By Stephen Mihm

Bloomberg

Next moves on tariffs — President Donald Trump is expected as early as Thursday to sign off on his plan to slap stiff tariffs on imported steel and aluminum, but in a surprise reversal the White House opened the door to exemptions for products from Canada, Mexico and other U.S. allies. Carve-outs for certain countries from Trump’s proposed double-digit duties would mark a retreat from the president’s insistence earlier that the levy would be across the board. And that could mollify leading U.S. trading partners and allies that have roundly criticized the tariffs and threatened to respond with retaliatory measures. Excluding allies from the tariffs also could help the Trump better focus on his intended target, China, even though most U.S. steel and aluminum imports come from Canada and other allies.

Treasury secretary supports tariffs — Treasury Secretary Steven Mnuchin said he recognizes the risk of retaliation against the U.S. for steel and aluminum tariffs the Trump administration plans to impose but still believes the move will benefit American workers. “If you want to negotiate things that are good for us, you have to be prepared for the consequences,” Mnuchin said Wednesday. “Our objective is not to create a trade war. Our objective is to make sure U.S. companies and workers are treated fairly.” Mnuchin said no one should be surprised at the tariffs. Trump has made renegotiating trade deals and getting better access to Chinese markets for American companies a pillar of his economic agenda since his candidacy.

— From wire reports

Donald Trump wants to help the steel industry in this country, and he’s announced plans for protective tariffs, saying “trade wars are good, and easy to win.” By way of explanation, Trump insists steel — and many other industries — has been “decimated by decades of unfair trade and bad policy.”

This has been a problem many decades in the making. But it’s a problem rooted in disastrous decisions made by the steel companies themselves when Trump was still in elementary school.

At the end of World War II, American steel had no real challengers. It produced nearly three-quarters of the world’s steel, and the factories of its biggest competition — Japan and Germany — lay in ruins. Giants like U.S. Steel looked poised to dominate the world for the foreseeable future.

Instead, the industry was lapped by foreign producers — and unfair trade practices were not a factor. U.S. manufacturers held onto the so-called “open hearth” method of steel production decades after its expiration date.

Europeans had no such attachment to the past, perhaps because many factories had been destroyed in the war. Moreover, they had started experimenting with the idea of turning iron into steel by blasting pure oxygen onto the molten metal. This method, which became known as the basic-oxygen process, first entered trial use in 1948 at a factory in Linz, Austria, owned by the small steel firm VOEST. The company soon built a full-scale commercial facility that went online in 1952.

Linz became something of an industrial mecca in the succeeding years, as steelmakers the world over visited to see this new process firsthand. Most became immediate converts, and with good reason: The cost of building steel mills using the basic-oxygen furnaces was 40 to 50 percent lower than conventional open-hearth factories; operating costs were 25 percent lower, though some studies suggested even greater cost savings.

But it was the productivity gains associated with the new process that should have really raised eyebrows. One factory that made the shift could produce 40 tons of steel per hour using the open-hearth process, but after installing basic-oxygen equipment, it managed to quadruple that figure.

Throughout the 1950s, as Europe’s steelmakers built new factories around the basic-oxygen process and simultaneously demolished its remaining open-hearth furnaces, representatives of the Big Three — Bethlehem, U.S. Steel and Republic — repeatedly claimed the jury was out on the new method, all evidence to the contrary.

By 1957, even Congress realized something was amiss, and it summoned steel industry executives to testify. A U.S. Steel representative told a committee: “The distinguishing characteristic of the American steel industry is its tremendous productiveness, a quality which other countries have been unable to emulate so far,” later adding that the company had examined the methods popular in Europe but found them wanting.

While Big Steel fiddled, basic-oxygen furnaces burned ever brighter around the world. So, too, did yet another method of making steel that was even more revolutionary: the electric-arc method. This technique used electricity to recycle iron scrap, turning it into steel. Unlike conventional steel mills, electric arc mills are small-scale enterprises that are easy to establish and cheap to build, even if they can’t produce anywhere near the scale of a conventional integrated mill.

Europeans began building these, too, en masse. As these two methods continued to take off in Europe, and then in Japan and elsewhere in Asia, American companies continued to add inefficient open-hearth furnaces to their shop floors, doubling down on an obsolescent technology.

By the 1960s, Big Steel began building basic-oxygen plants, but it was too late. The steel industry had squandered its supremacy.

It could have gone differently: Economists who have run counterfactual scenarios — where Big Steel made the necessary capital improvements to stay competitive — suggest that the American companies could have stayed on top, and reaped even greater profits than it did by postponing the inevitable upgrades.

But there’s a final twist to this tale. In the 1960s, a man named Ken Iverson took over a conglomerate that acquired a stake in the steel business that became Nucor. Iverson then bet the firm’s future on making steel using the electric arc process, building the first American facility in 1969. It began growing at an exponential rate, competing rather effectively with foreign producers, to say nothing of other American producers.

As other steel producers begged for protectionist trade policy, Iverson mocked the idea. In an interview in 1986, Iverson noted that protectionist measures already instituted hadn’t had the desired effect. “As soon as prices began to rise so that the steel companies began to be profitable, they stopped modernizing,” he said. “It’s only under intense competitive pressure — both internally from the mini-mills, and externally from the Japanese and the Koreans — that the big steel companies have been forced to modernize.”

Iverson died in 2002. Nucor has since become the nation’s largest domestic steel producer. After Trump announced the tariff, Nucor’s CEO vigorously applauded the move, saying it was long overdue.

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