Rogue Nation: American Unilateralism and the Failure of Good Intentions (2003) (9 page)

Nor is it easy to close a steel mill once production has begun. At $1 to $2 billion a pop, steel mills are extremely capital intensive, with fixed costs accounting for 35 to 40 percent of the total cost of producing a ton. Because of this high fixed-cost ratio, it is economical to produce and sell steel even at a substantial loss as long as the revenue is covering at least a part of the fixed costs. Beyond this is the fact that steel mills employ a lot of people directly, and even more indirectly in the industries that supply and service the mills. It is common to speak of ‘steel towns’ because frequently the steel mill is the life-blood of an entire city or region. Moreover, as an old industry with roots in the class warfare of the late nineteenth and early twentieth centuries, steel is everywhere strongly unionized and politically powerful. Thus, as new mills have been added in various places over the years, old mills have tended not to shut down. Instead they have struggled on, often selling at a loss and, in much of the world outside the United States, forming cartels to prop up prices while also becoming the recipients of substantial government subsidies. The result has been accumulation of production capacity far in excess of actual demand. Some analysts have estimated that nearly one-third of the world’s approximately 1 billion tons of steel production capacity is in excess of demand.
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Over the past twenty years, most of that excess production has found its way into the U.S. market, a fact that has led to dozens of bankruptcies of U.S. steel firms, the shedding of 18 million tons of capacity, and the shrinkage of the American steel labor force from 459,000 workers in 1982 to 139,000 today.
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Behind these painful statistics lie three major factors: the relative openness of the U.S. market, the relative lack of U.S. government assistance for the industry, and the peculiarities of the U.S. pension and health care system. Despite much criticism of U.S. protectionism, the fact is that the United States is the export market of choice because even with its idiosyncrasies it is far easier to enter than any other major market. The trade statistics demonstrate this dramatically. While imports take about 24.1 percent of the U.S. market, they account for only 19.3 percent of the EU market and a paltry 10 percent of the Japanese market.
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One reason for this is that Europe, Japan, and other countries are dominated by cozy business arrangements aimed at controlling imports and operated through industry associations and groups of interrelated companies. Another factor is the extensive government assistance provided to many non-U.S. steel industries in the form of injections of public capital, and absorption of debts, or provision of critical infrastructure – all aimed at restoring corporate competitiveness. A final factor is the ‘legacy costs’ of pensions and health care.

Even without the protection and the public assistance received by their foreign competitors, many U.S. steel producers have dramatically cut costs and improved productivity to remain cost-competitive for consumers in the U.S. market. (U.S. production per manhour increased from 70.5 tons in 1980 to 142.9 in 2000, compared with 67 and 127.9 in Germany and 63.2 and 134.1 in Japan.)
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But even as they have downsized and cut staff, they have been increasingly saddled with higher and higher bills for pensions and health care, which tend to make them uncompetitive. In most steel-producing countries, health care and pensions are publicly funded. In the United States, of course, these programs are provided by employers, and in the steel industry they have been a major part of the contracts negotiated between the companies and the United Steel Workers. Under the agreements, retirees and workers who have been laid off, along with their families, continue to receive inflation-indexed pension and health care benefits for as long as they live. Often made under heavy U.S. government pressure, these agreements and their legacy costs mean that an industry of 139,000 workers has the pension and health-care bill of an industry two or three times its size. Not only are these costs a heavy burden, they also tend to inhibit moves that could make the industry more competitive. Globally, the trend has been toward mergers and the creation of very-large-scale production facilities. This has not happened so much in the United States because no company can afford to take on the legacy costs of any firm it might acquire. Thus, while a merger of U.S. Steel with Bethlehem Steel would make economic sense, it cannot occur as long as the legacy cost problem exists.

