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American Steel Blames China for Sagging Fortunes

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NUCOR STEEL
Nucor

HUGER, South Carolina--Inside the dimly lit, cavernous rectangle that houses the Nucor steel mill, the workers are eager to expand their output. A mountain of scrap metal lies behind the plant, waiting to be deposited into a fire-belching furnace. Computerized equipment fills out the bare concrete floors--the gears of a well-orchestrated machine that turns molten liquid into solid construction beams and rolled coils of steel. Skilled hands motivated by a company profit-sharing agreement are keen to labor longer.

All the plant needs is one crucial element that remains in disappointingly scarce supply: orders for steel. With the American economy still weak even as it shows signs of improvement, and with much of the globe shaking off the strains of a punishing downturn, demand for this basic building block of industry remains constrained.

Yet even if the global appetite for steel soon expands, Nucor--which claims distinction as the nation's largest steel-maker--frets it will be unfairly denied a slice of the spoils. Despite innovative manufacturing processes that make the company a seeming model of old school American ingenuity, managers say they are defenseless against what they describe as predatory competition from China, now the most prodigious steel producer on the planet.

China's steel producers wield an arsenal of unfair advantages, Nucor complains, from an artificially undervalued currency to near-limitless state credit and free land for new factories, resulting in surplus product landing on global markets at otherwise impossibly cheap prices--sometimes less than the cost of the raw materials.

The worst part of this, fumes Nucor's chief executive Dan DiMicco, is how little Washington does to defend American interests by forcing China to play by the rules of the global trading system.

"As long as we continue to be namby-pamby, weak-kneed negotiators, the Chinese will continue to cheat," DiMicco declared during a recent interview. "History has shown us again and again that if you appease bad behavior, you get more of it, not less of it, and it can lead to something catastrophic. Our very existence gets threatened."

Nucor is merely one voice (albeit a particularly strident one) in a swelling chorus of complaints from American business interests claiming grievous injury at the hands of unfair Chinese competitors. Much like manufacturers from the textile trade to the paper business, American steel producers have been demanding that the Obama administration take a harder line with China. They want the White House to slap protective tariffs on Chinese steel while branding Beijing guilty of manipulating the value of its currency, which they argue keeps Chinese-made products priced unfairly low on world markets.

Many economists concur China's undervalued currency is a serious problem for the global economy, tilting too much trade toward its shores. President Obama plans to discuss the issue with China's President, Hu Jintao, when the two leaders meet in a widely anticipated summit at the White House next week. Yet most experts caution that outright trade hostilities are an invitation for trouble: As the global economy struggles to regain momentum, the last thing it needs is another restraint on commerce.

"A path of destructive responses would not only damage the Sino-US relationship but would also disrupt commerce on a global scale," concluded a recent working paper by Gary C. Hufbauer and Jared C. Woollacott released by the Peterson Institute for International Economics in Washington.

Nucor scoffs at such words.

"People say, 'Oh, you're going to start a trade war with China, what are you, crazy?'" said Giff Daughtridge, general manager of the Nucor Steel Berkeley complex, the cluster of hulking buildings here in South Carolina's low country, some 25 miles north of Charleston. "No, we're in a war. We've just chosen not to fight back. The trade war's on. We're getting our ass kicked."

BLAMING CHINA

Throughout much of American manufacturing, such sentiments amount to a running soundtrack, as if the United States and China are locked in a zero-sum game in which every advancement in Chinese living standards comes at the direct expense of another meal removed from an American table.

Much of this talk is overheated nonsense motivated more by political convenience and emotion than analytical integrity. Far too often, China is cast as the bogeyman in the American conversation, the ready explanation for seemingly every economic affliction.

American workers are earning too little, assert unions, because exploited Chinese workers undercut their bargaining power. Unemployment is near double digits because jobs have been sent to China. The traditional middle class American bargain--hard work, rewarded with security and comfort--has broken down because China has stolen our prosperity.

Shameless opportunism fuels this rhetoric, as politicians use China to divert attention from the many home-cooked causes of declining American fortune: an unwillingness to tax wealthy people or regulate an often-predatory financial system, for openers.

Not inclined to shoulder the blame for how American wages have failed to keep pace with the spiraling costs of health care, education and housing, and unwilling to champion the investments required to nurture new industries that could generate paychecks, the political class instead outsources culpability. It blames China.

