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It's Not Just Trump: Obama's Protectionists Are Attacking Chinese Steel

Tags Global EconomyInterventionism


Donald Trump is certainly not the only powerful protectionist out there. Chinese steel production has been coming under increasing attack by American interest groups and the US government itself. 

Back in late April, US Steel Corp began petitioning the US government for a ban on steel imports from China. US Steel Corp claims the sanctions are necessary to punish Chinese hackers who allegedly engaged in corporate espionage against US steel companies. 

If successful, the petition will block carbon and alloy steel produced in China from entering the U.S. Most critically, it will prevent those who allegedly stole U.S. Steel’s intellectual property from making billions of dollars from decades of research. The International Trade Commission has 30 days to decide whether to initiate a case.

The problem here is that the proposed "solution" is to punish the Chinese by punishing American consumers and producers. 

If US Steel Corp is able to ban the importation of Chinese steel, that will be great for US Steel Corp. Unfortunately, a ban on imports would increase the cost of living and the cost of business for everyone else. Cars would be more expensive. Housing costs would be driven up by higher construction costs, and every product or service that relies on steel would become more expensive. 

It's unfortunate that US Steel Corp was harmed by Chinese hackers (assuming the allegations are true), but if it's US policy to punish Americans for the crimes of Chinese hackers, then there is something very, very wrong with American trade policy. 

Defenders of the ban will claim that the ban must be imposed to protect the jobs of steel workers and the steel companies. Yet, jobs in the steel industry comprise a tiny portion of the overall American labor pool, and everyone else will be left paying higher prices. 

As Henry Hazlitt explained in Economics in One Lesson, the effect of trade restrictions is to lower real wages. Using the sweater industry as an example, Hazlitt writes: 

We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles. There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labor, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced.

If we look at it now from the consumer’s point of view, we find that he can buy less with his money. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced. Whether the net effect of the tariff is to lower money wages or to raise money prices will depend upon the monetary policies that are followed. But what is clear is that the tariff—though it may increase wages above what they would have been in the protected industries— must on net balance, when all occupations are considered, reduce real wages. [Emphasis in the original.]

US Steel Corp believes it will be "compensated" by its proposed ban on Chinese imports. And, no doubt, Chinese steel industries will suffer if locked out of of the American market. 

What is not being mentioned is that most Americans will suffer as well, so a ban on Chinese steel is really, to a large extent, just a wealth transfer from American consumers to US Steel Corp owners and employees. 

Jack Lew Lectures Chinese on "Overcapacity" of Steel 

Meanwhile, the US has been attacking Chinese steel on another front. 

The BBC reports how upon arriving for an upcoming meeting in China — which has the US Steel Corp issue looming over it — US Secretary Treasurer Jack Lew lectured the Chinese on how they have created "overcapacity" in steel, and that 

"It means you have misallocation of resources, it means that ultimately, the only way to clear the market is to sell things at a price that is below what the world market price would otherwise be."

It's great that DC policymakers have discovered the concept of "misallocation" although they're going about it all wrong. 

Given that the Chinese economic system is authoritarian and corporatist in nature, it's a safe bet that steel production in that country is not exactly being driven only market supply and demand. Just as in the United States, industry in China is greatly affected by dovish monetary policy and government favoritism for select industries like the steel industry. 

Thus, if there is "overcapacity" in Chinese steel, that is merely a symptom of a larger problem of interventionism. The problem arises from the misallocation mandated by state action for the purposes of subsidizing the steel industry in the first place.  Government subsidies are a problem, but large amounts of available steel, per se, are not a problem. In fact, having a lot of steel available means that a wide variety of productive goods and consumer goods can be produced at low cost. 

Only in the halls of government agencies are low prices a problem. 

The New York Times's article on the matter, however, revealed the real source of Lew's hand wringing over too much affordable steel: 

China’s exports of cut-price steel, aluminum and other products have become a contentious international issue, prompting anti-dumping tariffs and feeding into the American presidential race. Donald J. Trump and Bernie Sanders have both argued in their campaigns that blue-collar workers have lost jobs because of skewed trading rules.

So now we get to the heart of the matter. Whether it's organized labor or companies like US Steel Corp, the real problem is that some special interest groups don't like inexpensive steel. 

Lew's other feigned complaint is that " the only way to clear the market is to sell things at a price that is below what the world market price would otherwise be." 

Ok then, what is the "correct" price of steel? Obviously, in Lew's mind the correct price is higher than the current price, or he wouldn't be going on about it. In other words, Lew is telling us that's its current US policy to seek an increase in steel prices. 

Upon hearing this, one could be forgiven for thinking that we've entered a rip in the space-time continuum and traveled back to the days of Franklin Roosevelt when it was standard policy to increase prices on food and other necessities. These schemes were justified on the grounds that by increasing the price of food (or steel, or whatever) industries would hire more people and standards of living would increase. 

Not surprisingly, though, this has never actually played out as planned. 

Moreover, even when falling prices do actually drive some companies out of business, as cheap "dumped" Chinese steel allegedly does, the end result is actually more steel, produced more efficiently for global markets. Henry Hazlitt explains this phenomenon in the context of food production: 

In a competitive market economy, it is the high-cost producers, the inefficient producers, that are driven out by a fall in price. In the case of an agricultural commodity it is the least competent farmers, or those with the poorest equipment, or those working the poorest land, that are driven out.

The most capable farmers on the best land do not have to restrict their production. On the contrary, if the fall in price has been symptomatic of a lower average cost of production, reflected through an increased supply, then the driving out of the marginal farmers on the marginal land enables the good farmers on the good land to expand their production. So there may be, in the long run, no reduction whatever in the output of that commodity. And the product is then produced and sold at a permanently lower price. [Emphasis in the original.]

No doubt, some advocates for protectionism in this case will speak up and say "but Chinese steel has an unfair advantage because it can be produced below cost due to Chinese subsidies." 

But all this claim does is illustrate that Americans who use Chinese steel are benefiting at the expense of Chinese taxpayers who are making steel less-expensive to Americans.

In any case, attempts by the US federal government to determine the "correct" price of steel or to manage steel output is nothing more than good old-fashioned central planning, and will only add a new set of American interventions in the name of correcting some Chinese ones. 


Contact Ryan McMaken

Ryan McMaken (@ryanmcmaken) is executive editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor's degree in economics and a master's degree in public policy, finance, and international relations from the University of Colorado. He was a housing economist for the State of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

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US Treasury Sec. Jack Lew / US Embassy www.flickr.com/photos/usembassykyiv/