 2002 that the Bush administration passed steel tariffs and 2018 with President Trump’s new tariffs. In only 48 years, the United States went from the world’s leading steel producer to holding only 6% of the global steel market today.
There are many reasons why these jobs are disappearing from the steel industry. The most prominent cause is cheaper prices for foreign steel, particularly Chinese steel. Once a centrally planned communist country, today Deng Xiaoping’s China makes up over 50% of the global steel market. This is partly due to China’s Four Modernizations plan promoted by Deng Xiaoping, to the point where its citizens even forged steel in homemade furnaces. But the main reason today China makes up so much of the global market is because it has such cheap steel prices. China remains a developing country and so it lacks worker protections and regulations found in developed countries today such as the United States. For example, the minimum wage in China ranges from ¥9.00 to ¥17.00, which equates to $1.30 to $2.45 respectively. Considering that labor costs accounts for as much as 70% of total business costs, this makes steel considerably cheaper to make in China than the United States, where the federal minimum wage is more than twice the Chinese rate, at $7.25 per hour. In addition, United States steel companies such as US Steel are required to follow numerous sustainable steel certifications like the ISO 4001 that Chinese companies simply don’t have to follow. Finally, the Chinese steel companies are often owned and subsidized by the Chinese government to the point where towns are being built for nobody to live in.
The absence of regulations is not the only cause of low prices. Chinese companies in particular are guilty of over producing steel and then selling it all on the global market. This is called “dumping”, and is widely regarded as anticompetitive. This is because the increased supply lowers prices for the dumper’s product, thereby making it extremely competitive, to the point where the prices are below cost, driving others out of business. Companies will usually engage in dumping to gain market share in a foreign market. While Dumping is allowed per the WTO and NAFTA under the condition that it doesn’t cause material injury to a domestic industry of the importing country. This would mean that dumping is allowed per the WTO’s discretion. China is an example of this dumping, especially for steel. They allow it by having several companies do it. After Trump enacted tariffs on their steel, the EU had to enact their own tariffs on China to prevent them from dumping into their own markets.
Although foreign companies like those in China have access to our domestic market, our own American companies don’t enjoy the same pleasure. If an American company is interested in the Chinese market, China requires the company to utilize 1 of 3 methods. The first method is the American company must engage in a joint venture between the business owner and a Chinese company. Harris doesn’t recommend this strategy, saying “You’re working with someone who’s familiar with the territory on their turf, and they will end up with the business.”. The second option is setting up a Representative office, though this drastically limits the scope of what you’re allowed to do in China. A representative office is exactly what it sounds like: You can’t deliver any services or products, or generate revenue, as this representative office is only meant to represent your offshore entity, to build your brand name. The third option and the most attractive is through the wholly foreign owned enterprise. According to Frisbie, “75 percent of American investment in China these days is 100 percent American-owned facilities”. This method also endures the most discrimination from the government. It takes more time for approval, and it requires a minimal capital investment that you must put into a Chinese bank. For fair trade to be viable, both countries need to have equal access to each other’s markets.
Another reason is that domestic companies move overseas to avoid paying taxes in the United States. Companies headquartered in the United States will often buy a foreign company, and relocate their headquarters to said foreign company’s country. This is called Tax Inversion. Corporations will often do this because the United States taxes company profits at a rate of 39%, higher than any other developed country. Therefore when a company becomes foreign through a merger, or inverts, it no longer owes this tax to Uncle Sam.
As Bloomberg View columnist Matt Levine wrote in 2014:
“If we're incorporated in the U.S., we'll pay 35 percent taxes on our income in the U.S. and Canada and Mexico and Ireland and Bermuda and the Cayman Islands, but if we're incorporated in Canada, we'll pay 35 percent on our income in the U.S. but 15 percent in Canada and 30 percent in Mexico and 12.5 percent in Ireland and zero percent in Bermuda and zero percent in the Cayman Islands”
Many administrations have taken actions to save the steel industry in the past. President Reagan, for example, tried to negotiate steel import quotas in the 1980’s. Despite his advisors’ wide division among his cabinet, they finally agreed to hold foreign steel to only 18.5 percent of the American market. This was the first time any President has set an import penetration figure for steel. The countries targeted were said to be selling steel at unfairly low prices or to be overly restrictive in their own steel import policies. Among these countries were Brazil, Spain, Japan, and South Korea. According to the New York Times, “Mr. Brock said he was not accusing the Japanese of selling steel unfairly, but he noted that ''there is at least some problem'' when imported steel in Japan represents only 4.9 percent of the Japanese market, compared with 24.9 percent in the United States.”
