The part of the story that that author hasn't gotten to yet is that the open hearth process became very rapidly obsolete after WWII. Germany and Japan invested heavily in the basic oxygen process which had the speed of the Bessemer process and the quality of open hearth. US Steel producers responded by lobbying the government to protect the industry so they could keep using their old steel furnaces. It didn't end well.
Yes, there's a lot more to the story. The modern developments in steel production eliminate the blast-furnace-to-basic-oxygen-process entirely, by using the direct reduction method (which has used natural gas as the hydrogen source, but it can also use water-sourced hydrogen).
Here's a nice visual (gif) comparison of the direct-reduction -> electric-arc-furnace and blast-furnance -> basic-oxygen-furnace method pipelines. They converge on the same point, the steel refining facility:
I was surprised to learn about how bad bessemer steel was, I'd heard about it in the past sort of revolutionizing the production, but I must not have kept in my head how singularly useful it was.
Also it's an interesting case of how luck plays into things, were there people before Bessemer who'd tried something similar and had high phosphorous ores? How long would things have carried on before someone intentionally tried fiddling with that knob?
It is not really that bad, but it is worse in some ways than the other options.
Before modern steelmaking people made very high quality "crucible steel" despite understanding very little about the basic science behind metallurgy. See
it was crazy expensive though. (The bit cost more than the horse.) The high cost of steel caused Japan to conflate social status with military competence and led to the mystique of the Samurai sword, and contributed to Okinawa developing a system of fighting based on weapons with limited or no metal content
which makes as strong a case against protectionism as I've seen everywhere. Part of the cost of enabling the steel industry to keep using obsolete technology was harm to the competitiveness of other US industries such as the car industry because they were stuck using expensive and low-quality steel.
There is some quality steel made in the US today but many communities have never recovered from the failure of the legacy industry.
I think the real reason Wall Street made the decision to move US steel production to China is that a Chinese steelworker makes only about USD 12,000 per year, which more than makes up for any costs involved in shipping the steel across the Pacific to the US when it comes to the profit margin equation.
It could be true that there was some domestic monopolistic behavior going on, in that the steel industry's shareholders were blocking investment into research and modern process development, and since they faced no direct overseas competition due to protectionism, they got away with it for a while. Hence your argument about protectionism being a bad policy has some merit, but only if there's no robust domestic competition driving innovation and better technology (see SpaceX vs. ULA as an example of how competition drives progress).
Similar accounting-based cost-of-labor reasoning was involved in not investing in high-grade silicon and computer chip manufacturing facilities within the United States, although the consequences (supply chain vulnerabilities) seem to have caused something of a panic as seen with the 2021 & 2022 CHIPS Acts, which are probably good ideas, though no doubt they could also be called 'protectionism':
doesn't seem plausible that the difference between 12000 dollars per year per worker and 120000 dollars per year per worker would be a large fraction of the price of the steel produced
shitty steel costs about 50¢ a kg, so that's half a million dollars per employee per year, but fine steel can cost 10 dollars a kg, which would be ten million dollars per employee per year
the cost of shipping shit across the pacific varies wildly, but it is often about 3000 dollars per 40-tonne feu, which is about 8¢/kg, comparable to the cost of a steel mill employee making 80000 dollars a year, so it is plausibly false to say that 'a Chinese steelworker makes only about USD 12,000 per year, which more than makes up for any costs involved in shipping the steel across the Pacific to the US'
also as paul houle points out, the collapse of the steel industry in the us happened 50 years ago, at which point prc was not a significant competitor
if there's robust domestic competition driving innovation and better technology usually there are no calls for protectionism; it's your overseas competitors who have to worry about getting undercut by you, not vice versa
When looking at profitability and corporate decision making, never forget that decisions are often made not on the basis of the corporation's benefit, but on the advantages to the executive(s) involved.
>I think the real reason Wall Street made the decision to move US steel production
This is quite the statement, Wall Street didn’t do anything. Foreign countries developed their own steel industries and the US couldn’t compete. This had little to do with Wall Street. The largest steel companies aren’t US subsidiaries that moved production offshore. Chinas steel industry is dominated by large state owned enterprises.
Wall Street is where the decisions are made about whether to invest in domestic steel production or whether to direct corporations to import more steel. (2014):
> "U.S. steel imports increased from 28.5 million net tons in 2011 to 32.0 million net tons in 2013, an increase of 12.3 percent. Imports have increased not only in absolute terms, but also relative to domestic production and consumption, seizing more of the U.S. market and thwarting the domestic industry’s efforts to recover from the Great Recession... The import surge has depressed domestic steel production and revenues, leading to sharp declines in net income in the U.S. steel industry over the past two years (2012–2013), layoffs for thousands of workers, and reduced wages for many more."
