Steel Tariffs: Making America Competitive Again?
BHP, the world’s largest diversified natural resources company, recently celebrated the 50-year anniversary of its relationship with Japan – the two parties have experienced joint benefits as Japan’s industrialization was enabled by a steady inflow of BHP’s iron ore. During this period, Japan experienced a 1400% increase in steel production per capita, a 4x improvement in post-WWII standard of living, and was the “first non-Western economy to reach wealthy nation status.” [1] BHP has a vested interest in marketing this story as isolationist governmental policies gain traction globally.
Most trade agreements today are less celebrated. The world’s steel market is arguably “the most distorted industrial market in the world,” and the United States has not protected its own steel industry. Foreign steel producers engage in dumping – the practice of discounting steel in export markets while enjoying comfortable margins protected by subsidies in their home country. [2] American Iron & Steel Institute Chairman John Ferriola shared his frustration that “China has subsidized the [steel] growth… through grants, low interest loans, [and] free land… simply stated, the Chinese government is a company disguised as a country… waging economic war on the United States”. This results in higher steel supply than demand and lower U.S. steel prices. As a strong symbol of U.S. frustration, the Obama administration levied a 200%+ tariff on China’s cold rolled steel. [3]
President Trump resurfaced the topic during his campaign and gained political support from “Rust Belt” cities on the promise of protectionist trade agreements. These cities saw large levels of unemployment after low steel prices eliminated their ability to compete globally. Trump emphasized “…they’re dumping steel. Not only China, but others. We’re like a dumping ground, okay?” Steel is needed for defense – helmets, tanks, and rocket fuel – and Trump strongly believes this is not an area to become dependent on foreign sources. [4] He has suggested in post-election rallies a 45% tariff on Chinese imports that would “rip-up” existing trade deals. [5]
Currently, China is 41%, or $14 billion of BHP’s earnings. A decrease in China’s steel export ability would create uncertainty in iron ore demand. At the worst, global retaliation from China may cause a decrease in connectivity between Asia and Australia. Since mining is largely a capital intensive, fixed-cost business, lower iron ore prices directly impact profits. BHP’s 2017 annual report details “modest economic growth” in the short-term due to protectionism and a related external financial risk that is “difficult to predict and outside [BHP’s] control”. [6] BHP chief executive Andrew Mackenzie told the Financial Times that global businesses need a “call to arms”. Mackenzie emphasized that tearing down trade deals will lead to extensive negotiations, decreased market efficiency, and increased geopolitical tension. [7] Jac Nasser, BHP chairman in 2016, spoke out directly against the tariffs, saying the issue is greater than BHP’s balance sheet since “the whole world will start to be in complete trauma” with guaranteed countermeasures from other countries. [8]
Mackenzie further emphasized that “free trade doesn’t take jobs on a net basis. It makes them. Big time”. [9] But with one caveat: labor economists David Autor, David Dorn, and Gordo Hanson emphasized trading with China has not helped the U.S. workforce, but emerging market middle classes. As stated in the abstract, “…employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.” [10] Despite expert economists agreeing that steel trade is unfair and caused unemployment in U.S. steel-making industries, they fear the backlash of the tariffs for the many Americans who are employed by steel-buying industries. [4]
BHP executives including Mackenzie met with Trump in January 2017 to discuss a wide array of issues impacting the resources sector. [11] BHP’s strategy of operating “upstream assets diversified by commodity, geography, and market” is their greatest line of defense at mitigating the risk of trade restrictions. [6] Going forward, BHP needs to continue diversifying their commodity portfolio and actively engaging with foreign governments to encourage both tariff and subsidy free steel trade. If tariffs are enacted, I recommend BHP to actively lobby and file for exceptions. I would evaluate BHP’s relationship with China: by supplying China in one market, did they create a problematic situation in another? How should or can BHP and the community punish unfair trade?
[1] BHP Billiton, “Japan and BHP’s 50 year relationship.” June 5, 2017. http://www.bhp.com/media-and-insights/prospects/2017/06/japan-and-bhp-50-year-relationship, accessed November 2017.
[2] Mastel, Greg and Andrew Szamosszegi. “Leveling the Playing Field: Antidumping and the U.S. Steel Industry.” Anti-Trust and Competition Policies, Economic Strategy Institute (February 1999).
[3] Flanagan, Ed. “China’s ‘Zombie’ Steelmakers Hit with Huge U.S. Tariffs.” NBC News, May 18, 2016. https://www.nbcnews.com/business/business-news/china-s-zombie-steelmakers-hit-huge-u-s-tariffs-n576006, accessed November 2017.
[4] Lowrey, Annie. “The Limits of ‘Made in America’ Economics.” The Atlantic, July 20, 2017. https://www.theatlantic.com/business/archive/2017/07/made-in-america/534339/, accessed November 2017.
[5] Bryan, Bob and E. Holodny. “Trump’s considering a tariff that could put the economy on a path to ‘global recession’” Business Insider, June 30, 2017. [http://www.businessinsider.com/trump-steel-tariff-china-germany-japan-global-recession-2017-6], accessed November 2017.
[6] BHP Billiton. 2017 Annual Report. http://www.bhp.com/investor-centre/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf, accessed November 2017.
[7] Yeomans, Jon. “Protectionism threatens climate change action, warns BHP Billiton.” The Telegraph, October 10, 2016. http://www.telegraph.co.uk/business/2016/10/10/protectionism-threatens-climate-change-action-warns-bhp-billiton/, accessed November 2017.
[8] Kehoe, John. “BHP Billiton and Rio Tinto at risk in Donald Trump’s Steel Crackdown.” Australian Financial Review, April 21, 2017. http://www.afr.com/business/mining/bhp-billiton-rio-tinto-at-risk-in-donald-trumps-steel-crackdown-20170420-gvp55d, accessed November 2017.
