Download U.S. Trade with China

U.S. Trade with China
This Decade’s Historic Expansion in Steel
Mike Evans
Maurice Pincoffs Company, Inc.
October 2008
The Good, the Bad, and the Ugly
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Burgeoning US-China Trade
The Candidates & Government’s Role in
Trade
The US-China Rocket Ride
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Trade w/ China grows rapidly each
year, exceeding $300B in 2007.
The US in China’s Top trade partner
overall, with the US as its largest export
customer and 4th largest supplier in
2007.
Steel trade between nations grows each
year, ranking in the top ten of all goods
traded.
US – China Trade Growth
US Trade w/ China
450
400
350
Billions $
300
250
US Imports
US Exports
200
150
100
50
0
1998
1999
2000
2001
2002
2003
Year
2004
2005
2006
2007
US – China Trade Balance
US Trade w/ China
500
400
300
Billion $
200
Total
100
US Balance
0
1998
1999
2000
2001
2002
2003
-100
-200
-300
Year
2004
2005
2006
2007
US Top Items Imported from China
Top US Imports from China 2007
($ billion)
*Percent change over 2005
Sources: US International Trade Commission, US Department of Commerce, and US Census Bureau
HS#
Commodity Description
85
Electrical machinery & equipment
84
Power generation equipment
95
Toys & games
61, 62
Apparel
Volume
% Change*
76.7
18.2
64
2.9
26.1
25.1
24
20.7
94
Furniture
20.4
5.2
64
Footwear & parts thereof
14.1
1.8
Iron & steel
11.9
12.6
72, 73
39
Plastics & articles thereof
8.3
10.6
42
Leather & travel goods
7.2
5.8
87
Vehicles other than railway
6.1
18.6
Total US Steel Trade (Tons)
Total US Steel Trade
50,000,000
45,000,000
40,000,000
35,000,000
Metric Tons
30,000,000
Import Tons
25,000,000
Export Tons
20,000,000
15,000,000
10,000,000
5,000,000
2001
2002
2003
2004
Year
2005
2006
Government, Politics, and Trade
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On Deck: The Candidates’ Positions
History Lesson: Government & Business
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Protectionism and the Smoot-Hawley Act
Stock Exchange Crash of 1929
Taxation During Downturns
Government’s Role in Economic Growth
Bail Outs as Solutions
The Candidates’ Positions: Trade
McCain
Obama
Favors free trade and advocates lower
barriers to trade through multi-lateral,
regional, and bilateral negotiations.
Favors fair-trade, requiring
international trade agreements to
support labor, human rights, and
environmental standards.
Would work to renegotiate NAFTA.
Would expand Trade Adjustment
Assistance for those harmed by int’l
competition.
Would build on efforts to declare
China as currency manipulator.
Source: Bank of America Economic Brief
The Candidates’ Positions: Energy
McCain
Advocates
expansion of domestic oil and
natural gas exploration.
Wants construction of 45 nuclear power
plants by 2030.
Will commit $2B annually to advance
clean coal technology and encourage
alternative energy from low carbon fuels.
Supports new funding for transportation
innovations; tax credits, clean car
challenge, & higher mileage requirements.
Obama
Opposes
expanded offshore & Alaskan
drilling (may offer some compromise).
Opposes new nuclear power plants.
$150B over 10 years to develop climatefriendly energy resources.
Economy-wide cap & trade program to
reduce greenhouse gases.
Utilities to generate 25% of power from
renewable sources by 2025.
US leader against climate change.
Encourage energy efficient city
programs.
Tax credits for employers that subsidize
employees using mass transit.
Protectionism: The Smoot-Hawley
Tariff Act
In 1930, during the early days of the Great
Depression, Herbert Hoover signed into law this
act that raised US tariffs on over 20K imported
goods to record levels.
 While Hoover initially sought to lower tariffs, he
signed the bill despite petitioning by over a
thousand economists and many in the
business/financial community.
 Countries immediately responding by raising
tariffs on US goods, and import/export trade was
cut in half.
 While not the spark of the Great Depression, most
economists blame the Smoot-Hawley Tariff Act
for its severity.
Protectionism: Cause & Effect
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The act was passed, in large part, to protect US farmers from
cheaper European goods. As a result, allied nations found it
more difficult to generate much-needed revenue necessary to
rebuild following WWI.
The retaliatory tariffs waged by Canada, France, Britain and
others, caused widespread idling in new manufacturing and
agricultural capacity. US producers were poised to gain
greater shares in world markets due to automation, the tractor,
and assembly line production, but were thwarted due to a
drop in international demand.
