Steel: Famous Economists Get It Wrong

When a large number of famous economists from all sides of the political spectrum agree on something, the odds are that it is wrong. A new letter on the subject of steel tariffs is a good example of that rule.

In a public letter dated Wednesday July 12^th, economists including ex-chairman of the Federal Reserve Ben Bernanke, former chairman of the Council of Economic Advisors Jason Furman, and Nobel laureate Joseph Stiglitz argue that the U.S. should not impose tariffs on steel by invoking Section 232 of the trade law referring to national security concerns.  Their arguments defy common sense, are forty years out of date, and ignore the national security issues.

The fundamental reality these famous economists fail to address is that the problems plaguing the worldwide steel industry are entirely due to China’s decision to overproduce and dump exported steel around the world. Chinese steel companies are government-owned either directly or indirectly via Chinese regional governments and state-supported banks. In the last ten years, Chinese steel production has risen by 90% to just over 800 million tons, 50% of worldwide production. China’s net exports of 98 million tons are roughly three times the volume of the number two exporter and more than the entire volume of annual U.S. steel consumption.  According to steel industry experts, the global steel industry has overcapacity equivalent to more than 40% of annual production.  China has said it will cut back on its overproduction and retire some of its (horrendously polluting) steel furnaces and mills, but it has not done so.  A huge importer of iron ore, China has no comparative advantage in steel—other than its ability to tax its helpless citizens to support its loss-making steel industry with billions of dollars in government loans and subsidies.

Think about that for a second. If a U.S. entrepreneur were to take 50% of an important market, and then cut prices to drive others out of business, those famous economists would be quick to denounce him as a fat-cat monopolist who should be hauled into court by U.S. antitrust officials, convicted, fined, forced to divest some of his interests and compete fairly henceforth. But in steel, because the monopolist is the Central Committee of the Chinese Communist Party, the famous economists leap to its defense.

In an earlier article, we explained why a healthy steel business requires healthy prices across the full spectrum of steel products from basic sheet steel to highly specialized alloy steel. The famous economists don’t get into anything as tedious as how the steel industry actually functions.  Instead, they focus on their true overriding concern, that imposing tariffs on steel imports could “do harm to our relations” with friendly nations that export steel to the U.S., including Canada, Germany, the U.K., and Brazil. Our 15 famous economists’ foreign policy views are popular no doubt in the junior common rooms at their universities, but their views are obsolete. They imagine the U.S. has an obligation to continue running down its domestic steel industry and importing millions of tons of steel to maintain our “leadership” of the global trading system. This point of view belongs to the 1960s or before. Today, with 40+ years of trade deficits and a declining industrial and export presence in many crucial industries, we are a declining power. Beijing understands this dynamic very well.  

A true leader of the world community and the global trading system would stand up and say loudly: the UN/free trade/Marshall Plan world order has been made obsolete by the rise of many new power centers around the world, including one huge power that talks free trade but practices self-sufficiency and industrial domination, and the worrying industrial decline of the U.S.  It’s time for a new approach. When any nation has an essential industry, it must do what it can to maintain and support that industry.  Its allies will understand. Democracy is only as strong as its defenses.