A guy by the name of Harold Sirkin wrote a pretty good piece for Bloomberg Business Week called Made in the USA – and China. What is particularly impressive is that Harold overcame the twin burdens of a Wharton education and being a CPA to figure out what was patently obvious to us on Evolving Excellence less than a year after we did. While we wrote in January, "Chinese products are up 5-10% just in the last six months and will go up further and faster in the next six"; Harold figured out the same thing a couple days ago. (Actually we predicted it on the nose over two years ago, but we won't hold Harold to that standard)
Where Harold has it wrong, however, is in repeating a long outdated mantra about the Rust Belt states. He wrote, "U.S. manufacturing continues to shift from the highly unionized Rust Belt to the lower-cost South."
That was true once -long ago - but has little to do with manufacturing today. Oh, I always enjoy an opportunity to skewer the Obama administration's buffoonish attempts to bring their irrelevant cronies in organized labor back from the dead, but the fact is that only 10.7% of manufacturing workers in the USA are union members – and many of them are the auto industry new hires who get a fraction of the wages and bennies their older union brothers get. In Michigan only 16.5% of all workers are union members, and that includes the heavily unionized public sector. Unions have little to do with the obstacles to manufacturing here in the Rust Belt – and naive environmentalism has everything to do with it.
For those in the intelligencia who spend hours wistfully gazing across the Atlantic for inspiration from Europe, or staring out across the Pacific with visions of the great Chinese miracle, you are apt to have paid scant attention to the small-by-comparison Great Lakes as you 'flew over'. In particular, your knowledge of the economic and geographic significance of the Lakes might be lacking. So here's a primer:
Way up on the left is the Mesabi Range – the mother lode of iron ore. Down and to the right are the big coal fields of West Virginia, Pennsylvania, and some of Kentucky and Ohio. The basic recipe for steel is: Iron Ore + Coal + Fire = Steel. Those great big lakes hook the iron ore and coal together on a huge,cheap, aquatic super-highway; so from Pennsylvania to Chicago there were lots of steel mills. That big red "D" is where Detroit is. No coincidence that it is smack in the middle of the coal and the iron ore and right on the lakes. The auto industry, and a lot of basic, steel using manufacturing were in the middle of this incredible gift of natural resources and transportation infrastructure.
The death knell of the Rust Belt began tolling with the passing of the Clean Air and Clean Water Acts in the 1970's and 1980's, that really kicked into high gear by the 1990's. The cost of making steel went up a lot.
The American people got all that clean air and clean water for free, so it would seem. That is because at about the same time we went on this service economy/ flat earth/globalization kick and decided it was a good thing to import everything from backwater places made by poor folks living in squalid conditions – conditions without things like clean air and clean water.
So the economic basis for the Rust Belt – steel - was ripped out of it and sent to China. In fact, we import close to $3 billion worth of what used to be the heart and soul of the Rust Belt every month. All the pollution was sent there along with it. That is why it is 'Feel Good Environmentalism". The pollution levels are higher than ever – but we sent it to the other side of the planet where we don't have to look at it, so we get to feel good under the illusion of having helped the environment. And we get to feel good for nuthin'. Steel cost didn't go up because it is made without the added burden of the cost of complying with our environmental rules and regs, which China ignores. Clean lakes, clean air, and all seeming to be ours at no additional cost – what's not to like?
Of course it isn't free. It cost us tens of thousands of great value creating jobs – union or not. As manufacturing comes back, however, there is no longer any geographic reason for it to go to the Rust Belt. The jobs coming back are the ones lost in foolish pursuit of cheap labor – the ones lost to feel good environmentalism won't be back. So why make cars in Detroit if all the steel is imported from the toxic wasteland of China? Might as well make them in the South – or the North, East or West. If the source of steel doesn't matter then the lakes don't matter; and if the lakes don't matter, of what importance is Detroit?
Don't get me wrong. I am very glad we cleaned up the lakes and keep them in such great shape. I have spent more time in, on and around the Great Lakes than anyone I know. I love everything about them and would gladly pay more for steel to have them the way they are. It's the deception that we cleaned them up for free I despise. We should charge an environmental equivalency tarrif on steel coming from any country without the same clean air and water standards we set. Legitimately cleaning up the planet has a price, and the American people should know what the real costs of environmental regulations are, and decide whether they want to pay them.
Rust Belt manufacturing will come back when steel comes back – and steel comes back when we quit hiding behind long oudated myths about labor unions; and get out of the environmental dream world of free clean air and water.
