Why it is profoundly unwise to make steel the key to American renewal

In his zeal to speak to his electoral base, he may endanger other lucrative American exports, writes Rashmee Roshan Lall

Donald Trump. Reuters

Until Donald Trump announced steep tariffs on steel imports into the US, he used to talk about the metal a lot. On the campaign trail, steel was invoked over and over as something almost mythical, something much more than an alloy of iron, carbon and some other elements. Roaring steel production was supposed to put mettle into the American spine once again.

But it may be profoundly unwise to make steel the key to American renewal.

The US steel industry is doing rather well. Production is roughly at the same level it’s been for decades (90m to 120m tonnes per year) even though it accounts for fewer jobs because of efficiency gains.

As veteran economics commentator Robert J Samuelson pointed out during the 2016 presidential campaign, “True, dozens of steel plants have closed. But dozens of more efficient plants have opened. Productivity (aka efficiency) has increased dramatically.”

This is on account of the rise of mini-mills, as they are called, which use scrap steel as raw material and have a cost advantage over older mills. According to the industry group the American Iron and Steel Institute, from 1970 to 2015, mini mills’ share of US steel production went from 15 per cent to 63 per cent, with all the attendant efficiency gains (or lost jobs, to you and me). Consequently, Mr Samuelson’s subsequent assertion is as true in 2018 as it was in August 2016 when Mr Trump repeatedly bemoaned the plight of American steelworkers: “If there were no foreign trade in steel, most of those jobs would have vanished anyway. The least efficient vertically integrated (traditional) plants were forced to close. The decisive competition has been domestic, not foreign.”

That said, there is undoubtedly a global steel glut. This is mainly because China has accounted for 78 per cent of the rise in steel-making capacity since 2005, according to analyst Lucy Lu of the Peterson Institute.

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Which brings us back to Mr Trump’s tariffs on steel imports. They will be in force for “a long time”, he said, urging in the same breath, US steel producers “to grow your industries, that’s all I ask”.

But grow them how?

Return to old-fashioned mills that employ a lot of workers to make steel from scratch at greater cost than elsewhere in the world? That doesn’t make business sense and would be tantamount to forcing today’s car companies to return to the labour-intensive processes used by their predecessors in the transportation sector, namely horse-drawn carriage-makers in the 19th century.

In any case, the United States imports only about one-third of its steel and with a healthy US joblessness rate of 4.1 per cent, it’s not like there are armies of unemployed American steel workers.

So to the question of American economic revival. The answer is neither a return to traditional steel mills, nor this US first strike in a global trade war. Instead, it is the slow grind of working towards a global agreement to manage excess capacity. And to prepare for the upskilling of American workers and their move towards different capabilities.

Just consider the entrepreneurial imagination demonstrated by Austrian steel producer Voestalpine even at a time of falling global prices. In 2016, it announced that it would build a new steel mill that would not produce commoditised steel but specialist formulations instead, such as those used in cars or electronics. This is the sort of thing that business schools might one day use in their lectures.

In fact, US steel-makers – squeezed by foreign competition, falling prices and far-reaching technological changes – might benefit less from Mr Trump’s import tariffs than an inspiring presentation on the fate of buggy whip makers. The buggy whip maker has become an analogy for something obsolete, overtaken by other products more in tune with the zeitgeist and customer’s needs. But according to a Harvard professor who studied their plight, it was only a failure of imagination that prevented buggy whip businesses from surviving the changeover from horse-drawn carriages to automobiles. They should have thought of themselves as being in the personal transportation business, he wrote, rather than being so wedded to their product.

Steel, of course, is in an entirely different category from buggy whips. It is vital to a country, not a peripheral add-on. And yet, the buggy whip maker is a salutary lesson on the failure to prepare for change.

Mr Trump, alas, is helping American workers to prepare for the past. In his zeal to speak to his electoral base and by boosting steel – a healthy sector of the US economy – he may actually endanger other lucrative American exports (beef, bourbon, sorghum, soya bean) as wrathful trade partners impose their own tariffs.

The end result will be trade skirmishes all around the world, something that Pascal Lamy, former director general of the World Trade Organisation, recently described as fine for the Middle Ages, just not in the 21st century.