China has built-in advantage on trade

The Trump administration has made trade a primary item on its agenda since the inception of Donald Trump’s campaign and the beginning of his presidency. There is a fundamental lack of understanding of how international trade occurs, and the trade barriers (or lack thereof) that exist in this system.

The latest discussion has centered around the ongoing Section 232 investigation, which authorizes the secretary of Commerce to conduct comprehensive investigations to determine the effects of imports on the national security of the United States. In the current investigation, the import of primary steel products has been the focus.

I am in no way opposed to trade, including imports from China, Mexico, and any of our trading partners around the world. There is no disagreement from any serious participants in this discussion that global trade has been an amazing engine for economic growth in the world, lifting millions out of poverty and raising standards of living worldwide. However, unimpeded imports have come at a price, and that price has been millions of jobs in the affected domestic manufacturing sectors.

Economists have told us that these losses have been offset by economic gains that are created by importing cheaper goods, but in the industrial economy, those gains have been appreciated almost exclusively as a boost to profit margins of the biggest multi-national companies. Cheap steel has been good for balance sheets in the Fortune 500, but it has not been good for workers, or small- and medium-sized businesses that do not have the resources to establish a global supply chain.

America has intentionally used trade as a means to support diplomatic relations with other countries. This effort was increased as we dealt with the herculean task of assisting with rebuilding Europe after World War II and Japan shortly thereafter. More recently, we have been importing an enormous amount of foreign-made industrial and consumer goods from China. The difference now, however, is that China has been propping up its industrial economy in a very different way than either Europe or Japan did, through extensive subsidization, trade barriers of their own, and currency manipulation.

Many industrial companies in China operate at a loss for years just so they can grow market share, and they can do this because they are fully or partially state-owned enterprises and are essentially insured by the government against business failure. They create commodity products for which there is no marginal demand, dump them on the rest of the world, and suppress the pricing for these products for all the other businesses that have to actually compete using a market-based cost structure.

The primary process for combating these unfair trade practices in the United States is by initiating an Anti-Dumping and Countervailing Duty investigation through the U.S. Department of Commerce and the International Trade Commission. Classes of goods that are imported into the U.S. are identified by a code in a system known as the “Harmonized Tariff Schedule.” Typically when a trade case is filed, it is done so to one or several “codes” within the Harmonized Tariff Schedule, each of these codes representing a specific class of goods. This process is extremely expensive, time consuming, and simply untenable for any but the largest players in the affected industries.

Even if a trade case is successful, the practice of trans-shipping goods, i.e. shipping goods from China to a third-party country and then to the United States, has become widespread to avoid tariffs. The trade remedy process is one that is enormously difficult to pursue and relatively easy to game. It is a system set up to make American manufacturers the losers.

It has been unfair for many years, but it gets virtually no attention because the mechanics of it are complex and only understood by specialized lawyers. My industry, the foundry industry, is one with roots that reach back to the founding of the United States, and Ohio has the most foundries of any state in the country. We are unquestionably being trampled by foreign competition, specifically from China.

It is not because we have failed to invest in production efficiencies or to modernize with the times. It is not even because our labor costs are higher. It is because competition with China in this and many other industries is not competition at all, it is a rigged game that we are destined to lose because of short-sighted trade policy decisions.

Any action taken by the Department of Commerce with regard to its Section 232 investigation will not start a trade war. We have been in a trade war for decades. And we have been losing.