President Obama’s State of the Union speech made both manufacturing and steel front-page news. Reviving the U.S. export economy was a dominant theme in the speech, but one that struck me as an attempt to change the end result of years of dysfunctional policies without addressing the dysfunctional policies themselves — meaning it’s destined to fail.
While Obama’s comments were followed up pretty quickly with specifics from U.S. Commerce Secretary Gary Locke for export financing, expansion of local services in fast-growing economies and finally combating unfair foreign barriers to U.S.-made products, I believe it’s absurd — and even arrogant — to expect to be able to export our products into other countries when we can’t even defend our markets here at home.
Let’s stick to steel. One of the world’s lowest-cost commodity steel manufacturing industries is right here in the good ol’ USA. Not only are we relatively low cost on a world scale, but we have the market in our backyard (as we do the raw materials), so we have the home court advantage in terms of transportation costs to market.
But even though the United States has been a low-cost steel provider for nearly a decade now, we still remain the world’s largest importer. It makes no logical economic sense for this country to have imported 14.7 million tons in 2009 when the domestic steel industry was running at an average utilization rate of less than 50 percent.
Here’s the rub. There are structural impediments to the economics, and these are the types of things that Locke isn’t going to be able to address, or at least not address quickly. Currency is probably the single most critical barrier to exports by the U.S. steel industry, but it’s hardly the only one.
Ownership of distribution channels is an issue; some 40 percent of all distributors are owned either by foreign mills or foreign trading companies, so we are “hard wired” into our existing structure until that unwinds, but not a single ounce of steel that is sold by a distributor passes through the hands of a domestically owned trading company or distributor.
I remember in the early 1980s, when the European Coal and Steel Community disbanded and the quotas that had dominated each European nation began to ease, there was a flurry of acquisitions of distribution assets that started off as an offensive play and ended up as a defensive play. Within five years, half the steel distributors in Europe were owned by either domestic mills, foreign mills or a trading company.
Ramping up steel exports in the United States is equally structurally dysfunctional, but in my view has far more off-putting implications. In a “normal” economy, the United States is probably 15- to 20-percent dependent on foreign steel. This shouldn’t be, but this too is an artifact of the government’s ongoing mismanagement of both trade and manufacturing.
Steel companies in this country have been reluctant to reinvest to expand capacity in line with domestic demand and their newer, lower-cost position because the risk of random surges of foreign steel – that historically have happened like clockwork every five or six years -- is meaningful and potentially lethal.
So that leaves us with a capacity problem. In today’s weak economy, of course, we have low-cost under-utilized capacity to export into foreign markets. And as a low-cost producer we ought to be exporting. But that’s opportunistic exporting. The reality is that if we really want to have an export economy, we have to have dedicated resources to serve those markets in good years and in bad. And that costs money.
And here’s the part that’s off-putting. Domestic steelmakers just won’t reinvest, and they shouldn’t for good reason: Why on earth build an export infrastructure when we all know the likelihood that another region will dump or subsidize their way into that market is nearly 100 percent?
We have no confidence that our trade laws will be enforced. It’s like me, when I lived in the car-theft capital of the country (a.k.a. Lincoln Park, Chicago); I drove an old Pacer and it was, indeed, boosted one night. Why would I have kept a nice car on Clark Street?
Second is looming health-care and environmental legislation. It’s not that the steel industry isn’t willing to bear its fair share of environmental and even social costs — we have an industry that historically has had social obligations drawing market capitalization—but the uncertainty created by health care and cap and trade has frozen capital spending.
While we love hearing Obama talk our talk, we know that in order to walk the walk meaningful structural issues must be addressed. Calling China a currency manipulator once and for all is at the top of the list. Steering clear of trade agreements that turn into legalized rape so often is second on that list. Finally, create a government platform where stability—of environmental costs, social costs and defense against assaults on our trade laws—dominates the business community’s forecasts, so that these long-term structural investments can be made with some kind of assured return rather than the risk of random acts of profits, as we seem to be looking at today.