Has the Decline of the US Steel Industry been about Wages?

The following has not been meant to be a blog post, but a reply to a dear "mercantilist" friend who stubbornly insists that the US Steel industry’s decline has been solely due to "high" wages which require the "inflation" or the Keynesian "money illusion".

Since I am not an expert of the steel industry, I based the following from a variety of studies to debunk such “fallacy of a single cause” political absurdity

I am posting this to share with others, as well as, for my personal reference too. 

The idea that the steel industry has been primarily about high wages is simply not a reality.

The Peterson Institute of International Economics suggested that long years of government interventionism has prompted for the declining competitiveness of the industry

Interventionism in History:

Steel trade has been in turmoil since the late 1960s. Without exaggeration, more Washington trade lawyers work on steel disputes than any other trade issue. To recap the trade saga:

-In 1968, US steel producers filed a series of countervailing duty cases against subsidized European steel- makers. These cases led to “voluntary restraint agreements” that were terminated when the global steel market recovered in 1974.

-In 1977, US steel producers filed a series of antidumping cases primarily aimed at Japanese steel firms. These cases led to a system of minimum reference prices for steel imports, known as the “trigger price mechanism” (TPM). The TPM system was soon extended to European steel.

-In 1974 and 1979, at both the launch and the ratification of the Tokyo Round of multilateral trade negotiations, the US antidumping law was amended (at the insistence of the steel industry and to conform with the Tokyo Round Antidumping Code), making it easier for domestic producers to prevail in antidumping cases.

-In 1982, dissatisfied with the workings of the TPM system, US steel producers filed many antidumping and counter- vailing duty cases. These were resolved by new voluntary restraint agreements, which lasted until 1992.

-In the mid-1980s, trade remedy cases were filed against “new” exporters, such as Brazil and Korea. Most of these cases resulted in high antidumping and countervailing duty penalties.

-In 1989, the United States launched an effort to negotiate a Multilateral Steel Agreement designed to abolish subsidies. The negotiations failed and were ultimately abandoned in 1997.

-In 1992, when the voluntary restraint agreements expired, a new set of trade remedy cases were filed. Many of the resulting penalty duties remain in effect today.

-In March 1999, the House of Representatives passed H.R. 975, Congressman Peter Visclosky’s (D-IN) steel quota bill, 289 to 141. After a spirited debate, bill was defeated in the Senate. The current round of steel trade initiatives essentially renews the 1999 debate.

Why so much trade turmoil? One reason is persistent overcapacity in the global steel industry abetted by widespread market distortions. Persistent overcapacity has translated into cyclically falling prices and industry losses in every business slowdown. Another reason is the combination of rapid productivity growth and slow demand growth. Wheat farmers and steel workers share two traits: both have greatly increased their output per worker-year and both face sluggish demand for their products. The result is a painful secular decline in employment. These forces—in an effort to cushion the domestic steel industry—have provoked a series of rearguard trade actions.

The Unintended Effects from Peterson

Market Distortions

In a normal industry, prolonged operating losses will weed out weak firms. Ideally, steel firms with the highest costs would be the first to close. But the real world is far from ideal. Many plants have closed and steel employment has plummeted. In the United States alone, over the last three years, 18 steel firms went bankrupt and about 23,500 workers lost their jobs. However, it is not production costs but rather market distortions that often determine the global “exit order” of struggling firms. Moreover, these distortions prolong the agony of failing firms by stretching the duration of depressed prices for the whole industry.

One such distortion is cartel practices—private arrangements that enable some steel producers to maintain high prices in their home markets and sell abroad at low prices. Another distortion is public subsidies used to cover huge fixed costs (debt burdens, pension benefits, etc.). The United States is not the worst sinner when it comes to market distortions, but it is hardly free of guilt. Federal guarantee programs totaling several billion dollars have absorbed the pension responsibilities of some bankrupt steel firms and staved off bankruptcy for others.

As a result of these distortions, the least efficient firms are not necessarily the first to close their doors and the industry as a whole sheds its excess capacity at a very slow pace.

