Cleveburgh Steel

Remember when the steel industry rated local news?

The 24 hour news cycle can be brutal.  Just beyond greater Pittsburgh, but near the center mass of Cleveburgh is Trumbull County, Ohio… home to Warren, Ohio and part of the Mahoning Valley were these two stories recently:

24 hours ago the headline was:  Valley employment picture improving

Then a half day later:Over 1,000 RG Steel Workers to be Laid Off.  All of those 1,000 jobs are located in Trumbull County, a county with a total population just over 41K in 2010.

No schadenfreude here…  those headlines were de rigeur here we all know.  Still, the recent news for Pennsylvania is that mass layoffs.

and while some say steel in the greater region is still improving, there are some bigger issues on the horizon.  Steel is ever more an internationally traded commodity.  Just yesterday the US slapped tariffs on steel imports from India.  Whatever the details are in that trade spat, the bigger issue that will only exacerbate the problems of domestic steel producers is the continued appreciation of the US dollar.  Stronger dollar = harder for US producers to sell products elsewhere.  It is a particular issue in the steel industry.

Spot the Fallacies, Free Trade Edition

From, in response to Obama’s claim that international trade isn’t always fair:

Here we see the view, commonly held by the media and non-economists in our universities, that international trade is a competition, analogous to sports or military competition (sometimes, “trade competition” is compared to the Cold War). If the playing field is not level, then the trade is not fair. Economists, and this view is not limited to Austrians, understand that international trade is the fruit of cooperation, not competition. America and China are not trade competitors. Paul Krugman thoroughly demolishes this fallacy in “The Illusion of Conflict in International Trade” (reprinted in Krugman’s Pop Internationalism). Krugman explains that in international trade “it is the illusion of economic conflict, which bears virtually no resemblance to the reality, that poses the real threat.”

There are two main fallacies in this paragraph. The first is that of a false dichotomy. The second is the blatant ignorance of domestic economic policy as it relates to trade policy.

Regarding the former, it is wholly fallacious to say that trade is either analogous to competition or to cooperation. The truth is that there are elements of both. An automobile manufacturer, for example, must cooperate with its suppliers, distributors, and customers. It must also compete against other automotive manufacturers, as well as any company that manufactures substitute goods. Both comparisons can be correct, depending on how they’re applied, and it is thus fallacious to claim that trade is comparable to one or the other when it can be comparable to both.

Regarding the latter, it is quite fallacious to ignore reality when discussing policy. The fact of the matter is the US economy is quite hindered by regulations in ways that many foreign countries are not. It is not at all fair or free to allow foreign companies to compete with domestic companies when domestic companies have been hamstrung by the federal government. I’ve written extensively on this before, so I will not repeat myself here.<

In all, the case for free trade is often predicated on focusing on theory at the expense of reality, and building arguments on obvious fallacies. If this is the best free-traders have to offer, in the way of argumentation, perhaps they should reconsider their position.

A Troubling Sentence

The United States trade deficit surged in January to the widest imbalance in more than three years after imports grew faster than exports.

This is not a good sign. The US economy is predicated on false demand, by which I mean that the US, and the citizens thereof, buy a lot of things on credit. One thing that’s true about buying things on credit is that, in general, the credit has to be paid back, usually with interest. As Ian Fletcher noted in Free Trade Doesn’t Work (review forthcoming), the US has bought a lot of foreign goods on foreign credit, and this will have to be repaid, either with goods or with capital. Thus, there are a lot of downright terrifying scenarios implied by the simple fact that the US has run a trade deficit for every year of the recession, and continues to increase its trade deficit even now.
In the first place, it could be that the US is maintaining its trade deficit by essentially offshoring control of its capital. In this case, it would mean that foreign businesses and governments own US land, or US factors of production (factories, e.g., or perhaps natural resources). This means that US policy will quite probably become more pro-foreigners, which does not bode well for maintaining the social fabric that made this country free and wealthy.
In the second place, it could be the case that the US is simply expanding its credit with nary a thought of how it will be repaid. It will either be defaulted on, which has its own obvious negative implications, or it will be inflated out of, which also has its own obvious negative implications.
In the third place, it may simply be that the US is the least-worst place to trade right now, and so foreign producers sell on credit simply because they need to clear their inventories, and all the other potential markets are even less creditworthy than the US. Incidentally, this would imply that the situation in Europe is worse than most suppose, and would also imply that South American and African countries are all a long way from developing into powerful market economies, which does not bode well for lovers of liberty.
No matter how it’s sliced, though, the fact that the US has not run a trade surplus at any point during the recession indicates that a) demand hasn’t reset to its true levels and that b) things are eventually going to get much, much worse.

