U.S. Trade with China

1
U.S. Trade with China

• This Decades Historic Expansion in Steel
• Mike Evans
• Maurice Pincoffs Company, Inc.
• October 2008

2
The Good, the Bad, and the Ugly

• Burgeoning US-China Trade
• The Candidates Governments Role in Trade

3
The US-China Rocket Ride

• Trade w/ China grows rapidly each year, exceeding
  300B in 2007.
• The US in Chinas Top trade partner overall, with
  the US as its largest export customer and 4th
  largest supplier in 2007.
• Steel trade between nations grows each year,
  ranking in the top ten of all goods traded.

4
US China Trade Growth
5
US China Trade Balance
6
US Top Items Imported from China
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Total US Steel Trade (Tons)
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Government, Politics, and Trade

• On Deck The Candidates Positions
• History Lesson Government Business
• Protectionism and the Smoot-Hawley Act
• Stock Exchange Crash of 1929
• Taxation During Downturns
• Governments Role in Economic Growth
• Bail Outs as Solutions

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The Candidates Positions Trade
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The Candidates Positions Energy
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Protectionism The Smoot-Hawley Tariff Act

• In 1930, during the early days of the Great
  Depression, Herbert Hoover signed into law this
  act that raised US tariffs on over 20K imported
  goods to record levels.
• While Hoover initially sought to lower tariffs,
  he signed the bill despite petitioning by over a
  thousand economists and many in the
  business/financial community.
• Countries immediately responding by raising
  tariffs on US goods, and import/export trade was
  cut in half.
• While not the spark of the Great Depression, most
  economists blame the Smoot-Hawley Tariff Act for
  its severity.

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Protectionism Cause Effect

• The act was passed, in large part, to protect US
  farmers from cheaper European goods. As a
  result, allied nations found it more difficult to
  generate much-needed revenue necessary to rebuild
  following WWI.
• The retaliatory tariffs waged by Canada, France,
  Britain and others, caused widespread idling in
  new manufacturing and agricultural capacity. US
  producers were poised to gain greater shares in
  world markets due to automation, the tractor, and
  assembly line production, but were thwarted due
  to a drop in international demand.
• Overall, it is estimated that world trade fell by
  33 from the inception of the act until the end
  of WWII when new trade agreements were formed.

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The Crash of 1929

• The Wall Street Crash of 1929 began with the
  panic trading of 12.9M shares on Black Thursday
  (10/24) and spiraled down further to catastrophe
  only five days later, where Black Tuesday saw
  16.4M shares sold. The market lost 30B in one
  week, ten times greater than the federal
  governments annual budget and more than the US
  spent in all of WWI. The market collapse caused
  bankruptcies, massive unemployment increases, and
  widespread business closures. The event signaled
  the economic slide that caused the Great
  Depression. Stock prices would not return to
  pre-crash levels until November 1954.

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Letting the Air Out of the Bubble

• The prosperity of the 1920s was fueled by market
  speculation, causing the DJIA to increase
  five-fold in the five year period prior to the
  crash. Investors ignored warnings and believed
  the high stock prices were permanent. Many
  borrowed up to 2/3 of the value of stocks to
  invest in the market.
• Over 8.5B was out on loan to investors, more
  than the entire amount in circulation.
  Speculation lead to consistent price increases,
  creating the economic bubble.
• The inevitable downturn in the market lead to
  rapid and massive selling of shares. The mass
  sale was a major contributing factor to the Great
  Depression.

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Why the Crash of 29 is Relevant

• Speculation that drove up prices in 1929 was not
  an isolated incident, and very similar to the
  recent inflation of home-prices and home-building
  throughout the US. The economy is cyclical and
  corrections are inevitable.
• Common sense will prevent most financial
  disasters. With the indebted investors of the
  20s and over-extended homeowners of today, and
  the banks that financed them, excessive borrowing
  lending served as the underlying cause for
  collapse.
• Additional oversight may have prevented (or
  lessened the severity) of both collapses, though
  thoughtful reforms after the fact can prevent
  similar catastrophes.