Same observation from Cuts International

No different from the Heritage Foundation

The overproduction of steel is due to government intervention in the marketplace. Steel producers, left to themselves, have an incentive to produce only what consumers demand. Otherwise, they would be adding needless costs to their operations. When government intervenes and offers subsidies or other protections, normal market incentives are altered. Government subsidies thus may encourage a steel firm to produce more steel even if it exceeds consumer demand.

Subsidies are a common practice in the steel industry, both around the world and in the United States. For example, the American Iron and Steel Institute reports that between 1980 and 1992, foreign steel manufacturers received over $100 billion in subsidies. In the United States, the steel industry was the beneficiary of more than $1 billion in federal loan guarantees in 2001. When an industry produces more than consumers demand, the surplus puts downward pressure on the price of the product and makes it difficult for firms to earn a profit. As recently as January 10, 2002, even though the price of hot-rolled steel was rising, it was still being sold below cost.

Homegrown problems are another reason why the U.S. steel industry is suffering. Prior to 1968, the year the steel industry began receiving government protection from foreign competition, average compensation in the industry was roughly equal to the average in the manufacturing sector. Today, the average total compensation for the steel industry is $37.91 per hour--56 percent higher than the average compensation in the manufacturing sector. One of the principal reasons for this high average compensation is that the steel industry's very strong unions, without the threat of foreign competition, are able to negotiate high compensation packages for employees.

Harvard School’s Crimson Staff who wrote against the Bush era Protectionist tariff resonates

In defending the administration’s decision, U.S. Trade Representative Robert B. Zoellick said, “The global steel industry has been rife with government intervention, subsidies and protection,” and explained that the American response served to counter the protectionism of other governments. In order to equalize trade opportunities, the administration should not raise America’s trade barriers, but rather continue to break down the barriers of other countries. American tariffs will only lead to retaliatory tariffs, which will weaken the international free market economy and possibly lead to a trade war.

Failure to adapt with technological changes has also been a factor:

From the US Bureau of Labor and Statistics Technology and its effect on labor in the steel industry

Advancement in a technology led to productivity boom that led to a decline in employment

Again from the BLS:

From Multinational Monitor.org or “Fifteen Years of Neglect Have Left the Industry in Crisis - And Thousands of Workers Without Hope”

Since the early 1970s, when Japan became the world's leading steel producer, the industry has followed a policy of disinvesting in low-profit operations and diversification into oil and other industries. U.S. Steel has led the way: once the nation's largest industrial corporation, its share of the market has dropped from 75 percent in 1906 to around 20 percent today; and its major mills at Gary, Indiana, and Fairfield, Alabama were constructed at the turn of the century.

Instead of rebuilding, the industry has relied on outdated technology. According to Ira C. Magaziner and Robert B. Reich in their recent book Minding America's Business, the industry "made small, incremental investments to obtain `cheap' capacity rather than make the larger, more aggressive, and riskier investments that could have led to superior productivity.

A 1986 MIT paper analysis the significance of technology

This paper exemplifies a techno-economic-strategic analysis in which key characteristics of technologies are first analyzed, economic consequences are then derived, and strategic implications are followed. Additionally, it demonstrates how technological innovations coupled with critical fixities of a firm can partially explain the entry, exit, and performance of firms in the U.S. steel industry. Because of the reluctance of existing firms to switch to new technologies, entrants using these new technologies entered the low carbon steel market and earned an extra profit. The existing integrated firms would rather have suffered accounting losses than replace their obsolete equipment as long as the cash flow remained positive.

From a 2012 Princeton Paper by Allan Collard-Wexler and Jan De Loecker Reallocation and Technology: Evidence from the U.S. Steel Industry

There is extensive evidence that large gains in productivity can be attributed to reallocation of resources towards more productive plants. This paper shows the role of technology and competition in the reallocation process for the American Steel industry. We provide direct evidence that technological change can itself bring about a process of resource reallocation over a long period of time and lead to substantial productivity growth for the industry as a whole. More specifically, we find that the introduction of a new production technology spurred productivity growth through two channels.

