There’s no shortage of political pundits out there willing to opine about why Trump is doing a lousy job running the United States of America.
Here at engineering.com, we’re not political: if it’s engineering related, we cover it, if it’s not, there are a million Web resources to suit your taste. But President Trump’s announcement of sweeping tariffs against foreign steel imports, notably from China, directly affect American manufacturing, and that’s squarely in our wheelhouse.
So here it is: Trump’s plan is stupid. Here’s why.
Think about what steel is for a moment: It’s iron, alloyed with carbon and other elements, then hot rolled into semi-finished shapes for further processing. Some is simple low carbon steel used for commodity application like rebar in the construction industry, and some is further processed into other, semi-finished forms like sheet, strip wire, etc. Generally, those forms are the raw materials for manufacturers making everything from cars to pop rivets.
We know that Chinese steel imports have displaced much of America’s indigenous steel capacity and has been doing so since the 1970’s. Chinese steel is cheaper, and recently, its quality is improving. Is it priced below production cost? That’s the definition of dumping, and if it is, that’s also usually the trigger for WTO action. Now classical economists will tell you that the correct action against dumping is to do….nothing. By their logic, if China wants to subsidize US manufacturing by essentially paying us to use their steel, who are we to complain?
Unemployed steelworkers complain, naturally, as well as Americans who worry that the loss of domestic steelmaking capacity is a national defense issue, as steel is a strategic material. But one effect of those job-destroying Chinese imports has been to change the nature of American steelmaking.
Instead of smelting iron from ore, a new generation of smaller steelmakers use electric arc remelting of scrap steel to make higher value products that are more profitable, such as tailored blanks and the high strength, low alloy sheet grades that the automakers rely on for vehicle light weighting. It’s a “bend-but-don’t-break defense, giving away the low value, low margin commodity market and instead moving up the value chain. And that’s an excellent response to the cheap import supply, but note the major difference between the mini-mill technology and smelting: the raw material. Smelting uses mined iron ore and coking coal to make iron, which is further processed into steel. Mini Mills use scrap steel as the raw material, skipping the highly capital intensive and energy hungry smelting process. In effect, they use the product of smelting as the raw material for their process.
Cheap Chinese steel imports at the bottom of the steel value chain lowers the price of the raw material used by the higher value adding domestic processors. And who wants higher raw material costs? Now imagine if Trump, instead of taxing steel imports, instead used an export tariff on American scrap steel to increase domestic supply. This would “back up” the scrap pipeline, much of which is now exported, and reduce the price of the mini-mills major input. It would also create in essence, a national strategic reserve of steel, a reserve that China would effectively subsidize with commodity steel produced below cost. The result would be a reduced need for domestic smelting capability and no risk to American steel production in case of an emergency.
If the administration wanted to preserve some smelting capability, the Feds could buy pig iron and stockpile it in a strategic national reserve, like they do many strategic materials. And in case of a supply disruption from China, part of the reserve could be sold into the market to create price stability while alternate sources come up to speed, and in commodity steel, there are many countries making that product, notably India and South Korea. But the concept of keeping the higher value steel-making sector well supplied with raw materials while providing American business with low cost commodity grades through trade looks like a winner to me.
Mr. President, feel free to give me a call.