Pop Quiz

Q: Who said this:

Second, the idea that U.S. economic difficulties hinge crucially on our failures in international economic competition somewhat paradoxically makes those difficulties seem easier to solve. The productivity of the average American worker is determined by a complex array of factors, most of them unreachable by any likely government policy. So if you accept the reality that our “competitive” problem is really a domestic productivity problem pure and simple, you are unlikely to be optimistic about any dramatic turnaround. But if you can convince yourself that the problem is really one of failures in international competition—that imports are pushing workers out of high-wage jobs, or subsidized foreign competition is driving the United States out of the high value-added sectors—then the answers to economic malaise may seem to you to involve simple things like subsidizing high technology and being tough on Japan. [Emphasis added.]

A:  Paul Krugman (Pop Internationalism p. 16 [1996], The MIT Press, Cambridge).

In spite of his remarkable daily stupidity, Krugman actually correctly recognizes the problem of American competitiveness in international trade.  What hampers America is not foreign trade, but domestic productivity.  And one of the biggest hindrances to domestic productivity is government, both at the state and municipal level, and particularly at the federal level.  Thus, if one wants to know why Americans are losing manufacturing jobs, one need only look at domestic policy.  The federal government has increasingly hamstrung manufacturing jobs over the past several decades.

Furthermore, instead of allowing consumers to feel the pain that domestic production policy would naturally incur, the federal government instead decided to promote increased foreign trade (under, it should be noted, the auspices of so-called “free” trade).  This policy has then had the effect of subsidizing foreign production at the expense of domestic production because foreign manufacturers do not have to face the massive regulatory costs that domestic manufacturers face, giving foreign manufacturers a leg up on their competition.

As I have undoubtedly noted before, there are only two correct positions for a domestic government that presumably claims to represent the people over which it governs.  Either the government can highly regulate domestic business and place tariffs on imports that approximate the costs faced by domestic producers or the government can reduce the burden of regulation on domestic business in conjunction with the decreased cost of importing.  It is, however, quite foolish to do what the U.S. government is doing now:  highly regulate domestic business while decreasing the cost of importing.  Either a high degree of regulation is desirable or it is not.  If it is, whatever regulations that exist should be applied to every person and corporation that wishes to do business in America.  If it is not, the domestic market should be deregulated posthaste.  There is no excuse for the current state of affairs.

On Free Trade

Vox has recently leveled his formidable intellectual barrels at free trade (see here, here, and here). The conclusion that he has reached has been that free trade has had negative effects on the American economy for the past several years, and that the Ricardian theory upon which the defense of free trade rests is largely bunk. He is correct in both these assessments. However, there are a few things that need to be clarified.

First, the macroeconomic approach to free trade is different from the microeconomic approach. Vox’s argument rests on determining the ratio of imports to exports, which is the mainstream view. The microeconomic approach is to simply acknowledge that there is an exchange takes place, usually of currency for a good or service. The exchange is considered to be equivalent, in that the two parties consider that which is traded to be of at least equal value to what is being received in exchange. Thus, trade is always in a state of balance. It should be noted that the microeconomic view of trade balance is a tautology.

In the second case, Vox’s argument is based on macroeconomic reality, not microeconomic theory. The reality of American trade is that we are running what is defined to be a trade deficit, due in no small part to being willing to import cheap goods into the country. This has, in turn, shifted manufacturing jobs overseas. This is a matter of fact. Furthermore, Vox would be correct in recommending a tariff or a quota system as a way to remedy the trade deficit.

