The following article appeared on the globaleforum website and was written by Michelle Galanter Applebaum, founder and Managing Director of Steel Market Intelligence, an independent steel consultancy.
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The concept of free trade is an often misunderstood notion. The economic theory behind free trade is a concept called comparative advantage. Different regions of the world have different resources and the idea of comparative advantage is that each region should focus on leveraging those comparative strengths -- and trade with other regions in order to supplement their own production. There is not an economist on the face of the planet that would dispute the idea that when nations focus on comparative advantage, global economic prosperity is dramatically enhanced.
The problem with free trade comes about when nations pursue "industrial policies" favoring certain high cost industries in certain regions for non-economic or political reasons -- most often full employment, or a longer-term industrial strategy. A good example is today's Chinese steel industry. China has very few of the resources needed to be a low cost producer of steel, and in fact, China is one of the world's highest cost steelmakers.
The region imports virtually all of its iron ore, for instance, which is the basic virgin raw material used to make steel. The capital base of the region is very mixed; while many of China's newer steel mills are truly world class in their production, more are "backwards and polluting."
The laws of comparative advantage would suggest that China should be a large importer of steel from other lower cost regions -- Brazil or the United States, for example. However, China's moved along expanding steelmaking capacity, and is one of the world's largest exporters of steel.
According to a recent report from Eurofer, the European steel trade association, China supports their steel industry by a variety of mechanisms including grants, subsidies, capital market interventions, preferential tax arrangements, subsidized loan facilities, access to systematically under-priced (and protected from export) inputs, non-execution of internationally accepted minimum standard of labor protection and environmental sustainability, just to name a few ways.
Steel exports are subsidized still further, according to Eurofer, by an "intricate set of cascading value added tax rebates, export taxes, and even export quotas on inputs (coke), plus income tax reductions, preferential export credits and other schemes provided by the China Eximbank and other state-owned financial institutions." In the first 8 months of this global economic rout, the Chinese have already instituted two rounds of export subsidies and are rumored to be contemplating still further enhancements.
The notion of one of the world's highest cost steelmakers being a huge exporter of steel, of course, is completely contrary to the concept of free trade, and indeed, the Chinese industrial policy towards steel is highly protectionist in and of itself. However, the irony that China is the United States' largest source of steel imports -- and that the US is called protectionist when instituting a Buy America provision that is consistent with the WTO and in place in most of the rest of the world is a well kept secret that needs to be told.
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Jeffrey Immelt, the General Electric Chairman said NO to any import restriction on Charlie Rose show. He is not an engineer but managed to become the Chairman of one of the top industry leaders of the world. As they say, fluff rises to the top. In 20 years, GE will go the same way General Motors - but why should he care?
Truly, morons are running our country!