[9] Donna, Shawn. “BHP Billiton chief Andrew Mackenzie attacks barriers to trade.” Financial Times, September 16, 2015. https://www.ft.com/content/07309d80-5cad-11e5-a28b-50226830d644, accessed November 2017.
[10] Autor, David H., D. Dorn, and G. H. Hanson. “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” The National Bureau of Economics, Paper no. 21906 (January 2016).
[11] Ong, Thuy. “BHP Billiton’s Donald Trump talks ‘productive’ says mining giant.” ABC News, January 10, 2017. http://www.abc.net.au/news/2017-01-11/bhp-billiton-talks-with-president-elect-donald-trump-productive/8174894, accessed November 2017.
I am not surprised by Mackenzie’s position although I am less convinced that it stems from his love of and belief in free markets as he claims. China’s stubborn, or perhaps politically necessitated, unwillingness to rationalize steel production acts as a de facto subsidy of the industry and by extension iron ore suppliers such as BHP. The interesting questions is whether these short-term incentives to keep Chinese excess production online directly hurt the long-term incentives of iron ore producers to see the commodity cycle turn the corner?
I’m not convinced that companies like BHP can play much of a role in punishing bad behavior in global trade. Ultimately, their role is to make money for their shareholders – taking a normative view about the behavior of one of their customers seems tough to reconcile with their fiduciary responsibilities. This is a problem best left to diplomacy and trade policy between sovereign nations, who have many levers at their disposal to discourage bad behavior. It is likely that the U.S. did not have a large incentive to utilize these levers earlier on as the overriding goal was to promote globalization. Now that this is less of a focus, it may be possible to use the WTO and other organizations to help promote fair trade policies between countries. Companies like BHP should continue to focus their efforts on lobbying on behalf of free trade.
Thanks for an interesting read! I agree with Steve’s point that it’s not BHP’s responsibility to regulate the global steel trade and that punitive measures, if used at all, are under the purview of national governments. The US actually has a longstanding record of using protectionist policies to insulate the domestic steel industry though and, even before Trump became President, already had 161 active tariffs against steel dumping (http://www.nwitimes.com/business/steel/u-s-steel-industry-has-lost-jobs-since/article_4ffd704a-1cdc-5eb9-82eb-0b858a369877.html). “Buy American” restrictions in particular have required recent government construction projects in Texas, California, Alabama, Colorado, and elsewhere to use steel produced in the US (http://www.globaltradealert.org/sector/411).
Very interesting! Especially with what is currently happening in the world. It seems like the world is shifting to developed countries looking for a protectionist option in terms of trading and developing countries advocating for globalization.
It makes me reflect on what will be better in the long run? It makes sense in my mind that developed countries are looking for a protectionist option because of competition and the low prices other countries have to offer. The idea that people are being hired based on the low amount of money they are willing to receive poses a conflict for globalization. Although we agree or not with the idea of protectionism, we can all agree that its an idea that has spread through the world and is not going away any time soon.
Instead of debating whether it is better or not, we should start to reflect what elements of globalization are not working. Which elements are the ones that directly lead to this protectionist idea and the fear of free markets. By doing this we could improve the idea of globalization and the players that it has been benefiting.
This is a most interesting case on an industry which is extremely impacted by proteccionism and other distorting measures. While BHP can follow a strategy to try to lobby against certain measures, the ultimate output is very difficult to change or even forecast (especially as high profile economic and political actors might be lobbying for the opposite measures).
Operating in China has inherently created exposure for this kinds of risk, which is exacerbated by the fact that it represents a relevant 41% share of BHP’s business. There are certain measures which could help the company mitigate this risk. For example, the company could take a position in alternative metallic sources in the US or other positions in financial futures which could help compensate the risk of this kind of regulations appearing. Also, the company would be wise to analyze the impact of this measures for the China operation, drafting potential plans to suspend or reduce production and/or find alternative customers who could purchase excess iron ore volume.
This article highlights the key tension present in lobbying for or against protectionist policies. As Kate mentioned, the ultimate decision on tariffs lies with the policymakers in government. As a slightly cynical individual from DC, I believe that politicians are often incentivized to shape policy to align with groups that are most likely to help them get re-election. Therefore I would be interested to see the political contributions that BHP has historically made. That might be an indicator of how successful their lobbying efforts will be.
I am also still undecided whether these tariffs truly reflect “unfair” trade policies. I think it depends what you are solving for: job creation maintenance in the US or market efficiency. It is difficult to decide which solution ultimately provides the greatest benefit for the American people / society as a whole? Is protecting American jobs and industry better in the long run than allowing for complete free trade that could result in the most vibrant economy?
Thank you for the interesting essay! Foreign practices such as dumping are certainly harmful to American steel companies. However, I think it’s also worth investigating the consequences of dumping for the consumer. When China and other countries dump steel into the US, they reduce the price for US consumers to below market rates. In other words, US consumers essentially receive a discount. Therefore, the public policy case for combatting dumping has to depend on more than just the cost for US steel companies.
One reason to ban the subsidies would be to protect US jobs and businesses. If that is our objective, how do we weigh the cost to consumers against the benefit to US steel producers? Another reason to combat dumping could be the long-run implications. If Chinese companies providing cheap steel drive American firms out of business and raise prices tomorrow, we are worse off.[1] But if there is a competitive international market for steel, Chinese companies may never be in a position to raise prices above market rates.
https://www.economist.com/news/finance/21696325-throwing-up-tariffs-counterproductive-response-economic-weakness-why-no