First, the entry of minimills lead to a slow but steady drop in the market share of the incumbent technology, the vertically integrated producers. As minimills were 11 percent more productive, this movement of market share between technologies is responsible for a third of productivity growth in the industry.

Second, while the new technology started out with a 25 percent productivity premium, by the end of the sample, minimills and vertically integrated producers are very similar in terms of efficiency. This catching-up process of the incumbents came about from a large within reallocation of resources among vertically integrated plants. On the other hand, minimills productivity grew moderately, and almost entirely because of a common shift in the production frontier.

As as consequence of productivity growth, prices for steel products fell rapidly, though at different rates for those products which minimills could produce, versus those they could not. Markups decreased substantially, reflecting that prices fell more rapidly than production costs. This indicates increased competition for U.S. steel producers, which further drove increases in productivity.

The Economist went against Bush steel tariffs and cited the puffed up high costs from labor union privileges of “legacy liabilities”

Tariffs fail to address the real problem—high costs, including “legacy liabilities” in health-care and pension benefits. Many companies will fold anyway. When they do, putting workers out of a job and rendering those promised benefits null, the tariffs will only make the victims, as consumers, even worse off than they would have been

Failure to address inefficiencies through bankruptcy laws are another:

From Cato’s Dan Ikenson’s How Subsidies and Protectionism Weaken the U.S. Steel Industry

Some say that industry consolidation is necessary, but that significant legacy costs are preventing mergers and acquisitions. That may be true, but consolidation is not the only alternative for eliminating inefficient capacity. Attrition works too. Attrition works if the inefficient firms are liquidated in bankruptcy, and their assets are auctioned to the highest bidders.

The largest obstacles to attrition are subsidy programs like the Emergency Steel Loan Guarantee Program, unrealistic unions seeking to prevent shutdowns, and the U.S. trade remedy laws. Inefficient operations need to be retired, and this can be accomplished only if market signals are not distorted by these interferences.

When an operation is inefficient and losing money, access to investment naturally dwindles. Attempts to mitigate this outcome perpetuate the root problem. Although its expansion is being considered under different legislation pending in Congress, the Emergency Steel Loan Guarantee program should be abolished

The Living Economics says in Blocked Exit that a combination of the above have prompted for the decline in competitiveness of the US Steel Industry

In a mature industry with a saturated market such as steel, demand comes largely from replacement of existing products and normal growth. Generally, existing capacity that was inherited from the phase of explosive growth is much more than is necessary for current demand. Ideally, market competition should eliminate higher-cost producers in favor of lower-cost producers. However, all steel-producing countries have tried to preserve their production capacity regardless of cost efficiency considerations. In the U.S., for example, many factors have helped to delay consolidation of its steel industry:

First, U.S. bankruptcy laws have unnecessarily delayed the steel industry consolidation process. Although 28 U.S. steel companies have filed for bankruptcy since 1997, including the nation's third and fourth largest, not many have actually gone out of business altogether. Chapter 11-bankruptcy protection often keeps the incumbent creditors at bay while allowing the bankrupt companies to receive new loans to continue production.

In addition, the huge retiree benefit liabilities of weak companies have deterred potential acquisition by stronger companies. In an extraordinary bid to salvage the industry, USX-U.S. Steel Group proposed buying its troubled competitors Bethlehem Steel Corp., National Steel Corp. and Wheeling-Pittsburgh Corp. in early December 2001. But the $13 billion retiree healthcare and pension liabilities of the acquisition targets have stalled the consolidation process.

Even weak steel companies may have out-sized political clout. The industry remains big in swing states of presidential elections such as Pennsylvania, Ohio and West Virginia, where a good portion of 600,000 retired steelworkers live. It is understandable that these states want to preserve the steel companies and their suppliers that provide local and state taxes and jobs.