Interest groups such as the textile lobby have played a crucial role in this misinformation campaign. Americans could impose crushing tariffs on Chinese apparel right now, and Beijing could sharply increase the value of its currency, and Americans would still not be making t-shirts in the Carolinas. That business is gone, long since captured by locales where labor comes cheaper. If we didn't buy such basic goods from China, we would buy them instead from India, Vietnam or Guatemala.

The Blame China story also fails to account for the reality that American firms and American workers capture much of the value of a trade relationship that seems lopsided when viewed through the narrow lens of bilateral deficits. American imports from China outstripped exports to China by $25 billion in October, according to the Commerce Department. But this deficit--the number that captures headlines--counts a laptop computer assembled in a factory in the southern Chinese boomtown of Shenzhen and shipped to a mall in Los Angeles as entirely Chinese-produced. The full value of the finished machine lands in the books as a Chinese export, without reflecting the American labor that went into designing the machine, the computer chip that runs it and the royalties that accrue to patent holders. And never mind the assorted services connected to that profit stream, from accounting to legal to marketing.

THE CASE FOR AMERICAN STEEL

At first blush, steel seems a different proposition. It is capital intensive--a process governed by expensive machines and huge volumes of raw material. The cost of labor is a much smaller piece of the product than in, say, a piece of ordinary furniture or a shirt.

Steel is a core American industry, one crucial for realizing a host of other aims, from revitalizing the Rust Belt to encouraging the development of renewable energy. Wind turbines are huge, heavy and costly to ship, making their manufacture an ideal potential source of jobs for workers close to the Great Plains (known as the Saudi Arabia of Wind). But making them requires raw materials and machine shops that can deliver the piece parts. In a word, you need a steel industry.

In the broadest sense, steel is part of what is needed to bring the American economy back from its credit-induced flight to Neverland, in which the best minds stopped focusing on producing goods and services of real value and instead churned out bogus financial innovations like credit default swaps. Steel is real. It can be folded into making things that are useful, undergirding job creation in industries that will hold up longer than the next investment frenzy.

According to the basic tenets of free trade, every country is supposed to focus on what it does best and most efficiently--pursuing its comparative advantage, in economic parlance--and then trade with other countries for the goods they are best suited to produce. This is the doctrine that has, at least rhetorically, informed successive American administrations as free trade agreements have been forged, from the creation of the North American Free Trade Agreement in the mid-1990s to the inclusion of China into the World Trade Organization.

Steel seems to challenge the supposed promises of free trade. Making steel seems very much part of the American comparative advantage, given the country's stocks of energy and its ample ports with access to the raw materials of the world. Innovation has allowed American steel-makers to churn out higher-quality products at relatively low cost. Yet the domestic industry has suffered, losing sales to overseas competitors with stronger government backing.

Since 2000, the American share of global steel production has roughly been cut in half, dropping from 12 percent to less six percent last year, according to the World Steel Association. Over the same time period, China's share of global production has tripled from 15 percent to 45 percent.

China's leaders have long designated steel a core strategic industry vital to the country's increasing industrialization, a key part of the effort to nurture a national auto industry and a host of related enterprises, from petrochemicals to glass. In addition to gaining access to state credit and land, China's largest steel companies have been guaranteed supplies of raw materials, such as iron ore and energy, at subsidized prices.

In Washington, successive presidential administrations have threatened to impose stiffened trade penalties on China absent less interventionist policies, but have--with a few notable exceptions--mostly backed down after gaining only the promise of dialogue with Beijing.

The American relationship with China is complex and multifaceted. Other considerations, such as the need to win Beijing's support at the U.N. Security Council for sanctions against North Korea or Iran, typically trump trade concerns.

The White House declined requests to discuss its approach to China's steel industry. The U.S. Trade Representative also declined requests for a briefing, releasing only a written statement.

"We are working closely with the U.S. steel industry, steel workers' representatives and other manufacturing interests in the United States to address concerns about Chinese unfair trade practices," said the statement. "China has grown to be the largest steel producing and consuming economy in the world. While growth in steel production and consumption is natural as China develops, we are concerned that the high degree of Chinese government involvement in the largely state-owned steel industry has contributed to the development of excess steel capacity in China."

