Trump Roars, China Yawns, U.S. Shoots Itself in Foot
(Bloomberg Gadfly) -- There's a strange thing about the fire and fury that President Donald Trump is planning to wreak on the foreigners killing American manufacturing: The foreigners don't seem to care.
News of the planned 25 percent tariffs on steel and 10 percent levy on aluminum imports broke during the lunch break on the Shanghai Stock Exchange on Thursday. Shares in Baoshan Iron & Steel Co., China's biggest listed producer, promptly fell the most since, um, Wednesday.
It was the same pattern when markets opened Friday in Asia, with the drops from Japan's biggest producer Nippon Steel & Sumitomo Metal Corp. and Korea's paramount Posco pretty much in line with the declines they suffered two days earlier. That previous slump wasn't prompted by anything going on in Washington, but by an index of Chinese manufacturing that unexpectedly came in about 0.8 points below forecast.
That's to be expected. For all the sturm und drang coming out of the White House, China's trade in steel and aluminum with the U.S. isn't all that significant. The larger steel side of it represents about 0.2 percent of the global trade, and just 3.3 percent of China's exports to America, on a par with the trade in shoes. Electronics, machinery, furniture, clothing, toys and vehicles -- some of which contain substantial amounts of tariff-exposed metal -- are far more important.
The thing that China's steelmakers care much more about is their domestic market, which consumes about half of the world's steel and has been doing rather well of late. Thanks to a wave of mergers and the shuttering of small-scale electric arc furnaces in recent years, profits from blast furnaces have been enjoying their best run this decade, according to a costs-based index compiled by Bloomberg Intelligence.
It's true there is some connection between China's domestic market and the global one. When Beijing tried to rebalance the economy toward consumption and away from heavy industry in 2013, local demand suffered and exports rose. Still, the overwhelming majority of that product went to South Korea, alongside nations in south and southeast Asia and the Middle East that used Chinese steel to plug gaps in their own production as they increased capacity. The stream of metal that went to the U.S. during those years has already dwindled to a trickle as a result of existing trade actions.
If, as is commonly asserted in the U.S., China was surreptitiously exploiting back doors through third countries, it's striking that the only two nations among China's top 10 export destinations that are also on America's top 10 import list are South Korea and Taiwan, which are major producers in their own right.
As Gadfly has argued, the Trump administration's focus on metal manufacturing misunderstands the nature of America's trade with the world, where the deficit is not in raw materials, but in finished products.
It's cheaper for U.S. consumers to buy things made abroad, and that's what they've been doing for many years. Little wonder, then, that U.S. steelmakers have been reluctant to invest, showing some of the lowest rates of capital spending and R&D globally.
That refusal to spend now looks to have got its reward in the form of Washington's new protectionist stance. But the more innovative automative, machinery and aerospace manufacturers that consume American metal are the ones employing more workers and showing better prospects for the country's economy. Lifting the materials costs they face by protecting inefficient local mills is only going to exacerbate their problems.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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