Third, it should be noted that it is economically foolish to pursue international free trade while maintaining a high degree of domestic market interventionism. If the government is going to mandate, say, a minimum wage for all workers, then domestic workers are legally prohibited from competing with foreign labor on price, to a limited extent. Having partial market freedom is just as distortive as complete market intervention. As such, it is entirely reasonable to hold all producers to the same production standards, whether said producers happen to be foreign or domestic. Karl Denninger, for one, has recommended wage and environmental parity tariffs, which are the entirely logical response to domestic market interventionism. Quite simply, it is utterly asinine to support free international trade without also supporting free domestic trade. And it is even more foolish to show stronger support for foreign trade than domestic trade, especially if the one showing support is the government.

Fourth, it should be noted that “free trade” is a bit of a misnomer. “Foreign trade” would be a more accurate description, for most of what passes for free trade today is actually governmental interference. One of the most famous examples of “free trade” of the last two decades, the North American Free Trade Agreement, begs the question: if this is really free trade, why are the governments in three different countries involved? Tautologically, free trade needs no governmental interference, regulation, or oversight. In fact, it only requires that the government get out of the way. Getting out of the way does not require prolonged discussion with foreign governments.

Professor Hale objected to Vox’s claims, saying essentially that people should be free to trade with whomever they want. I agree with this assertion as well. However, there are a few things that need pointed out here as well.

First, using microeconomic theory to argue macroeconomic policy can be troublesome, especially if one does not account for the relevant alternative variables. I cannot tell if this is the case with Professor Hale, mostly because I have only been reading his blog for a rather short amount of time. I assume that he supports a free domestic market as well. I will simply say, then, that if one is going to support free foreign trade than one must first support free domestic trade.

It should also be noted that most online arguments do not easily lend themselves to hyper-qualified, highly nuanced arguments. Trying to explain how one’s foreign trade prescriptions are identical to one’s domestic trade prescriptions takes time, and doesn’t always strike directly to the heart of the matter. In Professor Hale’s case, it appears that he supports market freedom both internationally and domestic. Unfortunately, given the nature of online debate, his defense of freedom comes across as supporting international trade.

At any rate, these are my thoughts, thus far, on international trade. I’ve addressed this subject before, but since the debate seems to be breaking out again, I decided to revisit it. One other thing that I think is worth mentioning is that ideals should be given their proper place. In this case, freedom and prosperity are the ideals. These ideals should neither be ignored nor used as a substitute for reality. Instead, they should be principles by which one makes policies in light of the current reality.

The Folly of Risking Trade War

There is a scene in Book XXI, Chapter IV, of Sir Thomas Mallory’s Le Morte D’Arthur,” which described how King Arthur waged his final battle with Sir Mordred, concluding with the utter destruction of both their armies, and leaving the latter surviving, alone. Meanwhile, the monarch still had two knights left, Sir Lucan and Sir Bedivere, though they were both “sorely wounded.” Sir Lucan pleaded with the king not to continue the conflict any further, reminding him that he had “won the field” that day. But Arthur would have none of that as he was determined to exact final revenge, at whatever cost. Readers all know what happened next because of his fateful decision.

This all came to mind as I read a recent question posted in the Wall Street Journal’s online “Journal Community” section:

Should the U.S. and other countries risk a trade war with China over the valuation of the yuan?

Alas, it is just another way of saying, should the U.S. and like-minded countries risk mutually assured destruction in order to fix what others refer to as a non-existent problem, or at worst, one that is overblown.  We could all simply end up like King Arthur.

As economist Walter E. Williams noted in his excellent article entitled, “Our Trade Deficit (May 25, 2005):” “I buy more from my grocer than he buys from me, and I bet it’s the same with you and your grocer. That means we have a trade deficit with our grocers. Does our perpetual grocer trade deficit portend doom?”

