In late April, Trump, in conjunction with Secretary of Commerce Wilbur Ross, initiated a probe into the nature of the US steel industry as well as into the global steel market. Articles from the Washington Post and Reuters indicate that the purpose of the investigation is to preserve US national security by utilizing section 232 of the 1962 Trade Expansion Act, which allows the government to impose barriers on steel imports if those imports for reasons of national security. Although denied by the administration in some regards, there are numerous individuals who believe the probe is meant to target China. The assumption that is made is that China is dumping, a process of exporting a good at a below market price internationally, its excess steel to undermine the US market as a part of “economic warfare” combined with fears that US dependence on foreign steel hurts domestic producers who voted and endorsed Trump during the election. After the probe is completed, it is likely that the administration will impose trade barriers against foreign steel and direct those barriers against China. While one can be concerned with the fact that China holds the position of largest steel producer and largest steel exporter there are numerous reasons why a protectionist decision is 1) not relevant since the Chinese are not dumping, and 2) not beneficial to the United States and her interests.
First, the reason why China is not dumping is based in the basic economic principle of competitive advantage. Chinese steel production over the past ten years has been increasing rapidly over the past ten years evidence by the graph below form Trading Economics.
Another article from the New York Times indicates that part of the reason for this is that numerous industries within China rely on that steel, as well as numerous highly-skilled workers with high wages work in the industry that would have to be compensated if those steel mills no longer functioned. As a result, it carries an excess of steel that it produces within a lower opportunity cost than it would not producing or producing anything else, and therefore has an incentive to export abroad at below market prices. Simultaneously, the growth of those internal Chinese industries that rely on steel means that the growing number of steel mills in China is simply a way of preparing for future demand of steel domestically. In fact, this phenomenon is seen in the United States with the development of its shale oil reserves resulting from the Shale Oil Revolution which meets a lot of domestic demand and reduces foreign oil dependence.
The second argument that eliminates the idea that China is dumping is that, even though imports make up almost 26% of the US market, only about 2% of those imports come from China. Since the impetus for the probe is based on this idea of “economic warfare”, it seems unlikely that China could undermine the US market with such a low share of imports. In fact, this raises the idea much of the reason for attempting to create steel based protectionist policies is to satisfy interest groups, rather than promote national security or even support the US economy. In fact, there isn’t even a coherent argument as to why the Chinese dumping competes with US labor markets and the amount of US jobs since numerous studies conclude that more US steel jobs are lost due to changes in technological efficiency which makes it logical for US producers to substitute labor for capital in the steel industry.
In that sense, it is possible that any trade barrier that the US passes will most likely not be in the interest of the country. In fact, econometric analysis of market power and the steel industry utilizing panel data indicates that the existence of previous antidumping duties and safeguard tariffs, holding other variables constant, have little impact on the market power of US firms with a p-value of 0.001. Simultaneously, the paper’s model accounting for the existence of US trade policies in a dominant firm-competitive fringe format is not substantially different than the base model, in which the model appears to explain 73% of the variance of the data, or an R-square of .73. The results of this study clearly indicate that significant empirical work disproving the idea that trade policies have the potential to limit import supply or the stance of firms in the US. If anything, one of the models of the paper indicates that trade policies have an enhanced effect on the nature of electricity process on domestic pricing of steel. In particular, that increases in electricity prices increase the domestic price of steel, but the increase in domestic steel prices is much more during periods with trade policies.
Another argument against the potential increase in trade barriers to steel imports is the idea that because of competitive advantage, it is necessary to purchase Chinese steel at the lower rate since it allows firms in the US that rely on cheap steel as inputs for their products to produce more profitably and therefore produce in a way that makes them more competitive globally or provide lower prices domestically. In fact, Tim Worstall from Forbes makes the argument that it may potentially put the United States into a trade war with China, which only makes things worse when China decides to be protectionist in its production of non-durable goods to the US or decides to stop purchasing US made airplanes and soybeans.
Ultimately, it is not in the best interests of the United States to put up trade barriers to steel imports following the investigation by the Department of Commerce. While it is impossible to completely know if the Chinese are participating in some kind of predatory pricing due to the fact that they are producing, more or less, at a loss from the past five years; it seems unlikely that they are dumping in the US since they do not hold a significant share of the US imports, which already function as simply a competitive fringe to the United States total steel market. Simultaneously, the fact that the US benefits from purchasing cheap Chinese steel should serve as a disincentive to purposely price low and makes it uniquely critical that the US shouldn’t be rash in a decision to engage in protectionism. Should Ross determines that there is a case of dumping, hopefully he has the understanding to get a second opinion from the World Trade Organization before he proceeds. However, it is also possible that the probe could come up with nothing, and everything can remain “right” in the world.