The (Mostly False) Globalization Narrative
In the public imagination, no industry better symbolizes the downfall of U.S. manufacturing than steel. Shuttered plants dot the Midwest. Since 1973, steel employment has dropped 76%, from 610,700 to 147,300 in 2015. Moreover, the culprit seems clear -- trade -- and its influence seems pervasive: Manufacturing as a whole lost about 5 million jobs from 2000 to 2015. No wonder both Hillary Clinton and Donald Trump have jumped on the anti-globalization bandwagon.
Globalization seems guilty as charged -- except that the popular indictment is wildly misleading.
Though trade has helped reshape U.S. manufacturing, it is only one force of many. The appeal of making it the prime villain is political and psychological. We can blame manufacturing's problems and dislocations on foreigners and disloyal American multinational firms. If they behaved better, the American economy would improve. There is some truth to this, but it is hardly the whole truth -- as the case of steel shows.
Despite plummeting industry employment, U.S. steel production is roughly where it's been for decades, between 90 million and 120 million tons a year. Imports generally represent 20% to 25% of domestic consumption. True, dozens of steel plants have closed. But dozens of more efficient plants have opened. Productivity (aka, efficiency) has increased dramatically.
The industry's largest change of the past half-century is the rise of so-called "mini-mills." There are now two dominant ways of making steel.
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The traditional way is to start from scratch: Iron ore, limestone and coal are melted to form pig iron; then the pig iron is boiled in a "basic oxygen furnace" to make molten steel, which is formed into various finished products (sheet for cars, beams for construction and the like).
Mini-mills are the second way. Their raw material is scrap steel, which is melted in "electric arc furnaces" to make molten steel. The mini-mills have a big cost advantage over the older "vertically integrated" mills. From 1970 to 2015, their share of total U.S. steel production went from 15% to 63%, reports the American Iron and Steel Institute, an industry group.
This has huge implications. In a recent study, economists Allan Collard-Wexler of Duke and Jan De Loecker of Princeton found that the spread of mini-mills -- with their greater efficiency -- explained most of the industry's job loss. Put differently: If there were no foreign trade in steel, most of those jobs would have vanished anyway. The least efficient vertically integrated plants were forced to close. The decisive competition has been domestic, not foreign.
To be sure, steelmakers face legitimate trade issues. There's a global steel glut, mainly because China sharply expanded its industry on the unrealistic assumption of continued strong economic growth. The numbers are breathtaking, according to a report by analyst Lucy Lu of the Peterson Institute. Since 2005, global steelmaking capacity has increased by three quarters, with China accounting for 78% of the gain. China now represents 50% of world production, up from 31% in 2005.
The consequences were predictable. Prices have plunged, as China and others have tried to export some of their surplus capacity. American producers are now, to some extent, protecting themselves by filing trade complaints against steel imports being illegally dumped or subsidized by foreign governments. But this is a short-term expedient. What's needed is a global agreement that reduces the worst concentrations of excess capacity, starting with China. American steelworkers and companies cannot compete against foreign subsidies.
Still, we shouldn't lose sight of the larger picture. The standard story blames the loss of U.S. factory jobs mainly on foreign imports and the move of American firms abroad. That's part of the problem, but a larger cause is -- as with steel -- "rapid productivity growth," argues Harvard economist Robert Lawrence. Better manufacturing methods and technologies mean that fewer workers can produce the same output.
This is a good thing, even if it initially involves fewer jobs, because higher productivity promotes higher living standards. "Compared to other high-income economies (that is: excluding China)," writes economist Marc Levinson of the Congressional Research Service in a report, the "United States has performed well in manufacturing. ... From 1990 through 2014, the only high-income countries with faster growth (were) a handful of smaller economies, including Finland, Israel and Sweden."
We are being fed a largely false narrative on globalization. It is not the source of most of our problems. All dynamic economies experience constant disruptions from changing technologies, shifting consumer tastes and inevitable business cycles. Some instabilities come from abroad; most -- for the U.S. -- originate at home. What matters is the economy's ability to offset losses with new jobs and opportunities. That's the ultimate test.
