In June 1994, while attending AMMs Steel Survival Strategies IX Conference in New York, several people pointed out that for the first time ever there were attendees from China, and openly wondered why they were there.
It turns out they were there to begin executing a national strategy to make China the worlds manufacturing hub, andas weve learned over many yearsone of the first things developing nations concentrate on is building a steel industry to support manufacturing growth and infrastructure development.
Twenty years later, China produces around 800 million tons of steel annually, which is roughly 40 percent of the worlds capacity, and in my market sector of wire rod it produces nearly 160 million tons annually, giving it a 70-percent world market share. The only appropriate word for this is "dominant."
There have been numerous reports documenting how China got here that discuss government subsidies, the fact that most of its steel companies are state-owned enterprises, various egregious mercantilist policies, currency manipulation and more, but the fact is that this capacity is in place and, Chinas rhetoric aside, probably still expanding.
Go figure, because Ive never heard one steel expert or analyst expound on Chinas comparative cost advantages that usually accompany massive investment like this; rather, except for cheap labor, the reverse seems to be true.
The reality is that for many years now China has been a massive manufacturing hub and an export giant, and today it is the second-largest economy in the world. Their success has been so great that, coupled with the demand associated with their infrastructure build, Chinas consumption of iron ore, copper, tin and other basic materials so dominates world markets for these commodities that reports on Chinas economy are market makers on a daily basis.
Today, China is a complex country with myriad challenging problems, but its safe to say its been very successful in achieving the goals laid out in its "state-developed and -managed plans" from years ago. This success has lifted 400 million people into the middle class, given China a $2-trillion balance-of-payment surplus, created untold personal wealth and positioned China as a major geopolitical player. Not bad when you consider Chinas economic condition when President Nixon made his historic visit there in 1972.
So, how have the developed economies of the world fared over the past 20 years, particularly their manufacturing sectors?
The answer is that the economies of the United States, Europe and Japan have done poorly on almost every economic measureincluding gross domestic product (GDP), employment, structural unemployment and debt-to-GDP ratiosbut its the manufacturing sector that has been hit the hardest. Im not suggesting that China is totally to blame for this dismal economic performance, because there are many other contributing factors, but particularly as it relates to the destruction of manufacturing companies and jobs, Chinese policy successes and behavior in the world economy have substantially been the culprit.
The twist is, I dont blame China. That doesnt mean they havent ignored the rules of the game and allegedly exhibited a pattern of illegal behavior like transloading (triangular trade) and downright fraud in an effort to skirt trade laws. All of which is frustrating and damaging to those companies and industries that have taken the time and expense to win trade suits only to be confronted with little or no change in market circumstances because China has simply cheated.
Its my belief that China has been, is and will continue to be an important U.S. trading partner and potential ally on the world stage, but one that is aggressively working in its own self interest, as I would assume every nation would do. In fact, any rational leader confronted with Chinas challenging circumstances would do almost everything the Chinese leadership has done to provide the socioeconomic benefits theyve achieved in order to manage the emerging giant dragon.
Given todays reality, the only conclusion is that Chinas state capitalist model has outperformed the developed nations more-democratic economic model, and all those manufacturing jobs are gone, so get over it. But I have a problem with the inevitability of such a stance, because even though many economic fundamentals have worked against the United States and other developed nations, I believe weak and misguided economic leadership and a long history of policy failures, particularly in the United States, have been the main contributors to a very poor economic performance, particularly as it relates to manufacturing.
As an example, the World Trade Organization (WTO) was formed to promote rules-based trade around the world. Nations join based on an agreement to adhere to certain promises and the system is supposed to benefit all the participants. Fourteen years ago China joined, and its ascension agreement spelled out certain promises that other nations expected it to adhere to. I think its safe to say China hasnt met those expectations and has become a master of using the system to its advantage, regularly circumventing its responsibilities.
The real problem, however, is that those in charge of administrating our trade policies at the Commerce Department and the office of the U.S. Trade Representative (USTR) level have not held China accountable because theyre so focused on the system and the rules that they cant see the forest, and at the White House level because Chinas status as a geopolitical force is needed to help us deal with North Korea and other important world diplomatic issues.
In my world, China imposes a 15-percent export tax on wire rod, forcing its massive production into the local market at below world market prices, and then gives value-added tax rebates on wire and wire product exports, which is a clear violation of WTO rules. Chinas rationale for its behavior is the need to manage its environmental issues more aggressively, which apparently is a plausible if not counter-intuitive defense under WTO rules. When challenged about this, Commerce and the USTR acknowledge this really makes no sense, but they seem to feel helpless when it comes to holding China accountable for this and a long list of other mercantilist policies and actions.
I read almost every day that the United States shouldnt concentrate on creating manufacturing jobs because we really cant compete, the benefits to the economy are marginal, the impact on employment is minimal, and clearly there are labor-intensive industries where low-wage developing countries are the best natural producers. However, national policymakers should be focused on establishing the best and fairest conditions for their industries and companies to compete within and then let the competition begin.
The problem is that by not holding China and other trading partners accountable weve allowed the playing field to be slanted against many U.S. companies and industries. Im clearly promoting fair trade over free trade and do believe in the benefits of trade liberalization, which has benefited the U.S. economy for many years. The United States needs new and aggressive polices that ideally would be part of a national economic plan that would include more support and enforcement of our trade law process, a more-supportive tax code, and policies that take greater advantage of our strengths in energy, technology, finance and much more. Of course, realistically a comprehensive national strategy is too much to ask for, but between the administration and Congress there are many constructive actions that could and should be taken.
All of this said, today my most serious concerns have to do with several complicated trade agreements the United States is currently negotiating and Chinas somewhat abrupt downturn in economic growth.
I support both the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership because they have the potential to increase and improve international trade and the economic well-being of all the involved parties. However, we need to focus on the content and not the timing to assure these trade agreements produce the intended benefits without exposing us to more risk, particularly in the Pacific Rim, which has proved to be a pretty tough neighborhood.
Chinas steelmaking capacity, which is probably overbuilt even to support an economy growing at 12 percent, now appears to have more than 300 million tons of excess capacity. With its economy now growing at around 7 percent, where will all of the excess production capacity go? Given the explosion of direct and indirect steel and steel-containing imports from China over the past 15 years, I believe its clear it will be compelled to export as much as possible to wherever possible, and those countries that cant effectively defend themselves against dumping will continue to pay the economic consequences.
China appears to have a plan to transition away from an investment- and export-based economy toward a more consumption-based model, but the timing, given our trade law process, may be too late for many U.S. industries and companies that have already suffered greatly over the past 15 or so years.
Walt Robertson is president of Johnstown Wire Technologies Inc. in Johnstown, Pa.