Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade
American Iron and Steel Institute Board of Directors
Washington, DC
February 7, 2006
Thank you for having me here tonight. I was glad to have been able visit with AISI at last year’s dinner. During the course of the year I’ve had the chance to work with or visit just about every company here, and I’ve also had the chance to take tours of two different steel mills, so it is good to see many of you again.
Let me take a few minutes tonight to talk about the industry in general, and to look at some of the trade issues we are facing. I want to talk about the Administration’s steel agenda, and your agenda as well.
Good News
There is much good news in the American steel industry in 2006. Let’s take a look at some numbers that illustrate this point:
Domestic production was up about 4 percent over 2005; however domestic consumption was up even more, about 10 percent. U.S. imports and exports were also up in 2006, showing the growing international nature of the steel industry. In 2006 prices remain high for steel, though we saw some softening in the fourth quarter. Still, hot-rolled steel, even at $513, is 36% above the average price for the past ten years.
Administration’s Agenda for Steel
How do we keep the good news continuing for the American economy and for the steel industry in particular? Most important is to keep economic growth on track. The single most important policy stand we can take to help your industry is to keep the economy on a growth path.
We only have to reflect for a moment on times not too long ago when our country was beset by stagflation or a flat economy to remind us of how important steady strong growth is to business confidence, consumer confidence and capital expenditures.
Low taxes, tight spending, low unemployment and low interest rates give us the business environment we need to compete. Along the same lines, we can promote innovation, research and competitiveness through policies like the American Competitiveness Initiative, an important element of which is the research and development tax credit.
On trade, we have a variety of issues that we are addressing that are important to the steel industry and to our international economic competitiveness. Let me talk about two big markets, one where cooperation is working and one where it has not yet bourne fruit.
Expanding the North American Partnership- NASTIC
The North American Steel Trade Committee (NASTC) is headed in the right direction in its efforts regarding import monitoring, foreign market development, competitiveness, and productivity. It is no surprise that some 9% of U.S. steel production is now exported, and 84% of that is to Canada or Mexico. Our cooperation has improved the entire North American market, making all producers in our partnership more competitive and efficient.
China – rapid economic growth brings with it a number of challenges
Another place where we have tried to develop a similar cooperative approach is China. We launched the steel dialogue with the Chinese leadership last year and have had a series of useful exchanges on a range of topics through this mechanism. However, I cannot report to you that, as of yet, the steel dialogue has had much effect on our fundamental concerns of China’s steel imports and capacity.
Steel production in China was 418 million tons last year, up from 182 million tons in 2002, which is 129 percent in four years, making China the largest steel producer in the world. This is more than the production in the European Union, Japan, and the United States, the next largest producers, combined.
Growth in China’s capacity has transformed it from a net importer to the world’s largest steel exporter. Last year China displaced Canada as our primary source of steel imports.
More worrying than these numbers is the even larger increase in Chinese steel capacity that appears to be coming on-line in the near future. Last summer, the NDRC estimated that another 70 million tons of capacity was under construction and another 80 million tons in the pipeline. At the same time, we have yet to see any closures of inefficient facilities as a result of the Chinese government’s plan for steel.
Let me outline a few of the policy approaches we are taking to try to deal with these developments.
World Trade Organization (WTO) Subsidies Case
China continues to use a wide-range of what appear to be illegal subsidies under WTO rules. For example, the Chinese government gives exporting companies 50 percent off of their income taxes if they sell 70 percent of their products abroad. This is clearly a violation of WTO rules.
We have tried to secure China’s compliance with its WTO obligations to eliminate these prohibited subsidies. This has not produced the results we desire.
Therefore the Bush administration has filed a case with the WTO. This process begins with a mandatory consultative period that is now underway. If the results we desire are not forthcoming, we will move to a panel and formal adjudication.
Countervailing Duty Case (CVD)
The U.S. Commerce Department has initiated a countervailing duty investigation against coated free sheet paper being imported from China.
Commerce intends to determine whether the CVD law should now be applied to imports from China. A preliminary determination in the paper case will be made on April 2.
Let me mention five other issues that could play an important role as our economic relationship with China develops: Chinese environmental standards, China’s foreign investment rules, zeroing, and WTO Rules negotiation and enforcement.
In terms of environmental standards, we see widespread evidence that China does not live up to world standards when it comes to environmental regulations of its own industries, from power generation to steel production. On a personal level, as someone who lived in Hong Kong for a number of years, I am acutely aware of the widespread pollution that comes from China’s mills and factories, which is both an environmental and a trade competitiveness issue.
With increased foreign investment, we believe greater openness and transparency will help China internationalize its steel sector and rationalize its capacity and production.
On the matter of WTO rules enforcement, you should know that more than half the anti-dumping /CVD cases we administer are related to steel. Although we prefer to negotiate agreements in good faith with our trading partners, we are not afraid to aggressively use the tools we have to protect our interests.
And when it comes to WTO rules negotiations in Doha, we feel generally comfortable with where we stand at present. Our work has been largely defensive to date, with a few offensive proposals, and we think we have held our ground.
Lastly, on the matter of the recent decision in the Japan zeroing case at the WTO, we think the decision is wrong. We do not see an easy policy response to this, but we are in discussions with Congress to see what solutions we can come up with that are fair and equitable for all concerned.
Conclusion
I mentioned at the beginning of my remarks that I would talk about our agenda and your agenda. So let me conclude with some comments on the industry.
Regardless of how well we do our job on trade issues, ultimate industry success depends on the business acumen of the people in this room and the companies you lead. A company that believes it will be undertaking the same tasks or selling the same products twenty years from now that it is today is doomed to fail, in my view. Markets change, processes change, technology changes – and companies need to change as well.
The good news is that, in general, the steel industry sees this and has risen to the challenges that have confronted you. The U.S. steel industry has made tremendous strides since 201 measures were imposed. And output per employee hour has increased by 81 percent between 1994 and 2004, according to the Bureau of Labor Statistics. This compares with an increase in productivity of 54 percent for all manufacturing.
The bad news is that the world is not standing still. My old boss President Reagan once told me that the quickest drying fluid in the world is tears of gratitude. So to say that you have re-engineered your company, cut waste, reformulated products and so forth is all very good news. But it has to be done again and again as you seek to improve your process, productivity and production in an endless cycle of improvement. As you have met the challenges of the past, you will find solutions and opportunities tomorrow, and we at ITA will be there to help you by enhancing the environment for American companies on the global stage.