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Economic Downturns Taxation Hoovers Blunder

• Despite his brilliance as an engineer,
  businessman, and administrator, Herbert Hoover is
  most remembered for his dismal performance at the
  helm during the early years of the Great
  Depression. His greatest blunder was his support
  for the Revenue Act of 1932.

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Recipe for Disaster

• Despite having a hands-off philosophy of federal
  governance, Hoover agreed with Congress to pass
  the Revenue Act of 1932 to increase federal
  revenue.
• Taxes were raised across the board, increasing in
  percentage as income rose, w/ top incomes taxed
  at 63.
• Estate taxes doubled, and corporate taxes went up
  15.
• Hoover also supported a tax on all bank checks,
  vetoed a bill that would have created cheaper
  energy, and generally reacted w/ too little, too
  late.

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Results

• Decreased spending by businesses and consumers
  immediately followed.
• Unemployment and the federal deficit continued to
  increase, and the nation plunged further into
  economic turmoil.
• Hoover was hammered by critics for having
  Socialist economic views, and he was routed in
  the 1932 general election by FDR.

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Relevance in 2008

• Escalating unemployment and a stumbling economy
  hammer at consumer confidence and stock
  performance. Poor, delayed decision-making at
  the top accelerates the downward spiral.
• Additional taxes on companies and individuals
  always impacts spending, but much more so during
  downturns. The disincentives to earn and spend,
  shrink federal revenues significantly, allowing
  for lesser spending on public assistance and
  larger budget deficits.
• Heavy burdens on individuals and companies bog
  down innovation and productivity gains and
  encourage employers to cut payroll by slashing
  the workforce, exacerbating a bad situation.
• Messing w/ peoples income is usually a bad idea
  and can force you into a new career.

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Myth Big Government Yields Economic Growth (or
Kills It)

• Recent theories hold that big government (a high
  of GDP) is bad for growth, as it is believed to
  stifle innovation, overtax its citizens, and
  create disincentives for the poor to be
  productive. In fact, a growing number of serious
  economic studies disprove this belief, showing
  that bigger government spending has no adverse
  effect on economic growth. The opposite is also
  true, however. Big government does not, but
  virtue of its size, create economic growth. The
  only scenarios where government size clearly does
  influence the economy, are in extreme cases where
  a government is so large that it is massively
  oppressive, and when it is so small it is unable
  to protect individual property rights and
  intellectual capital.
• Substance and details matter. The greater
  influences on economic growth are the structures
  of governments revenues and expenses, not the
  overall percentage of spending. When tax
  revenues are spent wisely to improve
  infrastructure, public education, and other
  support mechanisms important to business
  (including some social spending), government
  boosts economic growth significantly. Not enough
  spending in these areas hinders success as much
  as over-spending.
• Political leaders on both sides generally skew
  data to support their agendas, but voters would
  be wise to listen to details of taxation and
  spending plans, and not allow themselves to be
  swayed by myths and fuzzy logic. Big-spending
  governments may not be the grim reaper to growth,
  but they are also not the cavalry riding in to
  save the economy. The devil is in the details of
  HOW government generates revenue and WHAT that
  money is used to buy.

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Bail-Outs No Long-Term Answers

• The proposed 700B government buyout of
  mortgage-backed securities, along w/ recent
  bailouts of AIG, Fannie Mae Freddie Mac, remind
  us of the long history of federal intervention in
  the economy. Controversial by nature, the
  bailouts rarely save companies, industries, or
  stave off the inevitable for long. Bailouts,
  however, oftentimes give impetus for banking and
  finance reforms and oversight.

