2-2008 Business Topics
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DiMicco: U.S. Needs Stronger Trade, Manufacturing Policy

(Editor’s note: Speaking at the Metals Service Center Institute’s Tubular Division Conference Jan. 18 in Scottsdale, Ariz., Nucor Chairman and CEO Dan DiMicco spoke on the precarious fate of American manufacturing if U.S. officials fail to negotiate more fair and balanced global trade.)

Though the U.S. economy may be weakening, there’s no reason 2008 can’t be another strong year for steel shipments and profits, Nucor Steel’s Dan DiMicco told service center executives at MSCI’s tubular conference last month. DiMicco’s concern for the steel market is more long term, he explained, as mercantilist trade policies by the Chinese and other governments continue to erode U.S. manufacturing.

Indeed, DiMicco was critical of Congress and trade officials for not taking a harder stance against the Chinese government’s currency manipulation and industry subsidies, which give China’s exports an unfair advantage on the world market in clear violation of World Trade Organization rules, DiMicco said.

Even though steel demand is down somewhat—and could slide further if the economy dips into recession—inventories are relatively lean and imports have declined significantly in the past seven months. Unlike in the late 1990s when demand was sky-high but supplies were even higher, which drove steel prices down to unprofitable levels, supply and demand are fairly even today and the outlook for pricing is good, he said.

“If you take a look at the steel market around the world today, it is a very busy, very energized market. Even though demand is down and may soften more during the year, it is still in balance with supply. In fact, because of outages at some mills, there could be some tightness early this year,” DiMicco said. That, combined with sharply higher raw material costs, gives steel prices an upward trajectory.

Iron ore and coal pricing could increase in the 50 to 75 percent range this year. After declining in October and November, scrap prices jumped in December by $30 to $40 a ton, and again in January by another $80 to $90 dollars a ton. “This kind of volatility is not good for anybody,” DiMicco said. “Those dynamics are in play today, and we don’t see them changing for at least the first six months of 2008. The second six months is anybody’s guess.”

‘Mercantilism must stop’
Monetary policies in China and other Asian countries designed to keep the value of their currencies artificially low to make their exports cheaper and imports more expensive, as well as billions of dollars in direct and indirect subsidies to their domestic steel industries, “outline a pattern of mercantilism that is damaging our manufacturing sector,” DiMicco continued.

“The major problem we have today is that our industry is threatened by a player in the marketplace that is not another company, not another industry, but a government—a mercantilist government that has brought its full weight to bear to make sure that its industry succeeds. I have nothing against government supporting economic growth within its country, but the issue arises when it goes to extremes and the forces let loose are not market forces. Goods are made to be exported with heavy government subsidies. That’s where the system breaks down. That’s where free trade is no longer fair trade, but mercantilism.”

In 1994, China pegged its currency to the U.S. dollar, artificially depressing the value of its own goods for export while maintaining artificially high prices for goods from overseas. The net result is a one-way street for Chinese goods to America and the rest of the world, DiMicco said. “The Chinese government’s currency manipulation has been going on for over a decade and our government has yet to call it what it is and stand up for the interests of American manufacturers,” he added.

Besides being unfair to trading partners in other countries, this policy perpetrates an insidious crime against the Chinese people at home, he explained. “As the country works to keep its currency low, it reduces the buying power of the poor and would-be middle-class Chinese population. Their currency is not strong enough for them to buy foreign goods. So that drive by multinational companies to go to China and participate in the creation of this great consumer society is not happening at anywhere near the pace that China’s growth would indicate. Inflation is running rampant, reducing their buying power even further. All because of a policy that should not be in place to begin with, according to their WTO obligations,” DiMicco said.

Illegal subsidies by the Chinese government affect virtually all manufacturing industries in North America, including steel. Despite agreeing to abide by global free trade rules upon its admission to the WTO in 2001, China continues to subsidize its industries and promote exports by offering discounted land and energy, low-cost loans, debt forgiveness and lax environmental regulation. These policies have led to a huge overcapacity of steel production, DiMicco said.

In 2007, China’s steel production capacity totaled approximately 550 million tons, nearly half of the 1.2 billion tons worldwide. With a domestic consumption of about 430 million tons, China’s capacity exceeded its usage by nearly 120 million tons. By comparison, the entire U.S. market consumed 130 million tons last year, DiMicco noted.

Trade deficit, lost jobs, emissions
The net result of the combined currency manipulation and subsidization has produced a U.S. trade deficit with China that could exceed $275 billion this year—over 35 percent of America’s total trade deficit. “If you add all the goods from other Asian countries that manipulate their currencies just to hold pace with the Chinese, it’s closer to 60 percent of our trade deficit,” DiMicco added.

This distorted trade has led to the loss of millions of manufacturing jobs in the U.S., he continued. In March 1998, 17.6 million workers were employed in manufacturing jobs in the United States. By 2007, that figure had declined to 13.9 million.

“Manufacturing jobs are the backbone of the American economy,” DiMicco said. “Jobs at Nucor pay $50,000 to $80,000 to $100,000 a year. Those are good jobs that, once lost, are impossible to replace for American workers.”

Many would argue that those lost manufacturing jobs are being replaced by service sector jobs—but it’s certainly not an even exchange, he added. “Today one out of every 130 Americans works for Wal-Mart, and we all know how well they pay and the benefits packages they offer. Is that the type of service job you want your son, daughter or grandchildren to have in the future? America cannot accept this kind of transition to a service economy.”

Manufacturing is also the driving force behind research and development in the United States. As entire sectors of the manufacturing base disappear, the drivers of technological change follow those sectors overseas. Innovation occurs in the labs and workplaces of other nations. “We all want to see developing world countries develop, but we do not want to see the U.S. become a second-rate economic power,” DiMicco said.

Last year several bills were written by Congress to offset the effects of currency manipulation and illegal subsidies. “Unfortunately not one was passed into law,” DiMicco said. “Our government has refused so far to label China as a currency manipulator, which would trigger certain remedies under our trade laws.”

Climate change legislation now coming out of Washington to regulate greenhouse gas emissions could further hurt U.S. manufacturing and the American consumer, said DiMicco, noting that the U.S. steel industry has lowered its carbon emissions by almost 50 percent since 1991. If not done properly, new laws could prompt even more manufacturers to move offshore to countries where emissions are unregulated.

“This is doubly damaging as it causes the loss of more jobs and actually increases emissions. Greenhouse gases are a global issue and affect everyone equally. We need a solution to greenhouse gas emissions that creates a level playing field for all manufacturers around the world and actually reduces emissions, rather than just relocating them. We don’t need a solution that encourages companies to set up shop in nations that refuse to take responsibility for their emissions in the name of economic development. Whatever our solution, all governments need to be held accountable to the same standards.”

Referring to the current political debates among Republican and Democratic presidential hopefuls, DiMicco said the country needs a leader who will help develop a more effective national manufacturing policy. “We need a national manufacturing agenda, one that encourages growth through competition and will hold accountable the mercantilists and the cheats of the world,” he concluded.

By Tim Triplett, Editor-in-Chief

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