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Monday, June 18, 2018

Iron Law of History Blunts China Trade Folly [feedly]

Iron Law of History Blunts China Trade Folly
https://www.bloomberg.com/view/articles/2018-06-17/iron-law-of-history-blunts-u-s-s-china-tariffs-folly


The U.S. may find a lesson in the rise of its own steel industry.

62
June 17, 2018, 3:00 AM EDT

The skyscrapers of New York might have struggled to rise if forced to depend on imported British steel.

Photographer:  ullstein bild/Getty Images

Who invented modern steel?

It's a 160-year-old controversy that's still going strong – and the answer, in a way, lies at the heart of the current U.S.-Chinese trade tensions.

Many Americans are taught that the originator was William Kelly, whose ironworks in Eddyville, Kentucky was among the first to produce the metal. In the U.K. and elsewhere, credit generally goes to Henry Bessemer, who obtained the first patents for a mass production process that's used in modified form to this day 1 .

As with the battles between Alexander Graham Bell and Elisha Gray concerning the telephone and those between Nikola Tesla and Guglielmo Marconi over the development of radio, everyone wants to take credit for a world-changing invention.

Metal Machine Music

The U.S. decisively overtook Great Britain in terms of steel output in the late 19th century

Source: Federal Reserve Bank of St. Louis

While the truth falls more on Bessemer's side 2 , it's worth trying to imagine how the world might have turned out if 19th century Britain had taken the same road in relation to technology and national development that 21st century America is headed down now.

President Donald Trump's planned list of tariffs on $50 billion worth of Chinese goods will home in on technologies where China wants to establish itself as a leader, five people familiar with the matter told Justin Sink of Bloomberg News last week.

The core of the dispute is Beijing's Made in China 2025 program, a roadmap to upgrade the country's abilities in high-tech manufacturing. The plan attracted little notice and less alarm when it was announced in 2015 in the wake of a similar initiative by India, but it's now taken on talismanic qualities in Washington. Made in China 2025 was mentioned more than 100 times in the U.S. Trade Representative's March report on alleged violations of U.S. intellectual property, where it was characterized as part of a suite of policies that threaten the competitiveness of American industry.

Search Me

Internet searches for "Made in China 2025" surged nearly three years after the program was announced in 2015

Source: Google Trends

Let's imagine that the government of Victorian England, instead of allowing Bessemer to license his process to the likes of Andrew Carnegie, had managed to kill off the nascent U.S. steel industry and insisted the country import from the British Isles instead.

The transcontinental railroad, which opened up the food bowls of the U.S. prairies and helped feed the world in the late 19th century, might never have been viable with more costly metal shipped across the Atlantic. George Westinghouse, who got his start in industry building brakes for rail cars, might not have had the capital to invest in the development of mass electrification. Forced to depend on expensive British-made structural beams, the skyscrapers of Chicago and New York might never have risen. 

It seems a ridiculous counterfactual, but it's only so because the idea of denying China a place at the high-tech table is equally ridiculous. It's only natural for a country that's becoming (and in many respects already is) the biggest consumer of advanced manufactured goods to want to develop more homegrown expertise. That's especially so given China's fears of getting caught in the middle-income trap.

America in the 19th century was as famous for its slapdash approach to intellectual property as China is now. Before the Kelly-Bessemer dispute, Samuel Slater helped kick off the U.S. industrial revolution by memorizing details of the Derbyshire cotton milling process. He then slipped into New York disguised as a farmer to get around British laws intended to stop foreign powers acquiring its technological expertise. Charles Dickens, too, spent much of his 1842 trip to the U.S. agitating for copyright laws to prevent the bootlegging of his works by American publishers.

It's understandable that Western businesses dependent on their expertise in sophisticated manufacturing should be nervous about the emergence of a powerful new competitor. And to be sure, there are aspects of the Made in China 2025 agenda – such as the setting of domestic production quotas and the abuse of technology transfer agreements – that should be addressed. Still, as we've argued before, a less confrontational approach is far more likely to bear fruit – one that takes advantage of Beijing's own desire to improve handling of intellectual property and rebalance its economy toward consumption.

Soft Power

Services make up more than three-quarters of gross domestic product in the U.S., in common with most rich countries

Source: World Bank

Opposition to the spread of technology is a short-sighted way to confront China's economic rise. Despite some pockets of highly sophisticated manufacturing, services make up more than three-quarters of America's gross domestic product, and aren't likely to lose their dominance any time soon.

Even if the U.S. stood a chance of prevailing in the trade war now brewing – a doubtful proposition – it would be the wrong approach. America has far more to gain in the long term by trading with a more prosperous China than one that's been stunted by an ill-advised attempt to freeze its economy in the past.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  1. Modern basic oxygen furnaces, the main method for making non-recycled primary steel, largely differ from Bessemer's process by using oxygen rather than air to remove impurities from the liquid metal.

  2. Kelly's plant made wrought iron, a quite different and lower-quality product to the steel developed by Bessemer. Kelly's first public mention of his process came in an 1856 letter to Scientific American responding to a report of the patents that Bessemer had already received, trying to assert prior invention. An electron microscope examination of firebricks from a "Kelly converter" exhibited for decades in the Smithsonian Institution as a crucial innovation in the history of steelmakingrevealed that no useful metal had ever been made in it, and the converter was later removed from exhibition.

    "The Kelly story is another example of how the contents of patents were often reconstructed after the fact for financial advantage and how legends about invention can be created in the process," Robert B. Gordon, a professor of geophysics at Yale University, wrote in a 1992 paper reporting the results of the Kelly converter study.

To contact the author of this story:
David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net


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