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With the
Doha Round of trade talks under way and mid-term elections at year’s
end, U.S. steel industry executives and trade associations are clamoring
for congressional action on Chinese currency manipulation.
By
Dan Markham,
Senior Editor
Sidebars
and Tables:
Frustration
over White House inaction on Chinese currency manipulation is bringing
a new sense of urgency to industry appeals for retaliatory trade
measures. Indeed, at least five bills are currently under consideration
in Congress designed to make American goods more competitive vs.
unfairly subsidized Chinese imports.
John
Nolan, vice president and manager of sales and marketing for Steel
Dynamics Inc., Fort Wayne, Ind., believes China’s intentional
undervaluation of its currency, the yuan, is the greatest threat
to America’s manufacturing base and economy for the long term.
Nolan
has been a point man in the steel industry’s effort to urge
U.S. trade officials to take action against China. Among his many
appearances, Nolan spoke on the issue before the House Ways and
Means Committee last year. Last month, he addressed the topic at
the Steel Business Briefings North American Steel Conference in
Chicago.
“The
Chinese are honest enough to acknowledge they do in fact intervene
and manipulate,” Nolan told steel executives. “Unfortunately,
the only one around who denies that is the U.S. Treasury.”
Rather
than allowing the value of their currency to float on the free market
as others do, the Chinese peg the yuan at a fixed value relative
to the U.S. dollar. Nolan says China’s peg undervalues its
currency by as much as 40 percent, effectively subsidizing Chinese
exports to the United States and other countries and affecting a
hidden duty on U.S. products that would be imported into China.
Anti-China
sentiment has been gaining steam nationally as the trade imbalance
worsens. The United States posted a record trade deficit in 2005
of $726 billion, a sevenfold increase from the $100 billion deficit
10 years ago.
A
number of industry trade organizations have made the Chinese currency
issue their primary focus this year, including the American Iron
and Steel Institute, the Steel Manufacturers Association, the Metals
Service Center Institute and the China Currency Coalition, which
represents various U.S. manufacturing industries in this common
cause.
The
growing grassroots appeal for action has caught the attention of
lawmakers on Capitol Hill, who have sponsored several bills relating
to Chinese currency and trade:
- H.R. 1498—This
bipartisan bill authored by Rep. Duncan Hunter (R-Calif.) and
Rep. Tim Ryan (D-Ohio), would hold China accountable for its currency
manipulation through stronger enforcement of existing trade laws,
including countervailing duties and Section 421 actions. Section
421 is a special statute that applies only to imports from China.
It authorizes the imposition of temporary trade barriers against
Chinese imports deemed a substantial cause of serous injury to
American producers.
- H.R. 1575—Authored
by Rep. Sue Myrick (R-N.C.), this bill would authorize the Secretary
of the Treasury to negotiate with China to accept a market-based
system of currency valuation.
- H.R. 3004—Authored
by Rep. Phil English (R-Pa.), this bill would require Treasury
officials to monitor all of China’s compliance with World
Trade Organization commitments.
- H.R. 2208—Sponsored
by Rep. Don Manzullo (R.-Ill.), this bill would define manipulation
under the Omnibus Trade Act to include nations involved in large-scale
intervention in the foreign exchange market.
- S. 295—Sponsored
by Sen. Charles Schumer (D-N.Y.) and Sen. Lindsey Graham (R-S.C.),
this bill would impose a duty of 27.5 percent on all Chinese goods
imported into the United States until the president recognizes
that China is no longer manipulating its currency.
Though
the volume of bills reflects increased interest in the issue among
lawmakers, it also presents a concern, says Thomas A. Danjczek,
president of SMA, which represents minimills. “It’s too
fractionalized,” he says. “I’d be happy if everyone
backed Hunter-Ryan.”
The
Hunter-Ryan bill already has the greatest support among representatives,
with more than 150 signatures on the House side. It has had difficulty
getting traction in the Senate, however, he says. Additionally,
H.R. 1498 is favored because it complies with existing WTO and International
Monetary Fund regulations.
Dan
Ikenson, a trade policy analyst for the Cato Institute, Washington,
D.C., acknowledges that China manipulates its currency and some
action needs to be taken. However, he believes any radical approach
to the problem is a greater threat.
“Many
in Congress view exports as good, imports as bad and the trade count
as the scoreboard. So they think we’re losing to China, and
we’re losing because China is cheating. To a certain extent,
they are correct. My concern is they are going to do something rash.”
Any
overreaching effort to force the Chinese government to float its
currency could have undesirable effects on China’s economy,
Ikenson says. A sudden shift in the currency could cause more than
half of all Chinese borrowers to default on their loans, crippling
China’s banking system, with worldwide implications. “Congress
needs to realize that it’s a gradual process. China is going
to revalue, but they can’t let it happen all at once. It’s
too delicate a matter.”
Regardless,
Danjczek and Nolan both believe that Congress’ frustration
with the mounting trade deficit, and Treasury’s unwillingness
to take action, may lead to new trade legislation.
