The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.” (Link) The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States. It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.” 

The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.” Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare. It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do. The country would have been better off simply by doing nothing. (“Don’t do something, just stand there!”)

There are two easily understood reasons why imposing trade restrictions won’t help the situation. The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide. If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey. Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers. 

The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input. These downstream users constitute a much larger segment of the economy. In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014. Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger. Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater. Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.

To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries. These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low. Still, important portions of the American steel industry have not been sufficiently profitable. United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion. So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.

Prices are high enough, though, to do meaningful damage to manufacturers of value-added products that use steel as an input. Many of those firms have difficulty competing with manufactured goods imported from countries with much lower steel prices. Carrier, for instance, has been criticized by politicians for its decision to move 2100 air conditioner jobs from Indiana to Mexico. It seems likely that the many AD/CVD duties against steel – not to mention restrictions on imports of copper tubing and aluminum extrusions – played a role in that decision. Carrier can escape those policy-imposed costs simply by moving production across the border.

The FT acknowledges that antidumping and countervailing duty (AD/CVD) measures “will increase costs for the numerous companies that use steel as an input,” and explains that the EU trade remedy process includes a “community interest” test that balances the potential benefit of import restrictions to steel producers against the likely damage that would be done to steel users. The community interest test helps to explain why the EU has many fewer AD/CVD measures in place than does the United States. 

Statutes in the United States contain nothing equivalent to the community interest test. Instead, the law requires the U.S. International Trade Commission (ITC) to consider only the effects of imports on the domestic industry producing the same product. So as long as the ITC determines that domestic industry has been injured, it must vote to impose duties no matter how great the costs will be to users. From experience, I know that this is an economist’s nightmare. But commissioners are sworn to uphold the law, so have little choice.

Thus, a suggestion by FT that trade remedies offer a reasonable way to counter China’s excesses seems to be much more a political response than one grounded firmly in economic realities. The policy analysis becomes clearer if we begin by recognizing that China’s decisions to export subsidized steel have the effect of transferring a substantial amount of wealth from that country to the importers. What’s not to like about being on the receiving end of a wealth transfer? Yes, there are adjustment challenges for firms producing basic grades of steel in importing countries. Trade Adjustment Assistance (TAA) exists to help address those problems in the United States. If policymakers conclude that more assistance is needed, they should take care to avoid measures that damage the broader economy.

The better policy approach would be for the European Union and United States to get the attention of Chinese leaders by reframing the debate and delivering this message:

“Thank you for transferring so much wealth from China to Western countries by selling low priced steel. It’s helping to keep our large manufacturing sectors globally competitive. Please keep doing it.”

This approach has a decent prospect for encouraging Chinese leaders to deal with the root cause of global overcapacity by downsizing and restructuring their steel industry. 

And, after engaging creatively with the Chinese, U.S. officials should follow up by reforming AD/CVD laws so that import restrictions could be imposed only when economic analysis shows that benefits would outweigh the costs. It makes no sense to respond to economic harm caused by low steel prices by imposing policies that do even more damage to the U.S. economy.