Steel Overcapacity: Trump Performed Triage. Can Biden Heal the Wound?

By Scott Boos
A ladle of molten iron is poured into a Basic Oxygen Process (BOP) furnace at U. S. Steel’s Granite City Works, where it will be transformed into liquid steel. Photo via U.S. Steel

America’s steel industry is vital to our national security and critical infrastructure. But it remains threatened by global overcapacity, and COVID-19 has only made things worse.

Editor’s note: This is the tenth and final entry in our blog series examining the policies and priorities that President-elect Joe Biden should focus on as he lookto lead America out of the COVID-19 pandemic and rebuild the American economy.

When President Donald Trump entered the White House in January 2017, global markets were saturated with excess steel production. Fueled by state-driven investments and policies rather than fair market forces, China and other countries produced far more steel than their own markets or global customers could consume. This flood of steel, most of it state-subsidized, depressed prices globally. The United States’ uniquely open market became a primary destination for this overcapacity, stealing market share, reducing domestic production, costing jobs, and, all too often, driving producers to shutter their manufacturing facilities for good.

Faced with the closure of 10 major U.S. steel-producing mills since 2000, Trump imposed Section 232 tariffs in March 2018 to stop the bleeding of production and jobs from the United States. Failing to act would have worsened plant closures and layoffs. Worse yet, if our domestic production capabilities were permitted to deteriorate further, our country would be forced to rely on unpredictable countries like China and Russia to supply our military and critical infrastructure needs.

The Trump administration deserves credit for recognizing the vital national security and critical infrastructure role of America’s steel production, used in everything from ships, tanks, and weapons to bridges, rail systems, and energy infrastructure. The Section 232 tariffs proved essential to the preservation of a commercially viable domestic steel industry that can support our national security and critical infrastructure needs.

Unfortunately, the underlying overcapacity problems plaguing global markets have only worsened in the absence of a global solution and have been compounded by the COVID-19 pandemic. The American Iron and Steel Institute (AISI) sums it up in their recent policy paper, The Facts: Preserve the Steel Tariffs:

“Global overcapacity, fueled by foreign government subsidies and other forms of state intervention, was estimated at more than 500 million metric tons in 2019, nearly six times the total steel output of the United States. According to the OECD, it is growing again in 2020 to as much as 700 million metric tons, due to continued nonmarket investment by China and others, despite substantially lower demand in most markets due to the COVID-related economic crisis.”

Despite the Trump administration’s timely triage of a vital U.S. industry that was hemorrhaging production, jobs, and capacity, the steel overcapacity problem has not gone away. In fact, it has gotten worse amidst the COVID-19 pandemic and remains a serious threat to our national interests. The question facing the incoming Biden administration is: Can Joe Biden heal the wound?

Just weeks after the election, President-elect Joe Biden made it clear that he will not be moving quickly to alter the course of Trump’s trade agenda. “I’m not going to make any immediate moves, and the same applies to the tariffs,” Biden said in an interview with New York Times columnist Thomas Friedman. “I’m not going to prejudice my options.”

Reading between the lines, the Biden administration will apparently aim to build consensus with allies while, at the same time, addressing urgent needs at home for American workers who have been left vulnerable by the economic fallout of the COVID-19 pandemic. Biden’s United Steelworkers campaign questionnaire offers additional insights into this course of action:

“VP Biden will build coalitions against our adversaries on trade issues, in contrast to the current administration. China, for example, has done nothing to reign in their subsidies. This has led to a failed effort to get multi-country agreements to address steel and aluminum overcapacity, which continues to harm our industries. While the Trump administration’s actions on steel and aluminum have brought some short-term relief, they have done nothing to address the long term challenges facing these sectors.”

To achieve a long-term global solution to overcapacity, we will need cooperation and action from others. Yet, we must not substitute dialogue for action. For instance, Biden would be ill-advised to rely too heavily on international bodies like the World Trade Organization or Organization for Economic Co-operation and Development to set rules on overcapacity. These are well-meaning institutions and need to play a role, but they lack effective enforcement powers necessary to tackle major global trade challenges – ones that have put U.S. national security at risk.

Another example is the G20 Global Forum on Steel Excess Capacity (GFSEC), which was created in 2016 to increase information sharing and cooperation and has proved a useful platform for discussion of overcapacity. A recent Global Forum report stressed that the “capacity-demand gap” in the global steel sector, while exacerbated by the ongoing economic crisis, cannot be closed with a rebound in global demand alone; instead, “curbing the root causes of excess capacity—market-distorting subsidies and other government support measures that contribute to excess capacity—will remain the priority well beyond the Covid-19 pandemic.” Unfortunately, however, China’s withdrawal from the Global Forum coupled with its demonstrably false claims that it reduced its steelmaking capacity further clouds the outlook for international cooperation to implement meaningful and sustainable reforms.

Biden also should avoid falling into the trap of those who claim that “overcapacity is purely a China problem.” While there is no doubting that China is a leading contributor to steel overcapacity, Biden will need to press other countries – even allies among them – to do more to curtail their own excess production and stop transshipments through their markets. AISI has correctly noted that Southeast Asian countries are increasing capacity with loans, export credits, strategic partnerships, and overseas investments. These other countries efforts to flood the market with steel must be met with specific, enforceable disciplines – not just engagement.

As Biden looks to build coalitions with traditional allies, he must remain vigilant to the fact that excess steel production represents a threat to America’s economic and national security. In the meantime, Biden must ensure that the Section 232 tariffs remain in place and remain effective. The President-elect should reject calls from importers and foreign governments to remove tariffs without first securing a meaningful solution to steel overcapacity – one that does not leave our nation’s security and our workers exposed to new import surges. This is particularly important given the COVID-19 pandemic and the weakened economy, which led to the worst steel industry downturn in more than a decade. The Biden administration must be mindful that the United States has been the export market of choice for excess capacity during past times of economic crisis. Imports surged after following the Asian Financial Crisis and the Great Recession, for example.

President Trump’s triage was necessary. But, to truly “Build Back Better,” the Biden administration must heal the wound of steel overcapacity with a long-term recovery plan that benefits American workers while protecting the security interests of the United States.

Listen to Scott Boos talk about this blog on The Manufacturing Report podcast.