The U.S. Trade Representative rejected the suggestion that it has failed to enforce trade laws, noting that it has, over the last two years alone, curbed imports of five Chinese steel products that have been dumped at below cost in the American market.

Nucor characterizes those measures as helpful but inadequate given the magnitude of the challenge. It demands immediate punitive tariffs on Chinese steel products reaching as high as 40 percent. Never mind the niceties of the international trade regime.

"We've got a failed trade policy," declared DiMicco, the company's chief executive.

Burly, plain-spoken and intense, DiMicco seems more like the sort of guy you might encounter at a bar, asking you to pass the peanuts while bemoaning globalization, than the head of a corporation worth $14 billion with some 20,000 employees scattered around the world. Lately, he has been training his invective on President Obama.

"The crisis of his day was jobs, and he's failed miserably," DiMicco said.

In Washington, momentum appears to building for a more aggressive posture toward China on trade. In late September, the House overwhelmingly passed a bill that expands the Obama administration's authority to impose tariffs on Chinese goods if Beijing does not allow its currency, the yuan, to float freely.

In December, the U.S. Trade Representative accepted a petition filed by the Steelworkers union alleging that China subsidizes crucial areas of manufacturing that are capturing outsized shares of key emerging markets for wind turbines, solar panels and other piece parts of the renewable energy realm. The administration said it would initiate formal consultations with Chinese counterparts at the World Trade Organization.

Some economists dismiss the claims of American steel-makers as meritless.

China has produced about 600 million tons of steel this year, while consuming nearly 95 percent domestically, according to Arthur Kroeber, managing director of GaveKal Dragonomics, an economic research consultancy based in Beijing. Its exports generally landed in lower-income countries in which Chinese construction firms have gained contracts.

"It's pretty much the same with all these trade disputes," Kroeber said. "If you're producing a low-value, commodity product, the Chinese will beat you. That's not unfair competition, that's comparative advantage."

Such characterizations provoke beleaguered sighs from DiMicco. Yes, he says, China may only be exporting five or ten percent of its steel production, but even that fraction amounts to roughly three-fourths of all the steel produced in the United States last year, about 80 million tons.

"Ten percent of China's production can destroy most any market in the world," he said.

INNOVATION IN STEEL COUNTRY

The very fact that Nucor's activities here-- in a pine-dotted, lonely stretch of South Carolina's Low Country-- are linked to decision made in the nation's capital, and to the policies of China's government in Beijing, underscores the globalized reality of commerce.

The 900 people who clock in and earn their living making steel here are part of an enterprise that must take heed of a host of disparate and geographically remote factors: the demand for new housing in Las Vegas and the real estate boom in urban China; the cost of iron ore in Brazil and Australia; the availability of giant freight vessels forged in shipyards in South Korea, Japan and Vietnam.

Nucor's prospects depend not only on its ability to react to changes in the global appetite for its product in fluctuations in the prices for raw materials, but also to constantly improve its process to become more efficient, keeping up with evolving technology in use throughout the industry.

While the concept of innovation may conjure thoughts of people in lab coats developing bioengineered pharmaceuticals or figuring out ways to move more data through strands of fiber optics cable, Nucor is a prime example of how innovation courses through much older, established industries as well, holding the potential for expansion and job growth.

The Nucor complex here--the largest of its 20 American mills--uses a technology known as an electric arc furnace to melt down scraps of recycled metals and shape the resulting molten stew into commercially useful steel products. In its broad outlines, it is as simple as a school science project. In its execution, it is as complex as a military exercise, with success dependent upon getting all the pieces to work together.

The metal sits piled up in the yard: shredded pieces of crumpled auto bodies, discarded cases of old refrigerators. Mechanized claws drop fresh piles into the furnace where heat reaching 3,000 degrees melts the material into a bubbling molten stream. It flows like water through a series of chambers, where workers test it for the desired chemical properties and add metals and chemicals to bring to the desired composition and consistency.

Then on the stream flows to the divergence point, with one branch going off to the line that makes construction beams and the other to a series of machines that spread it out, roll it to the desired thickness and curl it into coils that reach up to 30,000 feet long

The resulting products are trucked and railed off to end users far and wide--the construction beams to warehouses across the southern United States, the coils to a BMW factory in South Carolina and to a stamping plant that shapes it into the bodies for John Deere tractors.

