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Vertikal.net > Editorial
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Will we ever learn

Leigh W Sparrow, Publisher
Leigh W Sparrow, Publisher

April 9, 2018 - Once again we are on the verge of a major trade war as a tariffs and protectionism are promoted as a simple solution a range of complex issues. Will they work? Are they misguided? Or just a simplistic reaction the challenges of change?

As you might have guessed this comment is spurred on Donald Trump’s imposition of tariffs on steel and aluminium, supposedly for reasons of national security. This in spite of the fact that steel prices have been rising over the past year. Since announcing the steel tariffs he has moved on to a tit for tat battle with a wider range of Chinese products.

Getting back to the steel, the tariffs were originally supposed to apply to all imported steel regardless if it was being dumped or not, but several temporary exceptions have since been made – but make no mistake the exceptions are only temporary. The basis rationale behind this is that foreigners have been dumping cheap steel in the USA, undermining local manufacturers which have then closed plants and laid off steel workers. It is true that many steel plants have been closed and the number of Americans employed in steel production has dropped from 187,200 in 1990 to 84,900 at the end of last year, although this is only a marginally higher fall than that seen in global steel production employment – which is down around 50 percent over the same period.

The reason for the fall in employment has as much to do with new production methods, increased productivity and automation as it has to cheap imports. Steel companies in the USA along with the UK and almost certainly other developed countries, must take some blame for these declines, due to a lack of investment as they focused on the short term strategies and dealt poorly with strong unions. I recall visiting Bethlehem Steel’s sprawling Sparrows Point steel plant in Baltimore in 1978 when a trainee with a crane manufacturer. I was stunned by the decrepit condition of the place, which had a 1920s feel to it, with underemployed workers all over the place, suggesting grotesque inefficiencies.

Thankfully the steady move towards free trade meant that US manufacturers were not held hostage to high prices caused by the country’s the increasingly inefficient steel industry of that time, as imports forced local producers to become more efficient or die – sadly a good many died – in some cases due to incompetent, overpaid management and entrenched unions. But at least those manufacturers that did invest in research and development, new plants and in keeping their production world class, prospered as some of the dinosaurs dropped out of the market, while a number of new speciality steel plants opened and did well. More recently foreign companies have invested in the US steel industry.

Contrary to popular myth the US manufacturing industry is very much alive and kicking and remains a substantial part of the economy. In the access industry for example, market leaders such as Genie and JLG are shining examples of this, along with smaller companies such as Compact Equipment and MEC, while component suppliers such as Trojan Battery also do well. If early attempts to protect the US steel industry with untargeted tariffs had succeeded, who knows how such manufacturers would have fared?

The US equipment manufacturing sector employs at least 1.4 million in primary production, with many more than this in the supply chain. The US car industry is not far behind in terms of the number employed with 1.1 million jobs. Surely it is more important to protect these jobs and these industries than to trying to artificially prop up inefficient steel makers by manipulating the market?

It should also be noted that an increasing swathe of the manufacturing industry uses high specification, high strength speciality steels, rather than the cruder steel that tends to be dumped. Although the economy could benefit from holding down prices on more the basic steel used in construction, helping reduce the cost of rebuilding American infrastructure leading to more jobs in the sector and more new equipment purchase leading to a stronger economy etc…

George W Bush was the last president to impose indiscriminate steel tariffs in the spring of 2002 but had to drop them 18 months later after the WTO ruled that they broke world trade rules - imports had actually dropped in the year before they were imposed. On top of this the European Union began slapping tariffs on US products and probably more decisively GDP and employment began to suffer. In the meantime steel industry employment hardly changed, and perversely actually picked up after the tariffs were abandoned at the end of 2003.  

The fact is blanket tariffs and isolationism rarely ever works, and the vast majority of attempts to head down this route have ended in disaster when allowed to continue.

The market is far from perfect and certainly needs sound rules and monitoring to function well for the wider population. However, it is remarkably efficient at keeping the economy in balance and functioning efficiently, while politicians shooting from the hip as they try to appeal to particular constituencies or pressure groups, without looking back at history or properly considering the knock on ramifications are dangerous.

Let us hope that sanity sets in before the global economy is dragged into a major slowdown due to ignorance.

Let us know what you think about trade wars.

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