2007 Editorial

Last month’s Strategic Economic Dialogue between the U.S. and China failed to bring the two sides any closer on such pressing issues as China’s currency policies and trade practices. Steel industry leaders, who have been pleading with U.S. officials for years to take a harder stance on unfairly traded goods from China, report that members of Congress are becoming more receptive to calls for some form of government action. In fact, Congress may reconsider legislation proposed last year to impose 27.5 percent tariffs on Chinese imports.

Nevertheless, the U.S. appears unlikely to win any meaningful concessions from the intransigent Chinese anytime soon.

In remarks at last month’s MSCI annual meeting, Peter Navarro, associate professor of economics and public policy at the University of California and author of “The Coming China Wars,” painted a discouraging picture.

Political action is now too fragmented, he said, with industry, labor, environmental interests, human rights activists, etc., all doing their own thing. “Unless you build a broad-based coalition, you will get small victories, but still lose the war. That’s what I’m afraid of,” he told the audience of service center and mill executives.

Navarro does not use the term “war” casually. He believes the U.S. is in the midst of a serious economic war vs.

the Chinese, one in which the enemy has no intention of playing fairly.

Calling them “weapons of mass production,” Navarro outlined the eight drivers that give Chinese producers the ability to undercut competitors in the West. Five of the eight represent unfair trade practices, he asserted, and account for at least half of China’s overall price advantage.

China’s huge labor advantage—an enormous population willing to work for pennies—is well known, but cheap wages represent just 40 percent of its total price advantage. Highly efficient clustering of newly developed industries represents 16 percent, while direct foreign investment accounts for another 3 percent.

The remaining 41 percent of China’s price superiority is rooted in its mercantilism and protectionism, Navarro said, with illegal subsidies accounting for 17 percent, currency manipulation 11 percent, counterfeiting and piracy 8 percent, lenient health and safety regulations 2.5 percent, and lax environmental regulations another 2.5 percent.

The U.S. steel industry has been a vocal critic of China’s government subsidies and fixed currency, which most directly affect global steel trade, but it needs to become part of a larger multi-industry coalition with an even louder voice on all the issues that threaten U.S. competitiveness.

“There is no one magic policy bullet to stop the Chinese juggernaut,” Navarro added. “You’ve got to attack this on all five China price fronts.”

America ultimately pays for cheap Chinese goods with a loss of jobs, stagnant income, skyrocketing energy prices, and a less safe and more polluted world, he noted.

He put the trade conflict with China in a sobering historical perspective: “In the future, looking back at this period in time, the loss of economic sovereignty to China will be a bigger concern than the war in Iraq.”