In dealing with the adjustment problems of the steel industry, the U.S. government has long had the choice of moving proactively to assume these legacy costs, as other governments do, or imposing emergency tariffs on imports that are found under U.S. trade law to be a major cause of damage to the U.S. industry. Under the law, the U.S. industry must present a recovery plan to qualify for the tariff. Historically, however, such plans have usually not worked, and the tariffs have provided only temporary relief from low-price competition. By raising costs for users like auto and machine tool companies, they help make these industries uncompetitive as well. They also cause harm to the exporting economies, and yet do nothing to make the domestic industry more efficient.

Clearly, the preferable route in March 2002 would have been for the U.S. government to assume some of the legacy costs and make the industry more competitive. In a meeting with the chairman of one of the major U.S. steel companies, I was told that that was also the route the industry would prefer, because it would allow mergers and other measures that could bring the industry up to world-class levels. I was also told by the EU Trade Commissioner, Pascal Lamy, as well as by various Japanese officials that neither Europe nor Japan would object to such a U.S. policy. The Bush administration’s decision to impose antidumping duties instead was due to its political desire to please the steel unions, which preferred that choice, and to its market-fundamentalist economic philosophy of avoiding anything that smacks of industrial policy. While it was certainly right to react to the industry’s problems, the manner of acting caused an enormous negative reaction abroad and damaged U.S. credibility. At the very moment it was calling for new trade liberalization negotiations, the United States responded to a political problem by taking the easy way out and passing its costs on to the exporting countries, in direct violation of its own free trade doctrine.
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THE SOURCE OF MIRACLES

T
here is another face of globalization, and it is one that I know intimately. I first encountered it in 1958 when I sailed from New York to Amsterdam to spend time in Europe as an exchange student. Our voyage took ten days and cost about the same as today’s seven- or eight-hour flight. I remember my amazement at the thousands of bicycles parked in every imaginable spot around Amsterdam’s streets and canals. I was sixteen years old and I had just acquired my first car a few months before. Yet, here, even grandmothers were riding bicycles. I boarded the train in Amsterdam for Basel, Switzerland, and as the grandson of a railroad man, was delighted to find it pulled by a steam engine, something I had never seen at home. In the small Swiss village at the foot of the Alps where I was to stay, I became accustomed to the hot water cutting off in the middle of my shower and learned to go grocery shopping every day because the refrigerator was too small to hold more than a day’s supply of food. Europe in those days wasn’t poor in the way of a developing country, but neither was it rich in the way of the United States.

I arrived in Japan to pursue graduate studies in 1964, at about the time Norman McRae first proclaimed the Japanese ‘miracle’ in
The Economist
. It sure didn’t look like a miracle to me. Again, transportation was mostly by bicycle rather than car. My wife and I rented what our Japanese friends termed a ‘luxury’ flat. It had no running hot water, no bath, and no range, and heating was by kerosene stove. We slept on futons rolled out on the floor at night, went to the public bath, boiled our baby daughter’s diapers in a bucket over something that resembled a Bunsen burner, and wore gauze masks to protect ourselves from Tokyo’s noxious air. We never saw Mount Fuji until we were driven to it on a sightseeing tour. Our Japanese friends worked six days a week, never took a vacation, and lived in conditions that resembled what Americans would call camping. Again, Japan wasn’t really poor, but it wasn’t nearly as rich as Europe, let alone the United States.

Two years later I was back in the Netherlands as the Vice Consul at the U.S. Consulate in Rotterdam. Eight years had made an astonishing difference. Bicycles were out, and motorbikes and cars were in, and the trains had all been switched to diesel or electric engines. The growth industry was installing central heating in houses as northern Europe’s gas fields were developed, and the quaint little grocery stores were giving way to supermarkets. I soon understood the major factor behind this rapid development of wealth. The Consul General told me my tasks would be to promote American investment in the Netherlands and Dutch exports to the United States while keeping track of developments in the port of Rotterdam. It wasn’t called globalization then. A best-selling book by the French author Jean-Jacques Servan-Schreiber called it
Le defi americain
(The American Challenge). Regardless of what it was called, Rotterdam had already become the world’s largest port as the flow of investment capital into Europe created factories that sucked in raw materials and shipped out finished goods destined for the huge U.S. market. International trade and investment were making the Dutch and other Europeans truly rich – in the way of the United States.

