Biden’s “Protective Stupidity”
When President Biden addresses a joint congressional hearing tonight, he is likely to ask for increased government spending to support preferred industries in hopes of maintaining a competitive advantage over China. Whether or not he uses the term, he will endorse “industrial policy” – the use of central planning to reorient the economy in the ways desired by government officials. Unfortunately, past efforts to improve the economy by selecting “winners” often resulted in the overall economy being “losers”. Wait for the same result once. Proponents of industrial policy have a strong belief in the government’s ability to achieve useful results when intervening in the economy. Their goals generally fall into one of two categories. Maintaining employment in old-fashioned companies or building state-of-the-art industry to help America succeed in the future. The sad history of the US steel industry shows the huge disadvantage of the previous approach: it should raise serious doubts about the feasibility of the latter. Even before the Trump administration imposed a 25 percent tariff on 25 percent of steel imports in 2018, the United States had the highest steel prices of any major country. This was mainly due to the more than 200 anti-dumping / countervailing duties imposed on imports of iron and steel from large countries. Steel prices are even higher in this country today. SteelBenchmarker, a market analysis firm, reported on April 12, 2021, the price of hot-rolled steel from Mississippi to the east as $ 1,455 per ton. That is 60 percent more than the world export price of $ 911, even 42 percent more than the price of $ 1,026 in Western Europe. Import restrictions have turned America into a high-priced island in the ocean of low-priced steel. US steel mills serve about 80 percent of domestic demand. The remaining 20% is supplemented by imports, mainly from Canada, Brazil and Mexico. China is not in the top ten suppliers. As expected in the market of relatively frozen products, import restrictions lead to an increase not only in the price of imported steel but also in steel. American steel mills benefit from artificially high prices, accounting for 80 percent of their market share. Steel users, however, have to pay that high price for 100% domestic consumption. Because the costs to consumers far outweigh the benefits to producers, the economy as a whole is worse off. Tariffs reduce America’s overall well-being and standard of living. Relatively, steel users have to pay $ 10, while steelmakers earn only $ 8. This particular industrial policy burns the other $ 2 and smokes it, causing considerable damage to the US economy. Although there is more news. Steelmaking in the United States is a modest business, it does not expand. After the Great Recession, there was a high level of tariff protection, which should have helped boost the industry. Instead, US steel production fell by more than 10 percent, from 98.1 MM in 2007 to 87.8 MM in 2019. As of 2019, they employed 144,000 steel mills. They added $ 31 billion to the economy, equivalent to 0.15 percent of GDP. Companies that buy steel make useful things from it, but they have a much bigger footprint. They employ 6.7 million people, generating $ 1.1 trillion in economic value growth (5.4% of GDP). Thus, steel users employ 46 times more people և 35 times more GDP than steel producers. This means that we have an industrial policy that can harm every 46 employees who can help. Much of the damage comes from the fact that steel tariffs are a highly effective mechanism for reducing the international competitiveness of the wider US manufacturing sector. Imported finished products made from world-class steel can often easily sell US products. It is not easy to succeed in production when the government avoids the opportunity to increase your costs. Reducing competitiveness costs jobs. Pre-epidemic analysis by economists Lydia Cox (Harvard) and Cady Rass (UC-Davis) in February 2020 showed that Section 232 tariffs could lead to an increase of about 1,000 steel mills. However, they did cost 75,000 jobs for value-added producers. It is obvious that the protectionist industrial policy has not achieved the goal of rejuvenating the steel sector. Is there any reason to think that everything can work better when it comes to promoting state-of-the-art industry? Not really. The current appeal of industrial policy on behalf of semiconductors or artificial intelligence is likely to come from the fact that policymakers are not really good at predicting the future and making optimal investment decisions. Attempting to copy China is unlikely to be a recipe for success. After all, aside from its shocking, boastful claims, there is serious doubt as to whether the Chinese Communist Party will be effective with its centralized planned approach. As Ude ud Blanchett, a Chinese expert at the Center for Strategic and International Studies, recently noted, “If the state-led model is as inefficient as many people think, China will lose the generational capital in pursuit of the dream of centralized planned technological innovation.” “The United States must stick to an approach that has served it well in the past, and not pursue a disoriented industrial policy. It means maintaining a favorable business environment based on economic freedom, entrepreneurship, open competition markets, and the rule of law. It means fostering an economy that encourages education, research և development, investment: innovation. And that means avoiding the obvious downsides of the failed intervention of steel policy makers. Better idea Let’s put aside the new intervention programs and focus instead on clearing up the mess that industrial policy has already created for America.