Trade
reform via tax reform
Another effort to bring balance to the trade account is through
adoption of a border-adjusted tax, a move favored by several industry
associations.
As
allowed under WTO rules, nearly all countries impose a tax on imports,
generally from 15 to 25 percent. Those funds are used to supply
rebates to exporters to help cover the cost of the import tax they
must pay when their goods enter another country. The United States
is the only major trading country that does not have some form of
border-adjustable tax.
“This
is the single biggest factor contributing to trade imbalance, and
it’s completely self-imposed,” says consultant Charles
Blum, president of International Advisory Services in Washington,
D.C. “In effect, the U.S. government subsidizes imports into
this country by foregoing collection of obligations.”
Blum’s
position is supported by most U.S. manufacturers. Opposition is
strong from Wal-Mart and other retailers, who argue that such a
value-added tax would increase the prices of consumer goods. Blum
and other proponents maintain that the tax could be implemented
along with other changes to the tax code that would ultimately result
in a revenue-neutral outcome.
“It
would be inflationary, if it isn’t used to eliminate or reduce
existing taxes. The stated intention is to shift tax burden from
income onto consumption,” Blum says.
Though
Blum has been promoting this idea for several years, he is finally
reporting positive momentum in Washington. House Ways and Means
Chairman Bill Thomas is an open proponent of a value-added tax and
will hold a series of discussions in May on the issue.
“It’s
the first time in 30 years I’ve seen this level of interest.
That makes me really optimistic we could actually do something of
real importance,” Blum says.
Others,
such as SMA’s Danjczek, are a little more skeptical. “It
does not have traction on the Hill. We have no desire to be a Don
Quixote. There are only so many windmills you can chase, and that
windmill right now isn’t turning very well.”
Doha
round and round
Hovering over any trade talks on Capitol Hill is the continuing
Doha Round of WTO negotiations, designed to reduce barriers to free
global trade, especially for developing countries. Dave Phelps,
president of the American Institute of International Steel, a trade
group representing foreign steel mills, doubts Congress will pass
any significant trade legislation while Doha is ongoing.
“With
the Doha Round, Congress is not overly interested in stepping into
that arena (trade legislation),” Phelps says. “The U.S.
Trade Representative’s office would probably take a dim view
of that if they’re in the middle of negotiations only to have
U.S. law change.”
The
Doha Round is scheduled to conclude this year. Phelps is hopeful
it produces “common-sense reform,” arguing that the U.S.
steel industry has a number of wants—such as intellectual property
rights reform and elimination of trade tariffs—and only one
real area to offer: antidumping reform.
Ikenson,
in contrast, does not believe the Doha Round will produce any substantial
changes. “There have been some agreements, mostly giveaways
to developing countries, but not much in terms of market access
for U.S. manufacturers, exporters or service providers. So I don’t
know to what extent Congress is going to be all that excited about
this agreement.
“My
guess is they’re not going to get the ambitious agreement they
envisioned,” he added, “more like Doha Light.”
The
main reason Doha will disappoint, he says, is that all countries
in the WTO—from the powerful U.S. and European Union, to developing
countries like Brazil and India—are afraid of China.
Other
policy initiatives
In other policy issues, the American Iron and Steel Institute is
promoting its Gulf Coast Initiative to become a significant factor
in the rebuilding of hurricane-ravaged cities. Though the effort
is initially focused on education and assistance, AISI will also
back “Buy American” legislation as part of the rebuilding
effort.
The
Stainless Steel Industry of North America has also gone to the nation’s
capital to state the case for its industry, going straight to the
top. In February, Jack W. Schilling, SSINA chairman, wrote President
Bush expressing the organization’s support for the American
Competitive Initiative. Schilling’s organization had previously
released a report on the significant role specialty metals play
in national defense and the continued importance of maintaining
a competitive domestic industry.
“What
we’re concerned with is that over time, if we’re not careful,
this country could lose its specialty metals industry and have issues
with regards to national security,” Schilling says. “Without
strong investment in manufacturing, we won’t be able to maintain
a leadership position. It’s just not possible. We want to see
action taken by the government that would improve the climate for
investment in the United States.”
While
Schilling links his industry to national defense, Nolan worries
that the Bush administration has already aligned foreign policy
with trade policy. He fears that trade actions taken (or not taken)
in regards to China have been done so due to foreign policy concerns
at the expense of trade, hurting U.S. manufacturing.
On
the other hand, Blum maintains that the federal government makes
a huge mistake by distinguishing between trade policy and tax policy.
“I have come to understand that the single-biggest trade issue
we have is taxation. It’s never discussed when we have a free
trade agreement.”
Ikenson
forecasts a cloudy—if not stormy—2006 on the legislative
and trade front. “It could be a very confrontational year because
of the elections, because of Bush’s waning political capital
and the mounting trade deficit,” he says. n
Stainless
Industry Opposes
Hexavalent Chromium Limits
Concerned about American competitiveness, the Stainless Steel Industry
of North America sent a letter to President Bush in early February
appealing for more government support of U.S. manufacturing. The
late-February ruling by the Occupational Safety and Health Administration
on hexavalent chromium exposure was not what SSINA had in mind.