By 1972 I was living in Brussels, Belgium, as director of European marketing for Scott Paper Company. As I struggled to create a unified marketing plan for Scott’s various national operations in Europe, I developed great empathy and admiration for the European leaders who were harnessing the power of global capitalism to shape an entirely new European economic power. In 1976 I was reassigned to Japan, where I discovered that McRae had been right about the miracle after all. Traffic was impossible; the public baths were rapidly going out of business as people installed their own
ojuros
at home; the work week was down to five and a half days; and despite former Secretary of State John Foster Dulles’s comment that the Japanese couldn’t make anything Americans would buy, Japan had a large and growing trade surplus with the United States. One of my friends at the U.S. embassy in Tokyo bragged that he had done a better job of promoting Japanese exports to the U.S. market than I had done in promoting Dutch exports.

By the time I became a trade negotiator in the Reagan administration, the trade deficit with Japan had grown to $15.8 billion and the overall U.S. trade deficit was running at the unprecedented level of $27 billion annually.
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Many analysts said this deficit was unsustainable, and Secretary of Commerce Malcolm Baldrige told me it was my job to reduce it. By 1986, as the deficit with Japan hit $55 billion and the overall deficit climbed to $150 billion annually, it was clear that I had failed, and I left the administration to try my luck at writing a book about trade negotiations. I did not imagine that the U.S. trade deficit (technically the current account deficit) would be running at an annual rate of nearly $500 billion by the end of year 2002. That number has immense significance in a number of ways, but above all it is a measure of how America, working through globalization, has contributed to making much of the world rich.

This did not come about by accident. After World War II, the United States determined to avoid the mistakes of the aftermath of World War I and adopted a policy line that might today be called ‘nation building.’ The Marshall Plan provided the equivalent in today’s dollars of more than $90 billion to help rebuild Europe, and the Dodge Plan was crafted to get Japan back on its feet.
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With the dollar as its cornerstone, the International Monetary Fund was created to assure stable international financial markets, while the World Bank was established to provide essential funding for developing countries. The United States was and remains the biggest contributor to both institutions. Perhaps most importantly, the General Agreement on Tariffs and Trade (GATT) committed America and its major allies to reduction of tariffs and to realization of free trade on a truly global basis. Beginning with the Geneva Round of trade talks in 1947 and continuing over fifty years to the Uruguay Round, which concluded in 1994, the United States led the industrialized world to reduce tariffs and formal trade barriers to insignificance. Over that time, free trade has become largely reciprocal, at least among developed countries. But in the beginning, the United States sharply reduced its tariffs without requiring reciprocity from its trading partners in Europe and Japan. Very importantly, the United States also held the value of the dollar fixed for twenty-five years, while the rapid recovery and development of its trading partners dramatically reduced the huge American productivity lead of the immediate post-war period. Finally, U.S. industry was urged by its government to assist in the development effort by investing abroad, licensing technology, and increasing imports. The former Motorola Chairman Robert Galvin tells of being urged by President Eisenhower in 1957 to try to increase imports from Japan so as to help strengthen its economy and cement its alliance with the United States.

Europe was the early export star as Volkswagen’s famous ‘Beetle’ gained an incredible 5 percent of the U.S. auto market in 1958, and any bicycle with a gearshift and skinny tires was known as an ‘English bike.’
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But with the help of people like Galvin, Japan caught up rapidly. It specifically adopted an export-led growth strategy; by 1964, when I showed up in Tokyo, Japanese companies already had large shares of the American consumer electronics markets and were moving quickly to dominance. Japanese autos would come later, but textile, steel, and components imports from Japan were displacing U.S. factories and causing sharp trade disputes.