WHY JACK KELLY IS RIGHT ON TRADE
Yesterday (3/06), TTP’s Jack Kelly wrote “Why Trump Is Right on Trade.” It really hit a nerve, eliciting a number of excellent insightful comments, both pro and anti, on the TTP Forum. Here is why I think Kelly is right. It’s based on my personal business experience.
I have direct-reduced iron producing clients in 13 nations. These are the first tier beneficiation plants that convert iron ore into iron pellets for further use in steel making. Iron oxide in the ore is reduced to iron metal using coal or metallurgical coke as a reductant in very large rotary kilns. The process consumes a lot of thermal energy and can have a heavy environmental footprint.
I personally know my way around most of these facilities, know their production costs, their production efficiency, plant and equipment life remaining, and the names of the husbands and wives of the executives. I know the union bosses if they have them. I know this industry.
Free trade theory is discussed daily on American heavy industry shop floors. The blue collar guys understand the theory, they understand Milton Friedman and have studied Free to Choose at length. Many subscribe to the Cato Institute letter, FEE, or even that Mises Institute at Auburn. They understand the concepts as though their lives depend on it…because they do.
Most workers in the American iron and steel industries now have at least a two-year degree, many have bachelors of arts or bachelors of science degrees. A surprising number of blue-collar, shop floor steelworkers even have graduate degrees and are similar to nuclear industry workers. Their machinery and processes are too technical, too computerized, and too closely regulated for the two-digit IQ crowd to operate.
These are not ignorant people. Recognizing this truth put President Trump in the White House. Failure to recognize it is wiping out the old political order.
It’s important to understand that the argument on Trump and Trade is not centered around fairness – that it’s “unfair” for foreign governments to cheat on trade. It is an argument centered around the economic concept called national comparative advantage. It is a Friedrich Hayek argument, not a Keynesian or Ricardian or Malthusian argument.
The United States has been grossly hobbling our industry through a form of negative-merchantilism since 1972. Nixon’s “Opening China” strategy was devised to eliminate the peasant class in China, and thus eliminate Maoism’s threat to the world. Thus the US policy of afflicting the efficient while boosting the inefficient countries under the Wilsonian theory that democracies don’t go to war with each other.
This is the practice of promulgating regulations, taxes, administrative barriers, and denial of raw materials in order to create self-imposed, artificial barriers to our own ability to compete in the world markets.
For example: It is darn near impossible in the United States to get a new air discharge permit for new process machinery in the basic material industries. It is also darn near impossible to modernize the physical plant and increase production rates because the law says this triggers a new source performance review and a new permit to discharge – which is virtually impossible to be granted.
I recently worked in Puerto Ordaz, Venezuela at both a primary aluminum facility and an iron ore reduction facility. Both had 100% of their environmental control equipment bypassed and were discharging thick clouds of soot and fluorine compounds to the atmosphere.
The aluminum processor, the world’s largest of this type, received state-sponsored electricity from a hydro project at less than $0.01 per KWH. The inspector for all process and safety related matters was the local fire chief, an official appointed by the facilities themselves. Accounting was “creative.”
Conditions are about the same in Russia and China, much better in Japan and Korea, and a little better in the EU.
I have personally climbed up the smokestacks of 200 of these facilities and measured the emissions according to EPA Method 5. I personally operated the instruments, collected the samples, ran the lab tests and calculated the results. You know what I learned?
Every facility, every single one, operating outside the United States is reporting false air emission numbers. Not a single facility in the USA dares do this. Why? There is a designated go-to-jail person at each American facility but no such person exists anywhere outside the USA.
With regard to raw materials, our government has been trying to increase electricity costs while most governments subsidize costs.
Heck, France, China, and Sweden produce most of their power with state-owned nuclear reactors. They have very low-cost industrial power in reality. They report phony high-cost power in their press releases.
Guess what the United States declared war on for nearly a decade? Coal. Why? Global warming? No… to eliminate the comparative advantage to producing steel in a country with large coal reserves. The global warming was the cover story that worked. China built a middle class.
The United States maintains draconian regulations, a draconian legal system, and a federal bureaucratic class that simply will not allow environmental permit modifications needed to modernize plant and equipment.
We have negative tariffs now. Negative Tariffs are regulations that boost our competition’s ability to sell in the home market while significantly damaging our own ability.
If I had the opportunity to whisper in President Trump’s ear, I would advise implementing tariffs as the opening move towards ending our reverse economic war with Asia because we won. Asia has a middle class now. I would allow American industry to compete where we make things most efficiently and allow an industry to whither where we legitimately cannot.
I would allow market forces to decide this by removing the regulations and government jobs specifically designed to reduce American industrial comparative advantage.
I would allow state-owned industry outside the United States to scream and yell, and I would allow the consumer products industry within the United States to express outrage that they will no longer benefit from the transfer of wealth from (for instance) a steel mill to a potato chip in a can factory, or an orange branded laundry detergent factory.
After all, when we say the consumer gains or loses, we really mean Proctor & Gamble and the consumer products industry. It is just that nobody feels good about declaring that our economic policy is mostly directed towards a few packaged goods companies.
President Trump has command presence. He has courage, and he is going to force a discussion asking why we continue to hobble our industrial base to prevent peasant-based Maoism from growing when the few remaining Asian peasants are pretty much just in North Korea.
By ending the Asian peasantry we ended the justification for the reverse economic war that we have been fighting against our own nation. Let’s stop fighting the last war.
TTPer Mike Ryan is an engineering consultant to the global minerals, fibers, and chemical industries.