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Global Crisis Blog

Made in China America:

It’s NOT Their Labor Costs!

By Shlomo Maital

  An American steelmaker, Bill Hickey, who runs Lapham-Hickey Steel Co., explains on BBC’s Business Daily why China is competing unfairly with his company.  It’s NOT about the cheap labor, he says.

  The price of steel on world markets today is about $235 per ton.  The cost of shipping steel from China to the U.S., for instance, is $70-$80 per ton, even at today’s depressed shipping costs.  The remaining costs are labor and materials. Materials cost about the same on world markets, and give China no advantage.  The cost of labor per ton of steel is no more than $35/ton.  Labor is an almost negligible input. So China faces a disadvantage of $80/ton in shipping its steel to the U.S., while US-located steel companies have no such costs.  Suppose, now, that Chinese labor costs nothing at all, it is absolutely free.  It still would not give China a sufficient cost advantage to enable them to export steel in massive amounts to the U.S. 

  What then does give China the advantage?  Capital, not labor!  China’s government subsidizes the capital used by steel producers in many ways.  Chinese banks are largely government-run and supply cheap credit.  Land is subsidized.  And above all, China’s government offers up to a 40 per cent subsidy per ton, by ensuring that the Chinese currency, the renminbi, is undervalued, meaning that you pay fewer dollars for a unit of Chinese money, in order to buy Chinese steel.   China uses its capital to buy U.S. dollars,  which is directly equivalent to paying a 40 per cent subsidy to its steel exporters, equivalent to about 40 percent of the price of steel, or about $100/ton. 

    Of course these numbers apply not only to America, but to other countries as well – all the countries who make steel, or who used to, before China blew their plants out of the market. 

    Why doesn’t America fight back?  Why don’t other countries?  In an era of high and rising unemployment, when jobs are scarce, why are countries importing unemployment when they import steel?

   It is a mystery. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
November 2010
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