Home World Economy Protecting American steel from imports makes no sense

Protecting American steel from imports makes no sense

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AS AN example of all that is wrong with Donald Trump’s view of trade, the probe he has ordered into the steel industry is particularly hard to beat. If it results, as seems to be the plan, in blanket punitive tariffs slapped on steel imports, the consequences would be dire: the American economy would be hurt by a rise in the price of an essential material; it would invite retaliation that would cost American jobs, not save them; and the underlying problem—massive global steel overcapacity—would persist.

For Trumpists, steel is an emblem of their country’s descent from greatness. Ever since the 1960s, when production peaked at 168m tonnes a year, the industry has been in decline. Today it makes half as much as 50 years ago and employs just a third of the workers. Steelmakers have long blamed foreign rivals for their woes and lobbied hard for protection. So Mr Trump is not the first president to try to shield the industry from foreign competition. In the 1980s Ronald Reagan signed a series of agreements to limit imports. In 2002 George W. Bush imposed tariffs of up to 30%. Back then the bogeymen were steelmakers in Europe and Japan; now it is China, where a glut of steel has squashed prices.

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Cheap steel, however, is a boon to many producers as well as to consumers. Higher prices would hit firms that use the metal, such as carmakers. Mr Bush’s tariffs, for instance, are estimated to have cost 200,000 jobs in these industries—more than the 145,000 Americans employed in steelmaking today.

Moreover, the big threat to steelmakers’ jobs comes not from trade but technology. In the Reagan era 80% of the metal was made in the traditional way: converting iron ore and coke into pig iron in a blast furnace, before turning this into steel. Only a third is made in this way today. Scrap metal is replacing new pig iron. Smaller electric-arc furnaces are more efficient, thanks in large part to cheaper electricity, and can compete on quality and cost with blast furnaces. Methods that use shale gas instead of coal to make iron for steelmaking are also replacing pig iron. Thanks to such advances, labour productivity in steelmaking has increased fivefold since the 1980s, according to the American Iron and Steel Institute, a trade association. Tariffs will not bring lost jobs back.

Nor would they solve the underlying problem in global steel markets, which is the huge excess steel capacity in China. Indeed, they could be counterproductive in their effects. Existing trade-protection measures have successfully diverted Chinese steel to other markets. In 2016 Chinese steel made up just 4% of American steel imports, compared with 27% from Mexico and Canada combined and 23% from the European Union (see chart). A tariff that was imposed on imports from other countries would risk splitting a potential alliance between America and the rest of the world against China.

If a blanket tariff were to spark a wider trade war, the irony is that the biggest losers would include modern American steelmakers. At last they are becoming competitive abroad again. If Mr Trump really wants to boost American steel, free trade would be a much better bet.

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