U.S. Trade with China

1. U.S. Trade with China This Decade’s 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 & Government’s Role in Trade

3. The US-China Rocket Ride • Trade w/ China grows rapidly each year, exceeding $300B in 2007. • The US in China’s 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

7. Total US Steel Trade (Tons)

8. 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 • Government’s Role in Economic Growth • Bail Outs as Solutions

9. The Candidates’ Positions: Trade

10. The Candidates’ Positions: Energy

11. 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.

12. 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.

13. 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 government’s 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.

14. Letting the Air Out of the Bubble • The prosperity of the 1920’s 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.

15. 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 20’s 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.

16. Economic Downturns & Taxation: Hoover’s 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.

17. 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.

18. 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.

19. 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/ people’s income is usually a bad idea and can force you into a new career.

20. 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 government’s 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.

21. 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. However…these 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 Ruble’s 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. It’s déjà vu all over again.

24. 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.

25. 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 Street’s Crash of 1929 reminds us of today’s 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.