November 27, 2018 Boosting Sagging Productivity

Productivity-challenged U.S. manufacturers want their cheap foreign metals crutch back.

November 21, 2018

By Alan Tonelson

Anyone genuinely concerned with the long-term health of the American economy and its manufacturing sector in particular should be thankful for the letter sent Monday to the Trump administration by 33 business organizations asking for removal of the tariffs imposed earlier this year on steel and aluminum imports from Mexico and Canada.

For the letter – signed by groups from many sectors of the economy but principally by manufacturing organizations – unwittingly reveals the extent to which American industry has become addicted to supplies of metals whose prices have been artificially cheapened mainly by a global glut still primarily fed by subsidized over-supply from China. As a result, the letter also suggests a reason why American manufacturing productivity growth has been so lousy lately – in the process undermining the economy’s ability to generate lasting, as opposed to bubbly, prosperity.

To begin with, however, the signers’ leading claim is demonstrably, and whoppingly, false. They contend that the metals tariffs have caused significant harm to American manufacturers, consumers and workers. They have raised costs significantly for a wide array of industries….” Yet as I have repeatedly shown, (most recently here) since the levies began to be imposed, at the end of March, nothing in the official data on domestic manufacturing’s performance points to any harm whatever. In fact, in most respects, recent months have actually seen out-performance by metals-using industries – which logically should be where the greatest problems stemming from metals tariffs are concentrated.

Especially false is the insistence that because “Many manufacturing industries rely on imported inputs to produce goods competitively in the United States,” the tariffs “raise the costs of manufacturing in the U.S. and place our manufacturers at a competitive disadvantage with respect to finished products which are made outside of the U.S. and imported without being affected by the tariffs.  Further, consumers are starting to feel the pinch of higher prices across the board, as evidenced by recent increases in the CPI [Consumer Price Index].”

Indeed, this contention has been borne out neither by the consumer price numbers nor the producer price statistics.

But an examination of steel import figures and productivity performance suggests the real motive of the manufacturing signers in particular: They hope to resume relying on cheap foreign government-subsidized foreign metals for their growth and profits, rather than the kinds of productivity improvements that will do the most to strengthen both their bottom lines and the entire economy’s foundations over any significant time span.

The evidence comes from comparing total U.S. steel imports on the one hand, and total factor productivity (the broadest of the two main measures of efficiency tracked by the Labor Department) for the main metals-using industries on the other, during the previous and current American economic recoveries (the best way to generate apples-to-apples results).

That previous recovery officially lasted from late 2001 to late 2007, and through 2006, measured by quantity, steel imports increased by nearly 28 percent – largely fueled by a purchases from China that jumped more than 260 percent. (As the impact of the housing bubble’s bursting spread throughout the economy, steel imports from China and the rest of the world fell sharply before the recession’s official onset in the fourth quarter of 2007.)

And here are the total factor productivity increases for that 2001-2006 period for the American private sector for a whole, manufacturing overall, the metals industries themselves, and the key metals-using sectors:

private sector:                                      +9.19 percent

manufacturing:                                  +13.55 percent

durable goods manufacturing:          +19.44 percent

primary metals:                                   +5.72 percent

fabricated metals products:                 +6.35 percent

non-electrical machinery:                  +11.01 percent

transportation equipment:                 +13.38 percent

The figures for the current recovery look markedly different. Let’s examine the results from its 2009 start through 2016 (the year for the latest available detailed total factor productivity statistics). During that period, total national steel imports soared by just under 104 percent by quantity. Purchases from China sank like a stone (by more than 63 percent) between 2015 and 2016, because of China-specific anti-dumping tariffs. But clearly many other countries and their subsidized steel sectors picked up the slack, because total U.S. imports dropped off by only 17.31 percent. And continuing Chinese over-production kept exerting downward pressures on prices worldwide.

And how did total factor productivity fare during that big steel import run-up?

private sector:                                      +5.93 percent

manufacturing:                                     -4.48 percent

durable goods manufacturing:            +1.24 percent

primary metals:                                   +5.76 percent

fabricated metals products:                  -7.68 percent

non-electrical machinery:                     -7.08 percent

transportation equipment:                    +9.67 percent

That is, as artificially cheap foreign steel poured into the U.S economy, total factor productivity growth in most of the chief metals-using sectors shifted into reverse – and by startling extents. The only exceptions were transport equipment and durable goods as a whole, with the former clearly holding up the latter. And even in both these cases, total factor productivity growth slowed dramatically.

True, the letter’s signatories claim that they support continued tariffs on steel and aluminum imports from China – the main overcapacity and over-production culprit. They also say they back “negotiation of global arrangements to deal with overcapacity.”

But this position looks phony given their opposition to import quotas for steel from countries where tariffs have been lifted (South Korea, Brazil, and Argentina) because these measures allegedly have “placed severe supply constraints on U.S. manufacturers and created even more business uncertainly than tariffs regarding exports from these countries.” In other words, the signatories are opposed to the very policies that have helped ensure that all other metals-producing countries don’t simply keep transshipping China’s over-production into the U.S. market, or respond to China’s glutting their steel markets by ramping up their own exports to the United States.

So the real message being sent by the manufacturers’ metals tariffs letter couldn’t be clearer: “We want to regain access to that artificially cheap foreign steel, regardless of its impact on the entire economy’s future.” Arguably, that’s an appropriate, or at least understandable, priority for companies viewing their prime obligation as maximizing shareholder value at any given moment. But just as understandably, it’s the type of priority that America’s political leaders should emphatically reject.

ALAN TONELSON
Alan Tonelson is Founder of the blog RealityChek – www.alantonelson.wordpress.com – which covers a wide range of domestic and international policy issues along with political and social trends.

For 18 years before leaving to launch RealityChek, Tonelson followed the impact of globalization on the U.S. economy, domestic manufacturing, and U.S. national security for the U.S. Business and Industry Council. This national business organization represents nearly 2,000 domestic American companies, most of them small and medium-sized manufacturers.

Alan Tonelson is a regular columnist with Industry Today.

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