Of course not, I say, but as Dr. Williams had observed, this example illustrates that there is more to the issue than those seemingly frightening deficit figures used by certain “pundits and politicians” to scare the general public, and there are a fair number of such fear mongers these days, both from the political right and left, whether we refer to Pat Buchanan, Lou Dobbs, as well as former congressman Richard Gephardt, current U.S. Senator Sherrod Brown (D-Ohio), and a host of others.

However, judging from the lopsided poll results and angry posts in support of trade war, these respondents and other, similarly outraged individuals, have largely ignored the thoughtful and sensible pronouncements of people like Dr. Williams. Yes, these folks have certainly worked themselves up to a similar, “to hell with the consequences” frenzy, and the U.S. Federal Reserve’s new  initiative, known as QE2, is largely influenced by these same views. Fortunately, saner heads seem have to have prevailed at the recent G20 summit, with the general consensus rejecting American efforts to pressure China to relax tight controls on its currency. Yet, that hardly resolved any major issues, leaving the prospect of trade war hanging over everyone’s heads like a dreaded “Sword of Damocles.” More importantly, the United States has simply incurred the opposition of trading partners such as Germany (not to mention China) for this seemingly reckless monetary policy aimed at further bringing down the value of the U.S. currency, all in the name of “stimulating the U.S. economy and creating jobs.”

Gee, if only things were that simple and not fraught with risks, such as the likelihood of causing a dramatic rise in inflation, especially in the price of commodities like petroleum products. With the continued deterioration of the U.S. dollar, we may very well see oil prices again rise north of USD $100 per barrel, perhaps as early as 2011.  The Obama administration is probably betting that many Americans (especially those who actively participate as voters) are not savvy enough to know the connection, and unfortunately, that may very well be the case. Maybe people will finally figure it out once oil hits USD $200, with inflation raging at 20 percent.

Meanwhile, I doubt President Obama fooled anyone with his insistence that QE2 was “not meant to deliberately weaken the U.S. dollar,” as reported by Ben Feller of AP and others. It also appeared that the Fed was not fully prepared for international reaction, especially with countries getting ready to, or having imposed additional financial regulations meant to blunt the intended effects of QE2. Nowadays, I am increasingly convinced that Bernanke and his people are losing their grip on economic, global reality.

With this unfortunate and largely misleading political perception that America’s high unemployment rate is directly linked to its massive U.S. trade imbalance, and with increasing demands to impose trade barriers, other nations could likely respond in kind, which could bring us to a SH2 (Smoot-Hawley 2) type scenario and an economic nightmare that could reduce global trade dramatically and bring about massive, worldwide unemployment not seen since the Great Depression. As the philosopher George Santayana was quoted as saying, “Those who do not learn from history, are doomed to repeat it.”

The Ley Lines of Globalization

Six years ago, early in my tenure at Berkman, I wrote a blog post that tried to calculate the cost of shipping water from a bottling plant in Yaqara, Fiji to Cambridge, Massachusetts. I was interested in unpacking the everyday mystery of container shipping – how is it possible that we can sell a product for a couple of dollars a bottle despite shipping it 8,000 miles around the world – and in the odd idea that atoms might be more mobile than bits, as we get lots more Fiji water in the US than Fijian music, movies or news.

My estimate then was that a 40′ container filled with Fiji water would cost roughly $5000 to deliver from Suva, Fiji to Cambridge – I came up with the estimate based on a variety of statistics about international shipping that I bent and welded into a Fiji/Massachusetts estimate. At $5000 a container and 24,000 kilograms per 40′ box, it would cost $0.21 for a liter bottle of Fiji water to make the 8,000 mile journey. Not free, but a small fraction of the retail price of a bottle of “premium” imported bottled water.

I had occasion to return to this blogpost today – I’m working on a book, and this Fiji example features in it. So I decided to recalcuate the numbers and see if I could find an answer that’s more defensible and satisfying.