The idea that high wages alone has been the culprit for the dearth of competitiveness that merits either protection or inflation as a solution has simply been unfounded and wishful thinking, bereft of reality.

This of course, has raised by the great dean of Austrian school of economics, Murray N. Rothbard, who dismissed the impact of inflation and other forms of protectionism to solve what is a politically engendered problem.

On inflationsim…

And every week at his Philadelphia salon, the venerable economist Henry C. Carey, son of Matthew and himself an ironmaster, instructed the Pennsylvania power elite at his "Carey Vespers," why they should favor fiat money and a depreciating greenback as well as a protective tariff on iron and steel. Carey showed the assembled Republican bigwigs, ironmasters, and propagandists, that expected future inflation is discounted far earlier in the foreign exchange market than in domestic sales, so that the dollar will weaken faster in foreign exchange markets under inflation than it will lose in purchasing power at home. So long as the inflation continues, then, the dollar depreciation will act like a second "tariff," encouraging exports as well as discouraging imports.

…as well as other nonsensical interventionists excuses:

The arguments of the steel industry differed from one century to the next. In the 19th century, their favorite was the "infant industry argument": how can a new, young, weak, struggling "infant" industry as in the United States, possibly compete with the well-established mature, and strong iron industry in England without a few years, at least, of protection until the steel baby was strong enough to stand on its two feet?

Of course, "infancy" for protectionists never ends, and the "temporary" period of support stretched on forever. By the post-World War II era, in fact, the steel propagandists, switching their phony biological metaphors, were using what amounted to a "senescent industry argument": that the American steel industry was old and creaky, stuck with old equipment, and that they needed a "breathing space" of a few years to retool and rejuvenate.

One argument is as fallacious as the other. In reality, protection is a subsidy for the inefficient and tends to perpetuate and aggravate the inefficiency, be the industry young, mature, or "old." A protective tariff or quota provides a shelter for inefficiency and mismanagement to multiply, and for the excessive bidding up of costs and pandering to steel unions. The result is a perpetually uncompetitive industry. In fact, the American steel industry has always been laggard and sluggish in adopting technological innovation--be it the 19th-century Bessemer process, or the 20th-century oxygenation process. Only exposure to competition can make a firm or an industry competitive.

So there you have it, so while wages may have been a factor, it has been miniscule compared to the myriad political interventionism (subsidies, protection, inflation and etc…), the dearth bankruptcy laws, trade unions, and other political influences (lrentseeking, cartels etc…) which have prevented the US steel industry from adjusting to market forces, as evidenced by the failure to embrace technological advances.

Yet the proposed solution of more interventionism will only wound up in worsening of the current status.

For protectionists, the story has always been the same; address the symptoms and not the disease with the more of the same prescription that led to the disease.

Other references:

-Stefanie Lenway, Randall Morck and Bernard Yeung Rent Seeking, Protectionism and Innovation in the American Steel Industry

-ITA.doc.gov The U.S. Steel Import Crisis Global Steel Trade: Structural Problems and Future Solutions

-Wikipedia.org History of the steel industry (1850-1970)

World Economic Trend: Mercantilism or Globalization?

To paraphrase a recent comment I received from a mercantilist: Because of the US dollar standard, mercantilism have been more prevalent today.

It is easy to dismiss such an argument as post hoc fallacy since two distinctive variables have been made to function as causally related. Nevertheless let us see from a few charts and graphs whether this claim has validity, even if we exclude the role of the US dollar.

To rephrase the issue: Has the world economic trend been more about mercantilism or globalization?

According to Google’s Public Data World merchandise trade as % of GDP has ballooned from a little less than 20% in 1960s to about nearly half of the world's economy today.

Even trade balance of services, again from Google Public Data, based on OECD economies volume has leapt sixfold since 1996.