22
Buyouts Controversy

• Government bailouts of U.S. corporations are
  reserved for situations when the firms are deemed
  too big to fail. The injection of liquidity is
  intended only to meet short term obligations,
  while long term changes can be considered and
  implemented. Howeverthese interventions
  typically only delay the inevitable. Economists
  and markets see bankruptcies as the result of
  failures to meet consumer demands, thus, the
  desired result of free market economies. Federal
  bailouts, then, are government actions to
  override the will of the consumer.
• Some historical perspective

23
Lessons in Bailouts

• Lockheed Aircraft, 1971 Under pressure to save
  60,000 jobs, Congress awarded Lockheed 250M in
  loan guarantees. The bailout allowed the L-1011
  jumbo jet to reach market, but it could not
  compete w/ Boeing McDonnell Douglas, and it
  never again produced commercial jets. Lesson
  capitalism weeds out poor performers by design
  and government should not subsidize inferiority.
• Russia, 1998 The Clinton administration pressed
  IMF for 17B in loans to Russia to keep their
  economy from collapse. The effort failed as the
  Rubles value fell further and Russia defaulted
  on the debt. Lesson throwing money at a fire
  just makes a bigger fire.
• US Airways, 2001 Congress awarded US Airways and
  other domestic carriers over 15B in emergency
  aid following the 9/11 attacks. Despite the
  bailout, US Airways (and others) filed for
  bankruptcy a short time later. Many of the
  carriers that failed were losing money prior to
  9/11, and the bailout only delayed bankruptcies
  and cost taxpayers money. Lesson capitalism
  weeds out poor performers by design and
  government should not subsidize inferiority.
  Its déjà vu all over again.

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Business Minds its Own

• JP Morgan directed efforts during the Panic of
  1907, ending the run on most New York banks.
  Almost all funding raised to save the banks came
  from private financing, as solicited by Morgan.
  Most banks were saved, the stock market did not
  crash, widespread financial damage minimized, and
  banking reforms were initiated, including
  formation of the Federal Reserve.
• The Chrysler bailout of 1980 included 1.5B in
  public loans, but President Carter insisted that
  an additional 2B be raised by Chrysler itself,
  via employee and supplier concessions. The
  result of the mixed financing, along w/ better
  leadership from newly-hired Iacocca, resulted in
  an overhaul that returned the company to
  profitability and repayment of the debt.
• In 1997, after millions in losses and dwindling
  market share, Apple was saved by two great
  forces the return of Steve Jobs and a 150M
  investment by archrival Microsoft. The new
  leadership and infusion of cash helped both
  companies, as the Apple renaissance began and an
  antitrust suit against MS was dropped.

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Closing Thoughts

• US trade with China is expanding rapidly in steel
  as it is with all other products. The trade
  imbalance that grows w/ each year is likely to
  narrow in coming years, but can be expected to
  leave China as a net exporter for some time to
  come.
• The candidates for President have distinct
  differences to their approach on trade and
  economic development. Be an informed voter
• Protectionism is often seen as a neat way to
  protect domestic industries from harmful
  international competition, but these efforts most
  often backfire as trade partners tend to
  retaliate, thereby diminishing export
  opportunities and causing increases in prices to
  US consumers.
• Wall Streets Crash of 1929 reminds us of todays
  sub-prime mortgage crisis. Speculation driving
  up prices creates a bubble that eventually
  bursts, causing both corporations and taxpayers
  money. The key is to respond w/ reforms and not
  to overreact, making a bad situation worse.
• Increased taxation during economic downturns, on
  both corporations and individuals, is bad policy
  and makes the problem worse by forcing reduced
  spending and increasing unemployment.
• Economic growth is cyclical and not driven by the
  size of the US government. Taxpayers should be
  wary of politicians claims that big-spending
  government will be the catalyst for economic
  growth.
• Bail-outs can assist in the short-term, but
  present long-term negatives. Inefficient
  businesses should not be incentivized to take
  excess risk, w/ the expectation that taxpayer
  will save them if things go bad. Outcomes are
  unpredictable at best, and often take years to
  work out. Inevitably, companies are better
  suited by managing themselves better or getting
  out of the way entirely.