“In characterizing today's decision, Mr. Brock called it ''a clear message that the U.S. intends to play by the rules and that we expect other countries will do so as well.'' He said it also showed ''a clear determination that we will not be the world's steel dump.'”
The George W. Bush Administration also tried to impose tariffs of 8-30% after over 30 steel makers had declared bankruptcy. This quickly failed after the WTO determined it a violation of their terms and authorized over $2 billion in sanctions if the United States didn’t remove the tariffs. The European Union threatened to counter with tariffs on United States with Florida oranges and Michigan cars. The George W. Bush Administration quickly withdrew the tariffs in 2003.
Presently, the Trump administration has decided to impose steel tariffs of 25% on most countries. This has led countries like China and the European Union to impose retaliatory tariffs on United States food. In response, the Trump administration used the Commodity Credit Corporation to recoup farmers for up to $12 billion.
All of these past steel tariffs have been met with varying degrees of success and challenges. The Reagan import quotas helped the steel industry, but because most agreements were only voluntary, this has given other countries the ability to back out of this agreement later after the Reagan administration has passed. In addition, the Reagan administration only targeted a couple of countries, however they did not cover the country which requires our attention today: China. The George W. Bush administration implemented tariffs poorly. While it was the correct reaction, they didn’t cite Section 232 of the Trade Expansion Act of 1962 which allows the president to impose tariffs based on the recommendation from the US Secretary of Commerce if “an article is being imported into the United States in such quantities or under such circumstances as to threaten or impair the national security. Preventing any possible retaliation from the WTO. This is where the Trump tariffs succeeded. The Trump administration also undertook correct actions to recoup farmers and other industries to recoup any losses of retaliatory tariffs.
Therefore, Congress needs to pass a tariff of 25% on China. Based on the report from the US Secretary of Commerce, the recommended amount is 25%, and as China controls over 50% of the global steel market, the only country needed to impose upon China. Although President Trump has already enacted these tariffs via Executive Action, Congress needs to make this policy long-standing such that the next President can’t simply revoke these trade policies.
A tariff of 25% will raise the costs of foreign steel producers thereby offsetting their previous low prices. This will now make United States steel producers more competitive, earning higher profits and able to hire more workers. And this has been proven to work after the Trump tariffs too, as US Steel reported a 38% increase in its second quarter operating profit and tripled full year profit forecasts, while the actual price of steel has only risen 5 to 10 percent. Nucor also had profits double shortly during their second quarter. This shows that implementing tariffs raise the prices of steel, strengthening domestic companies, while hurting Chinese ones.
Similarly, this tariff will also penalize American corporations from moving , as they’ll now have to This will keep companies from inverting because we can introduce an automatic trigger when the company is identified as inverting (The Congressional budget Office has a described method for how tax inversions work) and this will trigger an automatic investigation and therefore tariff on said company until it comes home.
China will take notice of their weakening steel dominance in the United States, and they’ll want access back into our market. This is evident by their quick action to implement retaliatory tariffs on the US economy, their frequent whining of the US starting a “trade war”, and their opening of a complaint within the WTO. The United States can simply ask for the Chinese to reduce the requirements for the United States entry into their economy, reducing other tariffs, their recently implemented tariffs, and to stop the steel dumping. Should the Chinese accommodate to our commands, we’ll be happy to remove our tariffs. In this way, everybody wins. The Chinese gain access to our economy on condition that they engage in what we deem fair trade practices, and American steel gets access into the Chinese economy. This has been shown before to work, as evident with the Pasta War, during, funnily enough again, The Reagan administration. The United States raised tariffs on Pasta from Europe in 1985 because of discrimination against its Citrus industry. Europe responded with higher tariffs on American lemon and walnuts. Only one year later, both sides signed an agreement removing both tariffs and ending citrus discrimination.
As President Trump said in his first address to Congress: “I believe strongly in free trade but it also has to be fair trade”. The United States is and has been more than willing to trade with countries of all economic status, but when those countries’ trade policies negatively affect the United States, it’ll take action to protect its own interests. This includes starting a trade war if needed, and these United States will win.