Above is the breakdown of global trade per sector in 2010 (World Trade Organization)

Add to the current dynamic the dominance of intra-region trade

One major reason for the surge in global trading activities has been due to major moves to LIBERALIZE trade via substantial reductions tariffs which came from Regional Trade Agreement (RTA), Multilateral Trade Negotiations (MTN) and or even unilateralism (WTO)

Bilateral investment treaties peaked in 1995 but the effects of these are still being felt today through massive growth in cross border investments

While there have been some protectionist pressures as consequence to the financial crisis of 2008, generally speaking trade liberalization has been minimally affected.

From IMF Finance 

The number of new protectionist actions peaked in the first quarter of 2009 and bottomed in the third quarter of 2010. However, recent GTA data suggest that protectionist measures are increasing again; protectionist actions in the third quarter of 2011 alone were as high as in the worst periods of 2009 (Evenett, 2011).

The Group of 20 (G20) advanced and emerging economies account for most of the trade measures, most of which did not involve tariffs, imposed since 2008. There has been no significant increase in the overall use of tariffs or temporary trade barriers, such as antidumping measures, aimed at assisting local firms injured by import competition (Bown, 2011). Such measures affected only about 2 percent of world trade (Kee, Neagu, and Nicita, 2010; WTO, 2011). The trend of gradual tariff liberalization observed since the mid-1990s has not been affected

The World Trade Organization (WTO) notes of the recent increases in Non-Tariff Measures (NTM). But these have been based on technical barriers to trade (TBT) regarding standards for manufactured goods and sanitary and phytosanitary (SPS) or measures concerning food safety and animal/plant health, and partly domestic regulation in services which have hardly been about restricting competition.

From the WTO,

“I think it is a good time for the WTO to have a closer look at non-tariff measures (NTMs)”, said WTO Director-General Pascal Lamy, at the launch of the Report. “A clear trend has emerged in which NTMs are less about shielding producers from import competition and more about the attainment of a broad range of public policy objectives. The new NTMs, typically SPS and TBT measures but also domestic regulation in services, address concerns over health, safety, environmental quality and other social imperatives. The challenge is to manage a wider set of policy preferences without undermining those preferences or allowing them to become competitiveness concerns that unnecessarily frustrate trade.”

The above trends seems quite clear. Globalization has been the dominant theme of the world economy over the past decades, regardless or in spite of the role of the US dollar.

Now of course, events of the past may not extrapolate to the future. 

Bottom line: The religion of politics makes many people see fantasies as self constructed reality.

Bastiat on The Case for Unilateral Free Trade

The great Frédéric Bastiat makes the case for unilateral free trade. (source Mises Institute)

We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.

A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.

There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.

But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.

People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.

The following apologue will demonstrate this.

Stulta and Puera

There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, "See how Puera inundates us with her products; we must see to it." In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.

At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: "We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose." So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.

On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, "The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better."

A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: "Don't listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)

"This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules." Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.

The following passage resonates on the political stumbling block, mentioned by Bastiat above, for unilateral free trade:

The compelling economic case for unilateral free trade carries hardly any weight among people who really matter…

But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports—no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense—but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.

This was written by then international trade economist Paul Krugman in 1997 prior to his tergiversation of the free trade doctrine to become consumed by the forces of mercantilism whom he once condemned. (hat tip Professor Don Boudreaux) Given the temptations to power from "the economist who wants to influence that policy", Mr. Krugman reminds me of the transformation of Anakin Skywalker into Darth Vader

Quote of the Day: Ethical Defense of Liberty Knows NO Borders

an ethical defense of liberty, as well as an economic defense of liberty, applies equally to both sides of any national border. Anyone who claims to defend market liberty for his own people should be equally prepared to defend market liberty for the people on the other side of the national border. This is the doctrine of the rule of law. This widespread acceptance of this principle has made the West rich.

This is from Professor Gary North from his excellent article on the immorality of tariffs or why tariffs are undeclared acts of war against other nations.

How Anti-Dumping Leads to Reduced Competitiveness

For the left, because trade is a zero sum game and an activity done by nations and not by individuals, imbalances are always someone’s fault. Thus prescribe policies that lean towards protectionism.

