Manufacture This

The blog of the Alliance for American Manufacturing

There’s a lot of misinformation out there.

President Trump signed an executive order on April 20 to initiate a Commerce Department investigation to determine whether foreign steel imports threaten national security. A week later, he signed another order launching the same type of investigation into aluminum imports. If Commerce finds that these imports do indeed impact national security, Trump could act to restrict imports, including through tariffs.

While these investigations were heralded by both industry executives and the United Steelworkers union, the pushback quickly began. Let’s examine what folks are saying, and bust a few of the myths.

Myth No. 1: This is going to start a trade war with China.

This is the argument we see most often, so let’s start here. It requires us to take a step back to understand what is actually happening when it comes to steel and aluminum imports.

For the past several years, China has made far steel and aluminum than it can use itself. The vast majority of this production is being conducted by government-owned companies and heavily subsidized.

China has increased its steelmaking capacity 662 percent since 2000; its overcapacity in 2015 alone hit 336 million metric tons. This has completely shaken the global market. The world needs 1,500 million metric tons of steel to meet global demand; it now has 2,300 million metric tons. China is the problem — it has produced 75 percent of new steel stock since 2000.

It’s the same story with aluminum. China has increased its share of the world market from less than 11 percent in 2000 to nearly 53 percent today.

There’s a strategy here.

Since China cannot possibly use all that steel and aluminum itself, it prices these products far below fair market value and dumps them into U.S. and European markets. China knows that it takes time for U.S. manufacturers to respond to an import surge. What it is aiming to do is capture enough market share so it can put American companies out of business.

Unfortunately, the strategy has worked, at least so far. Tens of thousands of steelworkers have faced layoffs and dozens of steel facilities have closed since January 2015; there is only one American smelter left to produce aerospace-quality aluminum.

Here’s the truth: We already are in a trade war with China when it comes to steel and aluminum. We have been for years. What we’re seeing from the Trump administration is a change in U.S. strategy.

Myth No. 2: Isn't this just protectionism?

It’s important to remember that there are longstanding legal avenues in place to address instances of unfair trade, and previous presidential administrations have utilized them when appropriate.

President Ronald Reagan — considered by many to be one of the great champions of the free market — issued tariffs on Japanese-made products like computers, televisions and power tools after finding that Japan was failing to comply by a trade agreement. In 2002, President George W. Bush issued tariffs on several types of steel. And during the Obama administration, the Commerce Department and International Trade Commission (ITC) ruled in dozens of trade cases and issued tariffs on specific steel products, and the U.S. Trade Representative (USTR) even filed a World Trade Organization (WTO) case targeting China's aluminum subsidies.

The United States isn’t the only nation considering tariffs on steel imports, either. Just last week, South Africa announced it is proposing emergency tariffs on certain flat hot-rolled steel products because of damage from a surge in imports.

Here’s the truth: When a foreign country heavily subsidizes a product and then dumps it into the United States at a rock-bottom price, that’s not free trade. That’s unfair trade, and appropriate steps need to be taken to level the playing field for American companies and workers.

Myth No. 3: A more targeted approach is needed.

Please see above — we already have been doing that. The Obama administration recognized this problem, and along with issuing tariffs and filing trade cases, repeatedly pressed the Chinese to reduce their industrial overcapacity. In fact, when former President Obama traveled to his last G-20 summit, he urged China to tackle its industrial overproduction.

But the Chinese aren't responding to talk, and the current system of dealing with these issues on a case-by-case basis is a time-consuming and expensive process.

The United Steelworkers, for example, have been involved in more than 50 trade cases since 2000 for specific product lines — along with four dozen reviews to maintain already established tariffs — and won many of them. This has provided a lifeline to workers and companies.

Yet China’s overcapacity continues. That’s because smaller companies cannot afford to mount a lengthy legal challenge, so many simply go out of business. Even larger companies lose business and lay off workers during the legal fight, and never come back quite as strong.

Meanwhile, foreign importers find ways to get around tariffs after they’re issued — there’s evidence Chinese steel companies are sending products through Vietnam, for example — and oftentimes, the duties just go unpaid all together.

Again, it’s part of China’s long-term strategy — drag things out and capture market share.

Here’s the truth: The United States has spent years dealing with China’s overcapacity on a case-by-case basis. The problem continues — tougher action is now needed.

Myth No. 4: China already is reducing its industrial overcapacity.

LOL no.

OK sorry, we shouldn’t be so snarky. China certainly has put on a big show over the past few years about how it totally knows it needs to tackle this problem and is super committed to reducing its capacity. And every so often, it even announces some plant closures or says it is planning layoffs as proof.

It’s all for show. China has a history of broken promises when it comes to these commitments. In fact, a recent report from Greenpeace East Asia found that China’s operating steel capacity increased in 2016.

Because China’s steel industry is largely state-run, steel production doesn’t respond to market forces. Workers stay employed and keep paying their taxes. The Chinese government — especially on the local level — doesn’t want to deal with the fallout that closing facilities will bring.

Instead, it exports its unemployment to the United States and keeps the world awash in too much steel.

Here’s the truth: China will not reduce its industrial capacity in any significant way until it feels significant international pressure to do so.

Myth No. 5: This isn’t a national security issue.

A strong industrial base is essential for our national defense, period. Steel and aluminum equip the military, used in everything from armor plate on tanks, specialty metals in aircraft and the hulls of our battleships.

Now, some argue that because factories are running below capacity, they “might have room to ramp up military-related production in a crisis.” Might, of course, is the key word here — and if this problem continues, more steel and aluminum facilities are likely to close (including that sole aluminum factory that makes the high-purity product needed for fighter jets).

That would create even bigger problems for our military supply chain and put our national security even further at risk. Do we really want to put ourselves in a position where we have to rely on China or Russia for steel and aluminum to equip our military?

Here’s the truth: Steel and aluminum imports are a threat to our national security.