Turns out I got a few details wrong. First, the 24,000kg figure applies to smaller, 20′ containers – the limit for 40-footers is 30,480kg. And the price from Suva to Cambridge for a 40′ container is just slightly higher – $5,540.30. That comes out to $0.18 per liter, three cents less than I calculated six years ago.

These new figures come from my new favorite toy, Maersk’s online shipping rates calculator. The Danish superfirm A.P. Møller – Mærsk Gruppen is the largest shipping group in the world, with offices in 135 countries, 120,000 employees, and roughly 600 container ships, capable of carrying more than 2 million 20′ containers at any given time. They’ve also got a thoroughly badass IT system, which they’ve now made accessible to the general public.

Okay, it’s not exactly, or even Fedex. To use Maersk’s calculator, you need to register with the site, download a client browser certificate and accept three server certificates from Maersk before you can access their secure site. But once you do, it’s just a few short clicks before you can calculate the cost of shipping a 20′ container of “umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof” (yes, that’s one of the available categories, along with “bone and meal”, “ores, slag and ash” and “straw, esparto, other plaiting materials and articles of straw, esparto, other plaiting materials) from Auckland to Dubai: $2451.02

The main thing I’ve found playing with Maersk’s calendar: distance doesn’t matter as much as demand. Americans buy a lot of atoms from China. The Chinese don’t buy nearly as many from the US. A 40′ container filled with household goods, shipped from Shanghai to Houston, TX costs $6169.93. Reverse the trip and ship the same container from Houston to Shanghai and the cost is $3631.07. That’s because 60% of containers on ships coming from the US to China are empty, which means Maersk and other shippers are desperate to sell container space.

(The 2006 New York Times article that offers that 60% empty container statistic suggests that lots of full containers are coming to China from raw-materials rich countries like Australia, Brazil and the Middle East. That suggests we should see the opposite pattern – expensive containers from Sao Paolo to Shanghai and cheap ones in the other direction. Nope. $5101.70 from Shanghai to Sao Paolo, $1930.59 in the other direction. Perhaps containers from China to Brazil are riding the same ships as those to the US and paying the same premiums?)

Maersk also offers a set of maps that help you get a sense for how these trade routes actually work. It’s a four day trip from Suva to Auckland on the Pacific Islands Express, and then the bottles of Fiji water are transfered to OC1, the Oceania Americas Service. The Pacific crossing is a long one – 18 days to the Panama Canal, a quick stop in Cartagena, and we’re in Philadephia 25 days out of Auckland. It’s a truck ride from Philly to Cambridge, and that short hop is responsible for $950 of the total transit cost.

As I poke through these maps, schedules and tariffs, I feel like I’m glimpsing a secret world. Part of it may come from the sheer poetry of the names. Shipping routes include “The Boomerang” and the “The South China/Australia Yo-yo” and connect ports like Tin Can Island (Apapa, Nigeria, the main port for Lagos). And part comes from the sense that these routes and rates, the infrastructure that supports an economy where transPacific bottled water is possible, are the ley lines of globalization, radiating a mysterious and sinister power.

Currency Conflicts Come to Prominence Again

From the mid 1990s onwards, the US trade balance has steadily become bigger. This is a centrepiece of the problem of `global imbalances’. Starting from values of roughly zero, this got all the way to values like $70 billion a month, where the US was importing over $2 billion a day of capital to pay for the trade deficit. Here’s the picture:

US Trade Balance
The US trade balance (goods+services, per month, seasonally adjusted)

This was termed as the `Bretton Woods II’ configuration, where exporting countries like China gave loans to the US, in a form of suppliers’ credit, and the US bought Chinese goods. This magnitude of capital import was unsustainable for the US. Something had to give.