Overall, it is estimated that world trade fell by 33% from the
inception of the act until the end of WWII when new trade
agreements were formed.
The Crash of 1929
The Wall Street Crash of 1929 began with the panic trading of
12.9M shares on Black Thursday (10/24) and spiraled down
further to catastrophe only five days later, where Black
Tuesday saw 16.4M shares sold. The market lost $30B in one
week, ten times greater than the federal government’s annual
budget and more than the US spent in all of WWI. The
market collapse caused bankruptcies, massive unemployment
increases, and widespread business closures. The event
signaled the economic slide that caused the Great Depression.
Stock prices would not return to pre-crash levels until
November 1954.
Letting the Air Out of the Bubble
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The prosperity of the 1920’s was fueled by market
speculation, causing the DJIA to increase five-fold in the five
year period prior to the crash. Investors ignored warnings
and believed the high stock prices were permanent. Many
borrowed up to 2/3 of the value of stocks to invest in the
market.
Over $8.5B was out on loan to investors, more than the entire
amount in circulation. Speculation lead to consistent price
increases, creating the economic bubble.
The inevitable downturn in the market lead to rapid and
massive selling of shares. The mass sale was a major
contributing factor to the Great Depression.
Why the Crash of ’29 is Relevant
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Speculation that drove up prices in 1929 was not an isolated
incident, and very similar to the recent inflation of homeprices and home-building throughout the US. The economy
is cyclical and corrections are inevitable.
Common sense will prevent most financial disasters. With
the indebted investors of the 20’s and over-extended
homeowners of today, and the banks that financed them,
excessive borrowing & lending served as the underlying
cause for collapse.
Additional oversight may have prevented (or lessened the
severity) of both collapses, though thoughtful reforms after
the fact can prevent similar catastrophes.
Economic Downturns & Taxation:
Hoover’s Blunder
Despite his brilliance as an engineer, businessman, and
administrator, Herbert Hoover is most remembered for his
dismal performance at the helm during the early years of the
Great Depression. His greatest blunder was his support for
the Revenue Act of 1932.
Recipe for Disaster
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Despite having a hands-off philosophy of federal
governance, Hoover agreed with Congress to pass
the Revenue Act of 1932 to increase federal revenue.
Taxes were raised across the board, increasing in
percentage as income rose, w/ top incomes taxed at
63%.
Estate taxes doubled, and corporate taxes went up
15%.
Hoover also supported a tax on all bank checks,
vetoed a bill that would have created cheaper energy,
and generally reacted w/ too little, too late.
Results
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Decreased spending by businesses and
consumers immediately followed.
Unemployment and the federal deficit
continued to increase, and the nation plunged
further into economic turmoil.
Hoover was hammered by critics for having
Socialist economic views, and he was routed
in the 1932 general election by FDR.
Relevance in 2008
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Escalating unemployment and a stumbling economy hammer at consumer
confidence and stock performance. Poor, delayed decision-making at the
top accelerates the downward spiral.
Additional taxes on companies and individuals always impacts spending,
but much more so during downturns. The disincentives to earn and spend,
shrink federal revenues significantly, allowing for lesser spending on
public assistance and larger budget deficits.
Heavy burdens on individuals and companies bog down innovation and
productivity gains and encourage employers to cut payroll by slashing the
workforce, exacerbating a bad situation.
Messing w/ people’s income is usually a bad idea and can force you into a
new career.
Myth: Big Government Yields
Economic Growth (or Kills It)
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Recent theories hold that big government (a high % of GDP) is bad for growth, as it is
believed to stifle innovation, overtax its citizens, and create disincentives for the poor to be
productive. In fact, a growing number of serious economic studies disprove this belief,
showing that bigger government spending has no adverse effect on economic growth. The
opposite is also true, however. Big government does not, but virtue of its size, create
economic growth. The only scenarios where government size clearly does influence the
economy, are in extreme cases where a government is so large that it is massively
oppressive, and when it is so small it is unable to protect individual property rights and
intellectual capital.
Substance and details matter. The greater influences on economic growth are the
structures of government’s revenues and expenses, not the overall percentage of spending.
When tax revenues are spent wisely to improve infrastructure, public education, and other
support mechanisms important to business (including some social spending), government
boosts economic growth significantly. Not enough spending in these areas hinders success
as much as over-spending.