One of their populist claim is that asymmetric currency values leads to the alleged imbalances. But they hardly talk about how extant protectionist policies have been contributing to the loss of competitiveness and consequently high unemployment rates.

One of such protectionist policy is the anti-dumping emasures

Cato’s Dan Ikenson elaborates (bold highlights mine)

During the decade from January 2000 through December 2009, the U.S. government imposed 164 antidumping measures on a variety of products from dozens of countries. A total of 130 of those 164 measures restricted (and in most cases, still restrict) imports of intermediate goods and raw materials used by downstream U.S. producers in the production of their final products. Those restrictions raise the costs of production for the downstream firms, weakening their capacity to compete with foreign producers in the United States and abroad.

In all of those cases, trade-restricting antidumping measures were imposed without any of the downstream companies first having been afforded opportunities to demonstrate the likely adverse impact on their own business operations. This is by design. The antidumping statute forbids the administering authorities from considering the impact of prospective duties on consuming industries—or on the economy more broadly—when weighing whether or not to impose duties.

That asymmetry has always been insane, but given the emergence and proliferation of transnational production and supply chains and cross-border investment (i.e., globalization)—evidenced by the fact that 55% of all U.S. import value consists of raw materials, intermediate goods, and capital equipment (the purchases of U.S. producers)—it is now nothing short of self-flagellation.

Most of those import-consuming, downstream producers—those domestic victims of the U.S. antidumping law—are also struggling U.S. exporters. In fact those downstream companies are much more likely to export and create new jobs than are the firms that turn to the antidumping law to restrict trade. Antidumping duties on magnesium, polyvinyl chloride, and hot-rolled steel, for example, may please upstream, petitioning domestic producers, who can subsequently raise their prices and reap greater profits. But those same “protective” duties are extremely costly to U.S. producers of auto parts, paint, and appliances, who require those inputs for their own manufacturing processes.

Read the rest here

Tariffs on Furniture Trade: Example of Mercantilist Policy Failure

In the eyes of mercantilists, the world operates in a fixed pie where trade is reduced to a zero sum game—one benefits at the expense of the other.

Because it is a zero sum game, for mercantilists, trade has to be controlled to favor the locals.

And one of the conventional route for this is via protective tariffs.

The Washington Post gives an account of how recent tariffs imposed on the furniture trade with China, has resulted not to the benefits of Americans, but to politically affiliated lobbyists.

The WaPo reports, (hat tip Mark Perry) [highlights mine]

The United States and China have exchanged accusations of dumping for years and imposed tit-for-tat duties. All along, though, China has generally come out on top: Its trade surplus with the United States rose to $273 billion in 2010, according to U.S. Census Bureau figures, more than three times the level of a decade earlier.

The trade concerns have led to growing calls for tougher action from Washington to stem the tide and protect U.S. jobs. But do tariffs work? In the case of bedroom furniture, they’ve clearly helped slow China’s export machine. In 2004, before tariffs went into force, China exported $1.2 billion worth of beds and such to the United States. The figure last year was just $691 million...

“This whole saga is a perfect example of good intentions gone completely haywire,” said Keith Koenig, president of City Furniture, a big Florida-based retailer and critic of the tariffs. Like many retailers, he relies on imported goods, which are cheaper than those made in America.

The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. Their work includes haggling each year over private “settlement” payments that Chinese manufacturers denounce as a “protection racket.”

This whole saga is a perfect example of a longstanding myth debunked since the 18^th century.

First of all, people buy and sell voluntarily because they see fulfillment from such activity. And no territorial boundary changes such dynamics.

Next, mercantilism signifies a form of mental heuristics, only justified by the use of mathematical models, which essentially ignores human action.

Mercantilist see people as behaving like robots or automatons especially in the lens of statistical aggregates.

They omit the fact the people will work their way around absurd policies. And that’s why economic theories which support these policies are exploded as the above.

This is especially amplified in today's deepening of globalization trend as more avenues are made available to circumvent nonsensical policies.