In
a move to improve worker health standards, OSHA announced Feb. 28
that workplace exposure to hexavalent chromium must be limited to
5 micrograms per cubic meter during an 8-hour day, one-tenth the
current level of 52 micrograms per cubic meter. The new rule is
effective May 30, with all provisions except engineering controls
to be implemented by Nov. 27. Engineering controls must be in effect
by May 31, 2010.
Industry
officials, including stainless producers represented by SSINA, plan
to appeal the new standard as being unnecessarily restrictive and
costly.
At the same time, unions and other worker-safety interests argue
that the new exposure limits are not restrictive enough and should
be lowered still further to 2.5 micrograms.
Though
stainless steel does not contain hexavalent chromium, it is a byproduct
of heat-generating operations such as welding, cutting or torch
burning, plasma burning, forging or chrome plating. Dust-generating
actions such as abrasive blasting, grinding or polishing of stainless
steel or steel painted with chrome-containing material can produce
airborne hexavalent chromium, which has been shown to cause cancer
if inhaled over prolonged periods.
SSINA
is appealing in part on grounds that OSHA did not adequately evaluate
the economic impact of the ruling. OSHA estimates compliance will
cost the stainless steel industry $223 million, while industry officials
peg the actual impact at closer to $2.9 billion. SSINA says fabricators,
field erectors, tube welders, pipe welders, forgers, heat-treatment
facilities, auto repair shop, mining and fiberglass facilities were
not included in OSHA’s impact study.
Additionally,
SSINA claims that OSHA has overestimated the risk of hexavalent
chromium. “The preponderance of scientific evidence suggests
that stainless is a safe product to produce and fabricate in a wide
variety of applications. Overzealous parties have misrepresented
the data unrelated to the stainless steel sector in pushing for
an overly restrictive exposure limit that will cause undue harm
for our industry,” said Allegheny Ludlum Senior Vice President
Terry Hartford in a special presentation at last month’s MSCI
Specialty Metals Conference in Ponte Vedra, Fla.
If
the appeal fails to produce a stay, stainless producers and processors
must take several steps to ensure compliance. They include: engineering
assessments, medical surveillance, defining areas of exposure, posting
alerts, providing respiratory protection and protective clothing,
special laundry services, shower facilities and separate eating
and drinking facilities. The ruling also will require additional
record keeping.
Hartford
encouraged service center executives to take three steps in advance
of the regulations: conduct exposure monitoring tests, report the
results to SSINA or another industry group, and support legislative
efforts to prohibit OSHA from further lowering the limit. “Tell
your customers about this ruling. This has surprised a lot of people.
It could have a very serious impact on the stainless steel business,”
Hartford added.
DiMicco:
Expand
Offshore Gas Exploration
While fair trade is the top issue on the steel industry agenda,
the rising cost of energy remains a concern. In late March, Nucor
Corp. President, CEO and Vice Chairman Daniel DiMicco joined three
other CEOs for a press conference supporting legislative efforts
to open more of the Outer Continental Shelf to natural gas drilling.
“Now
I don’t expect our government to guarantee us low natural gas
prices. I do expect that our government will not withhold natural
gas supply that they control,” DiMicco said.
The
first aim of the executives is to open a portion of Lease 181, located
in the Gulf of Mexico off the Florida coast, to expanded exploration.
In 2001, 10 percent of the area was opened up for lease and 10 new
sources of natural gas were discovered. Industry’s ultimate
goal is to persuade government to allow more natural gas and oil
exploration on both coasts, the Gulf of Mexico and the coast of
Alaska.
The
Outer Shelf legislation appeals to the steel industry on two fronts.
First, the American Iron and Steel Institute estimates that energy
represents 20 percent of the cost of production for American steel
companies.
“When
our members don’t have access to an affordable and reliable
source of energy, it affects our competitiveness,” said Kate
Gallagher of the AISI.
Second, steel companies benefit from increased oil and natural gas
exploration, which increases demand for tubular goods.
DiMicco
said the need for the drilling is heightened by the push in the
U.S. to use more clean-burning natural gas. “Our over-reliance
on natural gas for electric generation has compounded the country’s
need for more gas supply. T
he
result is both higher, and wildly volatile, natural gas prices,
and consequently higher electricity prices. We have been our own
worst enemies on this issue,” he added.
While
Steel Manufacturers Association President Thomas A. Danjczek supports
the Outer Shelf Legislation, his greater concern is seeing the country
enact a committed, forward-thinking energy policy. “We need
to go out 30 years. We need to have a long-term view of what we’re
doing,” he said.
Additional
natural gas supplies will not be enough to meet the country’s
long-range energy needs, DiMicco agreed. “We need both more
gas supply and more efficient use of gas. We also need to fully
utilize new and safer technology to generate electricity including
alternative energy, clean coal and nuclear.”
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