Doing all of this well is much less about following a recipe than it is about adjusting to changes in real time. Given that the key raw material, scrap metal, has variation in its basic components, so does the resulting molten potion, requiring constant tweaks to the process--altering the speed and force of the machinery, adding chemicals to the mix--to yield the desired end products.

"Everybody in the world has access to this equipment," said Daughtridge, the plant general manager. "The difference is handling and cost management and the folks we've got. Every now and then you see a home run, but it's a thousand little things that make us more effective."

Innovation can be small yet meaningful--taking coils just off the line and depositing them on the mill floor, letting them cool from their initial temperature of 1600 degrees and doubling as a heating source to save on fuel bills.

Innovation is in the cameras that Nucor recently added to scan the surface of finished coils of steel, beaming the pictures to quality control agents who scour them for defects, locating more problems before the product goes out the door. Now, Nucor can locate the defective patch and snip it off and sell the rest of the coil, whereas before, the whole thing went back in the melt.

But lately, all this tinkering and innovation has failed to yield profit. In December, Nucor warned investors to expect a loss over the last three months of 2010, calling that period "the most challenging quarter of the year," given the continued weakness of American construction.

Nucor has drawn praise in the corporate management world for an incentive system that shares profits with workers and has meant far less to distribute in recent years. The plant was running at about three-fourths of its capacity last year and has not been going full tilt since 2008.

It has avoided layoffs by sharing the pain, with the average paycheck down roughly 40 percent compared to 2006, back when an ultimately disastrous real estate boom required more construction beams than could be made here.

Now, lost wages cycle through the community, depriving the next household of income.

"You're not going to run out and buy a car right now," said Kevin Kelley, 37, who has worked here for 13 years, overseeing a bank of computer screens that control the thickness of the construction beams sliding down the line.

A father of four, he and his wife dropped their membership at a pool club last summer. They have eliminated cable television.

"We get paid to produce," he said. "If the orders aren't there, it hits us right in the paycheck."

Ask workers here why things have gone so badly, and China swiftly enters the conversation, along with demands for a tougher line from Washington.

"We're not going to just lie down and let foreign imports come in," said Rickey Barrineau, another worker. "We have to fight that all the time. If we don't stay on top of that, we're slitting our own throats."

But the reality is far more complicated. If China captures some orders with its built-in cost advantage courtesy of its undervalued currency, the pool of orders itself has also shrunk significantly because of basic economic weakness.

Pressuring China may make for good politics, but it fails as a job-creation strategy while diverting attention from the one that might succeed: directing government finance at large-scale public work projects.

Andrew Fletcher, who oversees sales of beams, largely dismisses foreign competition as a reason for Nucor's lean times.

"It's more lack of demand than it is China," he said.

Even a swift resumption of orders would not produce jobs here, though it would restore lost wages. Nucor's very efficiency is an outgrowth of its ability to eliminate humans from the process of turning scrap metal into steel, as a tour of the complex makes clear.

Slabs of metal glow red-hot, sliding their way across the concrete floor as if levitating, watched mainly by men tucked away in so-called pulpits above the floor. They control the machinery that does most of the work. You occasionally bump into the odd man who walks the floor to look for trouble, but it feels almost spooky, like encountering a pedestrian on an abandoned urban block.

This is the simple truth of the challenge bearing down not just on the American steel industry, but manufacturing in general: The factories have not disappeared so much as the people who used to work inside them.

More than a decade ago, Jeff Powers, who oversees the melt shop here at Nucor, worked for a competing steel mill in Cleveland. That plant needed 4,000 employees to produce about four million tons of steel per year. The plant here can produce just under that amount, with less than a quarter of the people.

In the end, the incessant focus on China as the explanation for what ails steel country and the broader economy seems counterproductive, setting up the largely unrealizable expectation that a stiffened American trade posture can bring back paychecks.

Blaming China. Here is a pastime that may produce therapeutic relief for those seeking explanation for their troubles, but it is no curative. Even in a global economy, the American factory crisis--no easy problem to solve--is best attacked at home, with policies that boost demand for goods.