Note this hides the real level of steel imports, since a lot of steel goes into things like imported vehicles, which are counted separately. For example, the Ford Focus (2017):
> "Last year, the company said it planned to shift Focus production to a plant under construction in Mexico, primarily because of lower labor costs... Ford’s head of global operations, Joe Hinrichs, said the company would save $1 billion by building the Focus in China instead of Mexico."
if production of steel in the usa were competitive, barring chinese protectionism†, those fords built in china would be built with steel imported from the usa
arguably wall street shifted to investing in other hot sectors like computers (this was the 01960s and 01970s) and made capital more expensive for the steel industry, but then again the steel industry wasn't really posting the kinds of profits it had in the days of carnegie
You make a fair point, however I don’t think “wall street chose not to subsidize the US steel industry” is quite the same thing as “Wall Street chose to move steel production outside of the US”.
Wall Street isn’t a vehicle for national industrial policy, if anything that lies at the feet of Congress.
well, wall street didn't expect high returns from the steel industry in the us
one of the things that distinguishes capitalism from other economic systems is that national industrial policy (in the sense of allocation of scarce resources to future productive endeavors) is determined by private investors, not the state
The steel industry was hollowed out long before trade was opened with ‘the new China’.
I wouldn’t say protectionism is inevitably a bad policy, but it frequently is, may be so by default, and it is not driven by movements for justice and equality but rather by ‘special interests’ that can feed back a small amount of their gains to finance politicians and thus put their ‘activism’ on a sustainable basis.
Labor is a very small part of steel making. What maters most is the availability of needed resources, specifically energy and iron/coal. Then comes distance to markets and environmental regulations. Doubling/tripling/halving the cost of people is a secondary consideration.
Well, perhaps it's more complicated than any single factor can account for. However, US steel production has dropped from 115 Mt around 1970 to 72 Mt todays, even as the US population has increase from 200M to 330M, which you'd think would mean increased domestic demand for steel.
Overall output is worth looking at. The rise of China as the single largest producer begins around 2000-2001, which coincides to the US Congress agreeing to admit China to the WTO. China today produces almost 15X as much steel as the USA, and employs 2.5 million people in the industry, relative to about 200,000 employed in foundries and mills in the USA (bls.gov stats).
Wages in the steel mills in 1970 were about $6 an hour, about equivalent to inflation-adjusted $45 an hour today. Today's USA steel mill worker averages about $30 an hour by comparison, a relative wage cut of about a third since the heyday of US steel manufacturing.
Now, there are a lot more billionaires in the USA and a lot more poor people as well as a result of these general policies on all kinds of manufacturing, I think that's pretty hard to argue with. Lot more homeless people on the streets, too.
The location where of heavy/bulky goods always follows demand. North America could switch to only ever using domestic steel. That wouldn't make a dent to the demand that backs China's production.
2023 estimated demand in North America: 140 million metric tons.
2023 estimated demand in Asia (China): 1,284 million metric tons.
CHIPS act spending is going to be a boondoggle. There isn't significant local demand for ICs. Nearly all production is in SEA so anything made in the US has to be shipped back for assembly. That means the only devices worth making are higher margin VLSI parts. Anything cheaper will not be profitable without protectionist subsidies.
It's pretty damning when Micron has funding for a new factory handed to them and then they have mass layoffs a few months later.
Yes and no. It doesn't always go that far. Sometimes dirigisme has a success story such as the development of semiconductor manufacturing in Taiwan or Brazil's plan to back national champions in areas such as aviation and meatpacking. (Ride in an Embraer E-Jet, never mind a A220, and you will experience for yourself why the 737 is obsolete. On the other hand, massive subsidization of both Airbus and Boeing has contributed to an absence of competition for the narrowbody jets such that a 1967 jet competes with a 1987 jet -- although even an evolved 1987 car would struggle to meet current safety and environmental requirements.)
More often a government chooses to coddle a "national champion" that turns out to be irrelevant in the larger industry, such as many European car manufacturers. Cases like that unfortunately don't lead to death but instead can linger on for decades and have a negative impact on all sectors of the economy (because of dirigisme in steel, you're stuck driving an expensive low quality car, paying extra taxes for the privilege, and forgoing public services and investment that really would help you.)
It can be complicated. Think, initially, protectionism will benefit almost everyone involved in the economy. But the effects will largely depend if the industries (ie: individual companies) being protected are able to recover fast to catch up with foreign competitions.
This is where trouble happens. For that, if these industries fail to compete, what they'll ask for is more "protectionism" and usually it's downhill from there. They'll become a tax on the broader economy; and the practice of protectionism will find grounds to spread to other sectors.
> US Steel producers responded by lobbying the government to protect the industry so they could keep using their old steel furnaces. It didn't end well.
Not knowing the story too well, I wonder if Rearden steel was explicitly referring to this
Typo in footnote 2 (scan)
"Meanwhile, the carbon monoxide burns with a blue flame" should that be (instead of carbon dioxide - CO2 is the product, not reactant, that burns.)