Political leaders on both sides generally skew data to support their agendas, but voters
would be wise to listen to details of taxation and spending plans, and not allow themselves
to be swayed by myths and fuzzy logic. Big-spending governments may not be the grim
reaper to growth, but they are also not the cavalry riding in to save the economy. The devil
is in the details of HOW government generates revenue and WHAT that money is used to
buy.
Bail-Outs: No Long-Term Answers
The proposed $700B government buyout
of mortgage-backed securities, along w/
recent bailouts of AIG, Fannie Mae &
Freddie Mac, remind us of the long
history of federal intervention in the
economy. Controversial by nature, the
bailouts rarely save companies,
industries, or stave off the inevitable for
long. Bailouts, however, oftentimes
give impetus for banking and finance
reforms and oversight.
Buyouts Controversy
Government bailouts of U.S. corporations are reserved for
situations when the firms are deemed “too big to fail.” The
injection of liquidity is intended only to meet short term
obligations, while long term changes can be considered and
implemented. However…these interventions typically only
delay the inevitable. Economists and markets see
bankruptcies as the result of failures to meet consumer
demands, thus, the desired result of free market economies.
Federal bailouts, then, are government actions to override the
will of the consumer.
Some historical perspective…
Lessons in Bailouts
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Lockheed Aircraft, 1971: Under pressure to save 60,000 jobs, Congress awarded
Lockheed $250M in loan guarantees. The bailout allowed the L-1011 jumbo jet to
reach market, but it could not compete w/ Boeing & McDonnell Douglas, and it
never again produced commercial jets. Lesson: capitalism weeds out poor
performers by design and government should not subsidize inferiority.
Russia, 1998: The Clinton administration pressed IMF for $17B in loans to Russia
to keep their economy from collapse. The effort failed as the Ruble’s value fell
further and Russia defaulted on the debt. Lesson: throwing money at a fire just
makes a bigger fire.
US Airways, 2001: Congress awarded US Airways and other domestic carriers
over $15B in emergency aid following the 9/11 attacks. Despite the bailout, US
Airways (and others) filed for bankruptcy a short time later. Many of the carriers
that failed were losing money prior to 9/11, and the bailout only delayed
bankruptcies and cost taxpayers money. Lesson: capitalism weeds out poor
performers by design and government should not subsidize inferiority. It’s déjà vu
all over again.
Business Minds its Own
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JP Morgan directed efforts during the Panic of 1907, ending the run on
most New York banks. Almost all funding raised to save the banks came
from private financing, as solicited by Morgan. Most banks were saved,
the stock market did not crash, widespread financial damage minimized,
and banking reforms were initiated, including formation of the Federal
Reserve.
The Chrysler bailout of 1980 included $1.5B in public loans, but President
Carter insisted that an additional $2B be raised by Chrysler itself, via
employee and supplier concessions. The result of the mixed financing,
along w/ better leadership from newly-hired Iacocca, resulted in an
overhaul that returned the company to profitability and repayment of the
debt.
In 1997, after millions in losses and dwindling market share, Apple was
saved by two great forces: the return of Steve Jobs and a $150M
investment by archrival Microsoft. The new leadership and infusion of
cash helped both companies, as the Apple renaissance began and an
antitrust suit against MS was dropped.
Closing Thoughts
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US trade with China is expanding rapidly in steel as it is with all other products. The trade imbalance that
grows w/ each year is likely to narrow in coming years, but can be expected to leave China as a net
exporter for some time to come.
The candidates for President have distinct differences to their approach on trade and economic
development. Be an informed voter…
Protectionism is often seen as a neat way to protect domestic industries from harmful international
competition, but these efforts most often backfire as trade partners tend to retaliate, thereby diminishing
export opportunities and causing increases in prices to US consumers.
Wall Street’s Crash of 1929 reminds us of today’s sub-prime mortgage crisis. Speculation driving up
prices creates a bubble that eventually bursts, causing both corporations and taxpayers money. The key is
to respond w/ reforms and not to overreact, making a bad situation worse.
Increased taxation during economic downturns, on both corporations and individuals, is bad policy and
makes the problem worse by forcing reduced spending and increasing unemployment.
Economic growth is cyclical and not driven by the size of the US government. Taxpayers should be wary
of politicians’ claims that big-spending government will be the catalyst for economic growth.
Bail-outs can assist in the short-term, but present long-term negatives. Inefficient businesses should not
be incentivized to take excess risk, w/ the expectation that taxpayer $ will save them if things go bad.
Outcomes are unpredictable at best, and often take years to work out. Inevitably, companies are better
suited by managing themselves better or getting out of the way entirely.