Daily Times

In the public imagination, no industry better symbolises the downfall of US manufacturing than steel. Shuttered plants dot the Midwest. Since 1973, steel employment has dropped 76 percent, from 610,700 to 147,300 in 2015. Moreover, the culprit seems clear – trade – and its influence seems pervasive: Manufacturing as a whole lost about 5 million jobs from 2000 to 2015. No wonder both Hillary Clinton and Donald Trump have jumped on the anti-globalization bandwagon. Globalization seems guilty as charged – except that the popular indictment is wildly misleading. Though trade has helped reshape US manufacturing, it is only one force of many. The appeal of making it the prime villain is political and psychological. We can blame manufacturing’s problems and dislocations on foreigners and disloyal American multinational firms. If they behaved better, the US economy would improve. There is some truth to this, but it is hardly the whole truth – as the case of steel shows. Despite plummeting industry employment, US steel production is roughly where it’s been for decades, between 90 million and 120 million tons a year. Imports generally represent 20 percent to 25 percent of domestic consumption. True, dozens of steel plants have closed. But dozens of more efficient plants have opened. Productivity (a.k.a., efficiency) has increased dramatically. The industry’s largest change of the past half-century is the rise of so-called “mini-mills.” There are now two dominant ways of making steel. The traditional way is to start from scratch: Iron ore, limestone and coal are melted to form pig iron; then the pig iron is boiled in what’s known as a basic oxygen furnace to make molten steel, which is formed into various finished products (sheet for cars, beams for construction and the like). Mini-mills are the second way. Their raw material is scrap steel, which is melted in electric arc furnaces to make molten steel. The mini-mills have a big cost advantage over the older, vertically integrated mills. From 1970 to 2015, their share of total US steel production went from 15 percent to 63 percent, reports the American Iron and Steel Institute, an industry group. This has huge implications. In a recent study, economists Allan Collard-Wexler of Duke University and Jan De Loecker of Princeton University found that the spread of mini-mills – with their greater efficiency – explained most of the industry’s job loss. Put differently: If there were no foreign trade in steel, most of those jobs would have vanished anyway. The least efficient vertically integrated plants were forced to close. The decisive competition has been domestic, not foreign. To be sure, steelmakers face some legitimate trade issues. There’s a global steel glut, mainly because China sharply expanded its industry on the unrealistic assumption of continued strong economic growth. The numbers are breathtaking, according to a report by analyst Lucy Lu of the Peterson Institute. Since 2005, global steelmaking capacity has increased by three-quarters, with China accounting for 78 percent of the gain. China now represents 50 percent of world production, up from 31 percent in 2005. The consequences were predictable. Prices have plunged, as China and others have tried to export some of their surplus capacity. US producers are now, to some extent, protecting themselves by filing trade complaints against steel imports being illegally dumped or subsidized by foreign governments. But this is a short-term expedient. What’s needed is a global agreement that reduces the worst concentrations of excess capacity, starting with China. US steelworkers and companies cannot compete against foreign subsidies. Still, we shouldn’t lose sight of the larger picture. The standard story about the fate of US manufacturing is incomplete. It blames the loss of US factory jobs mainly on foreign imports and the move of American firms abroad. That’s part of the problem, but a larger cause is – as with steel – “rapid productivity growth,” argues Harvard University economist Robert Lawrence. Better manufacturing methods and technologies mean that fewer workers can produce the same output.