If we’re so productive in steel, why the persistent deficits?

March 7th, 2018 at 9:03 am

First, let’s get this out of the way: I’m certain the Trump tariffs will do more harm than good. But I’ve been trying to add a bit more nuance to the conversation than “trade war!” and “higher prices!”

It’s been clear forever that team Trump mistakenly views the trade deficit as a scorecard, one that’s not improved on their watch so far. Again, nuance is required. There are times when the overall trade deficit is a clear drag on growth, and times when the capital flows that support it are distortionary. But this is not one of those times, and targeting bilateral trade deficits makes no sense and can be counterproductive, as I describe here (and I’ll have more to say about this question of when trade deficits are problematic in coming days).

Still, Trump’s lousy tariff idea is surely motivated by our persistent deficits in steel and aluminum, a point I thought was missing from this otherwise useful article in the AMs WaPo on US productivity gains in steel.

Source: https://www.trade.gov/steel/countries/pdfs/imports-us.pdf

The piece describes impressive productivity gains in steel production:

Labor productivity has seen a fivefold increase since the early 1980s, going from an average of 10 hours of work for each finished ton to an average of two hours in 2016, according to the American Iron and Steel Institute. Many North American plants were producing a ton of finished steel in less than one person-hour…

But if we’re so damn productive in steel, which should imply competitive pricing, why are we by far the world’s largest importer with persistent net imbalances? Why is so much domestic demand for steel met by imports? Obviously, price—but again, why?

It could be that other countries’ productivity gains in steel production have been greater than ours, or their labor costs are lower, i.e., our unit labor costs are not so competitive. But at least in broad manufacturing, that’s not the case–our ULCs are, on a dollar basis (so factoring in exchange rates), are below that of most of our trading partners, both in levels and growth rates.

Source: BLS

Certainly at the heart of the problem is China’s out-sized contribution to excess global capacity, which neutralizes the productivity gains documented in the WaPo piece (excess capacity is roughly unutilized production). This 2016 Duke University study (sponsored by the Alliance for American Manufacturing) gets right to the point:

The global steel sector is once again in a state of overcapacity. The sector, predominantly fueled by China’s expansion since 2000, has grown to over 2,300 million metric tons (MT) while only needing 1,500 MT to meet global demand. The result is a global steel sector at unviable profit levels and an influx of cheap steel in the global trading system adversely affecting companies, workers, and the global trading regime.

The first figure shows the Duke studies measure of steel capacity and production, along with the difference, which is overcapacity. The table below that shows production by country, wherein you can see the extent to which China is an outlier.

Source: See text.

Source: See text.

The table also shows how clearly Trump’s scattershot tariffs are not the solution; just look at Canada’s production! But the fact that Trump’s tariffs are the wrong solution does not mean there isn’t a problem!

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6 comments in reply to "If we’re so productive in steel, why the persistent deficits?"

  1. Fedup says:

    It’s a terrible problem. According to my information, the US imports as much steel as it produces. Given that it exports some of its production, it imports over half of what it consumes.

    If once country dumps on the market, others may lower prices to compete.

    Regarding productivity, I highly doubt that the statistics are gathered properly on US manufacturing. Perhaps it has changed recently, but not having the time to wade through it, I have to simply assume that they are inaccurate.

    Because of globalization, if components of a large, manufactured product are produced in a foreign country, the cost is simply a component cost, and the labor required to produce it is not counted against our manufacturing productivity.

    I would expect the ‘scattershot’ nature of the tariffs will be corrected over time, so I don’t think this is a big deal at all.

    RE: “But this is not one of those times,” I disagree. Consumer debt is extremely high and growing. While it might not seem like a drag at the moment, the trend doesn’t look sustainable over the long term. Recessions tend to come in waves through changes in credit and consumer spending conditions (often hand in hand). So its kind of like an earthquake that builds up pressure at the boundaries through undetected drift. The drift is there, the drag is there, but it is only detectable when the boundary releases the pressure or causes a recession.

    International capital flows aren’t necessary to produce unsustainable consumer credit imbalances.

    • Pgl says:

      Globalization has been going on since the 19th century. Change your view here.

      It is really really simple. The US Steel industry is a monopoly that charges high prices. You can get cheaper steel from Canada or Japan because it is priced better. Tariffs will not change that because the world is denominated in dollars. That will just pump more bucks out into foreign countries and destroy what the tariff was intended for. We are already seeing that in Timber. If you want to return to the Gold Standard, then Wilber Ross can be honest, but I suspect he has overseas business interest with this.

      Oh, I will also add current US steel imports are not that impressive when you adjust volume size, historically to GDP in the private sector. A big difference not mentioned is public investment has fallen from 15%ish to 3%ish since 1973. Many of those old public works projects required American steel. With that diminished, that leads toward unprofitability. But we already know that.

      • Fedup says:

        “Globalization has been going on since the 19th century.”
        So what?

        “Change your view here.”

        “That will just pump more bucks out into foreign countries and destroy what the tariff was intended for.”
        This doesn’t make sense.

        “If you want to return to the Gold Standard”
        This is a ridiculous statement.

        “With that diminished, that leads toward unprofitability.”
        Hence the higher prices, apparently. So what?

        What is your business interest in this?

        We’ll just have to see what happens.

  2. spencer says:

    Most of the improvement in steel productivity stems from closing down old blast furnances an opening up new minimills as Nucor does.

  3. Orderacustomessay says:

    b1- b2-b3, deficit grave): invalidità del 100%; – schizofrenia residuale (tab. b1- b2-b3, deficit moderato): invalidità del 75%; – schizofrenia residuale (tab. b1- b2-b3, deficit grave): invalidità del 100%; – disturbo schizoaffettivo (tab. b1- b2-b3, deficit grave): invalidità del 100%; – depressione maggiore, episodio ricorrente (tab. c1-c2, deficit moderato): invalidità dal 61 all”80%; – depressione maggiore, episodio ricorrente (tab. c1-c2, deficit grave): invalidità del 100%; – disturbo bipolare I (tab. c1-c2, deficit moderato): invalidità dal 61 all”80%; – disturbo bipolare I (tab. c1-c2, deficit grave): invalidità del 100%; – disturbo bipolare II e disturbo bipolare sai (tab. c1-c2, deficit grave): invalidità del 75%; – disturbi deliranti (paranoia, parafrenia, delirio condiviso, altri): invalidità del 75%; – anoressia nervosa (tab. d, deficit grave): invalidità dal 75 al 100%; – ritardo mentale di media gravità (q.

  4. otsutsumi says:

    I am Spartacus #2658434, posted on March 12, 2018 at 2:45 pm You are mistaking concepts. Not to mention (conveniently) ignoring that countries have both surpluses and deficits depending on their trading partners. Yes there can be net trade deficits, but that is not income. International trade is not a nations only source of income. Even accepting the GDP = C + I + G + X – M, the trade deficit (or surplus) is the X – M bit. I have not ignored what you claim. I”ve repeatedly referred to the overall US trade deficit of $800B. It”s a given that with some there will be a deficit, with others a surplus. What”s important is the end ledger. So don”t claim something I haven”t said or ignored. For the US, $800B is the equivalent of 4.5% of GDP. It”s up to you to make the case that the US can sustain the annual loss of 4.5% of GDP indefinitely. Since running these huge deficits, underemployment has grown, wages have been stagnant and growth has been low. These are facts not theories like you put forward. Returning some of that deficit to the US will increase GDP. This is a fact not an opinion. custom writing