Steel tariffs are first step in stamping out overcapacity

Steel tariffs are first step in stamping out overcapacity

It has been clear since summer 2016 that President Trump would impose tariffs to protect the US steel industry. He outlined his strategy on the campaign trail in Monessen, Pennsylvania.

“When subsidised foreign steel is dumped into our markets, threatening our factories, the politicians do nothing,” he said. “I will use every lawful presidential power to remedy trade disputes, including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.” 

Apparently nobody took him seriously. Instead of working to rein in global overcapacity, resist an epidemic of beggar-thy-neighbour dumping and end an inexplicable tolerance for China’s state-led assault on the free market, the elite consensus has focused ire on the president, while continuing in a state of denial as Mr Trump’s tariff strategy has begun playing out. He has announced his intentions to implement heavy tariffs on steel imports.

Signing those papers will focus attention on an existing problem. World steel production far exceeds demand, and China is most complicit. Beijing first acknowledged in 2007 that it was producing more steel than it could use. 

Yet instead of limiting production, China brought online 552m tonnes of extra capacity between 2007 and 2015, and produces half the world’s steel. By contrast, the US produced 78.5m tonnes of steel in 2016, down considerably from its peak of 136.8m tonnes in 1973.

Consumers may view overcapacity as a gift in the form of depressed prices but western steelmakers and steelworkers see it differently, with justification. As a commodity, steel pricing is already subject to volatility. Compound that with the scale and scope of non-market actions by China, including state subsidies and limited market access, and you have quite a mess. 

That is why most big steel producers practise active or tacit protection and deploy tactics to absorb or deflect excess production. In the US, the industry brought dozens of successful steel dumping cases before the Obama administration. The US Department of Commerce maintains 169 anti-dumping and countervailing duties, intended to balance foreign subsidies, on imported steel products.

This piecemeal approach has done little to staunch import penetration, however. Finished steel imports accounted for 27 per cent of the market in 2017. The US still imports more steel than any other nation, so one can hardly claim this is a protectionist racket. 

"Overcapacity is a malady that begs for a hacksaw, rather than a laser-guided scalpel some would prefer"

 Efforts by the Organisation for Economic Co-operation and Development and the G20 to reduce overcapacity in the sector have failed to rebalance the market. The World Trade Organization is functionally and institutionally incapable of mediating China’s state-led capitalism and the industrial overcapacity it spawns. Put simply, efforts to mitigate the damage of China’s practices have failed. 

Mr Trump has chosen to stand up and fight back. He is within his rights to do so. The Section 232 instrument his administration may deploy is a blunt tool in the arsenal of trade measures. But overcapacity is a malady that begs for such a hacksaw, rather than a laser-guided scalpel that some people prefer.

 Many pundits forecast that “trade wars” will follow, which is an attention-grabbing headline. This seems far-fetched. Even with broad steel tariffs in place, the US is still likely to be the world’s largest steel importer. Instead of threatening the US with retaliatory measures aimed at Wisconsin dairy or Kentucky bourbon — which are sure to be quashed by the WTO — governments would be better served by quarantining Chinese steel imports until Beijing winds down overcapacity.

 If the WTO were to claim that the US cannot invoke national security as a rationale to impose steel tariffs, that would provide Mr Trump’s trade ambassador, Robert Lighthizer, with more evidence that the trade body is dysfunctional. 

I visited Coatesville, Pennsylvania, which has made military-grade steel since 1810. The steel mill delivers world-class efficiency but its future is uncertain. Mr Trump’s action will be cheered in this community. Market corrections are not without pain, but for decades the pain has been concentrated in the steel valleys of America.

 The market, our workers and consumers are best served when global production and consumption are better aligned, and fair market pricing is restored. Mr Trump can jump-start a long-overdue process of squeezing out massive overcapacity. Such steel tariffs would be an audacious first step in normalising the steel market. 

Scott Paul is president of the Alliance for American Manufacturing. He served on President Trump’s American Manufacturing Council before resigning in August last year es un sitio web oficial del Gobierno Argentino