Warning for Indian readers: In India, the term `trade balance’ pertains only to merchandise trade. In the US, the monthly trade data covers both goods and services. So it is a meaningful measure of what is going on in international trade, unlike the corresponding Indian data.
Bretton Woods II first broke down in the financial crisis. In the downturn, the mighty American consumer purchased fewer 50″ television sets. The US trade deficit dropped nicely all the way to $25 billion per month. Alongside a rise in the US savings rate, this looked like a world which was rebalancing.  In recent months, this movement reversed itself and the US trade deficit once again started getting worse.   A deterioration of $20 billion per month is visible; i.e. a deterioration of $240 billion a year. Suddenly, the story of global imbalances righting themselves came under question. The present US run rate is around $40 billion a month or $0.5 trillion a year.
Alongside this, we have news that the Chinese reserves rose by $194 billion in Q3 2010. The Chinese seem to have also passed on some of their problems of exchange rate pegging upon their neighbours by purchasing Japanese, South Korean and Indonesian assets. I am not aware of such behaviour having been observed prior to this in human history. Japan, South Korea and Indonesia have taken unkindly to this behaviour. Given the opacity of the Chinese regime, one can’t help wonder if similar things are going on through less visible channels – e.g. a Chinese sovereign wealth fund buys $10 billion of OTC derivatives on Nifty.
So we seem to be headed for quite some escalation of conflict over the Chinese exchange rate regime. Here are some interesting readings on the subject:

Interesting Ideas in Trade

Akbar’s transport of ice

In the ferocious height of the Delhi summer, Akbar setup a mechanism whereby horses started out with ice in Kashmir and rode south. The ice was handed from one horse to another, keeping it constantly on the move. In the end, what reached him was a few kilos of ice.

(I’m unable to recollect where I read this, and google doesn’t seem to have heard about it. Please do tell me if you know something about this.)

The Indian ice trade

In 1833, merchants figured out that it was profitable to transport ice from the US to India. The existing technical skills enabled the production of low-grade ice in Calcutta for six weeks of the year at a price of 4p per pound. Transport by sea made possible perfect Boston ice, available round the year, at a price of 3p per pound. Ships would start out with 150 tons of ice and reach Calcutta with 2 tons of ice.

`Ice houses’ were built to store ice. The ice houses in Bombay and Calcutta no longer exist, but the ice house in Madras, built in 1841, still exists [location].

In 1878, manufacturing of ice began with the formation of the Bengal Ice Company, and this transport of ice from America dwindled away. By 1882 — a short four years later — it had ended. In 1904, there was an ice plant in Peshawar.

Sources: Better than Hooghly slush by Jayakrishnan Nair, in Pragati, June 2010.

The world’s largest refinery on the coast of Jamnagar

India’s biggest company, Reliance Industries, runs the world’s largest refinery off the coast of Jamnagar. Crude oil is imported here, products are made, and re-exported. Here’s my interpretation of what’s going on. The natural place to put a refinery is in the Persian Gulf, but the political risk in that region is too great, given that the fixed assets in question amount to Rs.2.3 trillion.

What’s the most efficient way out? To transport crude oil on the shortest possible hop from the Middle East to a place with political stability. That takes you to the coast of Gujarat.

A new trade: Alaskan water

I just read a story by Sambit Saha in the Telegraph about a new frontier in trade. A firm named True Alaska Bottling has obtained rights to transport 11.34 billion litres of water (i.e. 11.34 million tonnes) out of a lake in Sitka, Alaska. This will be transported to a plant near Bombay, which will be run by a firm named S2C Global, thus yielding bottled water to be sold in India and in the Middle East.

This seems to me to reflect an extension of the themes above. If you want to deliver product into the Middle East, it is better to build a factory in India given political stability and low labour cost. In this sense, it’s a bit like Reliance. And, it reminds me of the old ice trade; except that this time we’re transporting water.

Economic Events on April 13, 2010

At 7:45 AM EDT, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.

At 8:30 AM EDT, the International Trade report for February will be released.  The consensus is a deficit of $39 billion, which would be a increase of $1.7 billion over January.  Weaker oil prices in that month are expected to be offset by increases in consumer spending and corporate investments.

At 8:55 AM EDT, the weekly Redbook report will be released, giving us more information about consumer spending.

Also at 8:30 AM EDT, the monthly Import and Export Prices index for March will be released, providing some data that can be used to monitor the threat of inflation.

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