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Sunday, March 11, 2018

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

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

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.

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!

 -- via my feedly newsfeed