As Ludwig von Mises wrote,

All that a tariff can achieve is to divert production from those locations in which the output per unit of input is higher to locations in which it is lower. It does not increase production; it curtails it.

Lastly mercantilism sells to either economic ignoramuses or to ideological zealots which sees the state as an omni-virtuous entity.

The latter hardly realizes that the state is composed of acting humans, who also operates on the premise of self-interests.

The key difference is that these entities use the power of gun (coercion) to exploit the masses from which to attain their personal goals.

The followers of mercantilism also hardly realize that they serve as pawns to unscrupulous political masters and the crony clients, who benefit from politically unequal policies in the name of the upholding the public’s weal.

Mercantilism is like a superstition which simply refuses to go away.

Politics Of International Bailouts

One major development that has offset such policy mistakes has been globalization. But of course, while policies from fiat currencies tend to likewise distort trade, the fact is that globalization has mushroomed in spite of fiat currencies.

Google Public Data: Global Merchandise trade has Doubled Since 1971

Global merchandise trade has more than doubled since the Nixon shock which closed the US dollar-gold convertibility in 1971 or the Bretton Wood standard.

Yet even when I harbored or expected a tinge of possible policy responses similar to that of the Great Depression, as it has been the natural impulse by governments to use crisis to usurp or expand the reach of political power, or in the words of former White House Chief Emmanuel Rahm[1], "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before", this did not happen.

Well, not for most of the world.

DLC.org[2]: 155 temporary tariffs in 2008

In short, most nations opted to keep trade channels open in spite of the crisis.

Alternatively this means that nations have not responded in the same way as in the past or that most of the world has remained receptive to globalization to the disappointment of the protectionists.

And today, globalization isn’t only on trade but also in terms of bailouts. Not only that the US has been bailout the Europe[3] and the world, but also China[4] and Japan[5] as earlier stated have offered to bailout the Eurozone by buying the Euro debts.

Why then the international bailouts?

Bailouts always have political dimensions whether it is local or international. And the likely answer is that globalization has become a huge political influence from which the present crop of political leaders has latched on.

Where trade levels should diminish and magnify poverty levels, unsustainable political structures, like China and other autocratic regimes, could be exposed and risk destabilization that would result to the overthrow of the incumbent political leader or the system.

And considering that political dynamics have likewise been substantially affected by trade enabled innovations on technology, as evidenced by the recent People Power in Tunisia[6], rigid vertical government structures would be challenged by the political influences based on real time “flat world” connectivity, thus likely resulting to a new political order.

It’s either global governments prevents further advances of trade and technology, or governments adapts to the new political realities of the information age.

And given that people continually adjusts to the state of government affairs by circumventing policies or regulation, my bet is one of the latter.

Even the despotic regime of North Korea hasn’t stopped people from engaging in voluntary trade underground. North Korean authorities attempted to inflate the currency[7] in order to wipe out savings and stop the informal economy but this resulted to a huge backlash which the North Korean government eventually backtracked.

So while the politics of international bailouts may be meant to keep trade channels open, the longer term effects is for the mass distortions that could risks future trade via frictions from boom bust cycles or “super” inflation.

Nevertheless, one of the major fundamental positive developments is that connectivity enabled by technology would certainly pose as continuing hurdle to the advances of governments.

---

[1] Wall Street Journal Editorial A 40-Year Wish List, January 29, 2010

[2] DLC.org Governments imposed 155 temporary tariffs in 2008, September 23, 2009

[3] See The Phisix And The Boom Bust Cycle, January 10, 2011

[4] Los Angeles Times, China moves to prop up Europe's economy, January 15, 2011

[5] Wall Street Journal Japan To Buy Eurozone Debt To Help Europe Tackle Debt-Crisis, January 10, 2011

[6] See Tunisia’s People Power: A Combination Of Creative Destruction And The Politics of Obedience January 16, 2010

[7] Will North Korea's Version Of The 'Berlin Wall' Fall In 2010? January 3, 2010