Trump’s vision of tariffs assume successful political economies are based mainly on trade. He views economies as mainly blocks of goods, traded back and forth. He thinks economies are like real estate inventories, so many bought and sold, and thinks to “win” a nation has to sell more than it buys.
This view turns a blind eye to supply chains, pricing, demand, innovation, income, new markets, niche products, financing, investment, multi-national ownership, public-private partnerships and education–all vital features of an economy. Tariffs on goods put law and power first: tariffs are an extension of the idea that economies operate by fiat and that decisions will have a single effect and no more.
This view is simple–and incredibly wrong! Economies are orderly, but they have a series of complicated relationships. A Brookings report points out 11 Midwest states export 48 percent of US exports to Canada. The Midwest would experience economic shocks if a trade war begin, and other nations raised prices on its grain and food exports.
Returning to steel, the Commerce Department’s International Trade Administration reports the US imports steel from 85 countries, 9 countries providing 75 percent of the total. Imports fall into 5 categories: flat-rolled (automotive, machines, appliance), semi-finished (billets, slabs, ingots), long (bars, rails, rods, beams), tube (pipes and tubes for construction and energy), stainless (corrosion resistant). Of the 5 categories, China only appears in the top 5 exports in one category, long steel. Canada leads in flat and long exports; it is number two in tube imports. Brasil leads in semi-finished products; Taiwan leads in stainless.
Steel: A Statistical Profile, What It Reveals
Last year, 2017, according to the Commerce Department’s International Trade Administration (ITA), steel imports declined from the top 10 US exporters, except Canada. Overall, China ranked 26th.
According to an ITA profile, a major reason the US imports steel is not price–since 2009, US consumption (demand) has exceeded production (supply). This shortfall is made up by imports. Of the top 7 steel producers in the US, 2 are foreign-owned, by companies headquartered in Luxembourg and Brasil. China’s steel production is decentralized and has many small companies; an ITA report points out China’s top 10 steel makers only produce 34 percent of its total production. Yet China is the world’s largest exporter of steel, exporting to 220 countries–although its exports are only 14 percent of its total production.
Although ranked 26th among US steel importers, China has 16 US anti-dumping duties and 12 countervailing duties in place (total: 28) to protect against unfair trade in steel. China consumes most of its own production. Its top 3 export markets are South Korea, Vietnam, and the Philippines. Yet both the political and popular narratives in the US blame China for catastrophic US job losses, claiming government subsidies and low wages are stealing market share, in trade with the US. This narrative hides and distorts the real reasons for China’s success and US decline. Success and decline are connected, not by wage differences, production or trade, but by differing visions and strategies.
China’s vision is seen in its major economic project, a trillion dollar, multi-national infrastructure plan, the One Belt, One Road Initiative (BRI, OBOR). Recalling the phenomenal, long lasting success of the ancient Silk Road that tied trade and prosperity across the continental landmass of Asia and Europe and into Africa, the BRI criss-crosses Asia, moves west across Asia Minor and the Arabian peninsula to Istanbul and Rotterdam on new roads and rails. Crossing the oceans, BRI will build new, world class facilities in port cities in Asia, India and East Africa.
The World Bank describes the BRI objectives: “closer coordination of economic development policies, harmonization of technical standards for infrastructure, removal of investment and trade barriers, establishment of free trade areas, financial cooperation and “people to people bonds” involving cultural and academic exchanges.”
The bank notes:
“There are at least four reasons why OBOR (BRI) can succeed better than individual countries fending for themselves: network effects, finance, leadership and China’s current stage of economic development. On network effects, benefits to individual countries accrue if each part of the Belt and Road gets built. It simply does not pay for individual countries to move forward on their own. In addition, the initiative helps individual countries align with each other, and China’s finances and leadership provide vital credibility.”
Most observers agree BRI’s mission will redefine global and local economies as it builds out new, coordinated global instructure. It will reduce costs, provide efficiency, improve security, expedite customs clearance and inspections, open new markets, and create local jobs. The project, well on its way, touches 40% of global GNP. That figure will grow as it routes capture a sizeable share of the commerce of the new emerging middle class centered in Asia, which will reach 6 billion in size by 2025.
For the BRI, China is acting as its own supplier. For example, China is building cement plants along the routes, 37 to date. It plans to build steel plants in several countries and will obviously see a rising demand in long steel products.
Moreover, China’s largest coal company merged with the country’s largest power generator to create the world’s 2nd largest power company. It will service BRI routes. At the same time, China is closing low-grade iron mines (over a 1,000), preferring higher grade raw materials purchases on the world markets. By building global infrastructure outside of China, China is helping global trade: but by taking the lead, setting standards, developing and leading financing, creating new economic agreements, involving the private sector, China is helping itself: guaranteeing long term, structural, financial, and regulatory access to new markets and greater coordination and integration of its economic goals within the world stage. Because of a history of conflict with China, India is pushing back, but the sheer size of the project will make it difficult for India to avoid being drawn to its advantages.
Walter Rhett writes about power, power: its worst and best cases, its hidden relationships; the strategies, paradoxes, pursuit and scorecard of its prize.
This really matters! A large part in our IMF/OECD/World Bank analysis to identify gains from stronger G20 action come from higher productivity through stronger competition and more innovation. OECD estimates suggest that a 10% reduction in the level product market regulations can boost GDP by 1 to 1.5%. This corresponds to the size of reforms made by countries that have undertaken significant reforms over the past decade. And this is a challenge and an opportunity for advanced and emerging economies alike.
In particular, we need more competition in services to make them more efficient – which in turn will help your countries compete and upgrade in global value chains. Services sectors such as transport, logistics, trade finance are key to a smooth functioning of global value chains, while domestic services are increasingly important components in exports of valued added. Yet, these sectors often lagged behind with respect to the modernisation of their regulatory framework and remain impervious to competition – it’s time to catch up!