Former Michigander says
A note on Great Lakes steel–the Algoma Steel Corporation still operates a successful steel mill (in Canada, however)at Sault Ste. Marie and you can take a tour boat through the Soo Locks right up to the mill. They mostly use Mesabi Range iron ore. It is also worth noting that some of the old mills in and near Gary, IN are operating again. They built “riverboat” casinos next to the old steel mills when the mills were shut down and now there are alternating casinos and steel mills lining the south shore of Lake Michigan. Must make it fun for the resorts to have all that smoke and noise next door!
Pete says
I’m not with you on this one Bill. I worked across a small river from a Republic Steel plant. When they went to basic oxygen, we couldn’t see the sun anymore. I drove past Bethlehem Steel on numerous occasions. Very difficult to breath the air. My residence is within a few miles of the former Roblin Steel site. The slag dumped near the Niagara River are not forgotten by nearby residents. Did you ever work or live in an area where you were subjected to the air and water emissions?
Unions gain strength from poor management practices and your famous failure to respect people. Similarly Clean Air and Water regulations resulted from a failure to respect workers, neighbors and yes, the environment. I took a cab ride in downtown Shanghai a few years ago and my throat and eyes were burning after 20 minutes. Is this what you want to return to? I doubt it very much. You misidentified the root cause in my opinion.
Bill Waddell says
You missed my point completely, Pete. Probably my fault for poor writing.
I wrote, “Don’t get me wrong. I am very glad we cleaned up the lakes and keep them in such great shape. I have spent more time in, on and around the Great Lakes than anyone I know. I love everything about them and would gladly pay more for steel to have them the way they are. It’s the deception that we cleaned them up for free I despise. We should charge an environmental equivalency tarrif on steel coming from any country without the same clean air and water standards we set.”
I have been to Shanghai – and a whole lot of backwater places in China much worse than Shanghai and every bit as bad as the old Great Lakes steel mill towns. That is precisely my point – we did not reduce polluton – we merely exported it to China. The planet is no better off – we just get to feel good about not having it in our corner of the planet any more. And we lost a lot of good manufacturing jobs – union or otherwise – in the process.
Clean air and clean water are good things – but they cost more. We avoided paying for clean air and water by offshoring it to China. If we want it we should be willing to pay the price for it. We should charge a tarrif on Chinese steel to compel them to put in place the same environmental regulations that we have. That would elevate the cost of Chinese steel, just as the regs have elevated the cost of American steel.
You wrote that unions “gain strength from poor management”. Unions are as dead in manufacturing in this country as Marley’s ghost. By your logic I assume that means we now have good management.
Jim Fernandez says
Great point and a piece of writing Bill….
Dean says
In Pete’s defense, Bill, your piece comes across as an anti-environmentalism diatribe until your thesis, which is a good one, finally makes an appearance at the end.
Ultimately, though, your argument is somewhat of a strawman. For every “nimby environmentalist” that is solely concerned with the environment in their own back yard, you’ll find another that knows we have simply shipped the problem offshore.
Your argument for an environmental equivalency tariff is a good one, although not novel. I’ve heard such proposals before — from environmentalists who, like you, are concerned that we have simply externalized the costs of clean air and water.
david foster says
Interesting post. I wonder what % of the total cost of a car was represented by steel when the original auto-plant location decisions were made, and how it compares with the current cost structure.
Bill Waddell says
David,
Whatever the steel content was, it was signficant enough for Henry Ford to dredge the Rouge River and build a lake port for the ore boats from Lake Superior to offload to his own steel mill at the front end of the plant.
I think there was also a cultural element. Steel working in general spawned the early machine tool industries, and the Great Lakes region had a core mechanic/machinist culture as a result – a perfect breeding ground for automobile innovation.
The original autos had a significant wood content – also a Great Lakes staple – as well, which may have played a part in things.
Bill Waddell says
Thanks Dean, but I think the ‘nimby environmentalists’ outnumber, or at least out-weigh, the ones with a global outlook. Why else would China and their ilk get a free pass at Kyoto, Copenhagen and elsewhere?
david foster says
“The original autos had a significant wood content”
Enough wood content to cause Ford to seek an outlet for the scrap wood left over from the manufacturing process….apparenty that’s the origin of Kingford charcoal.
Bill Waddell says
David,
According to Seeking Alpha:
“Steel is the most common material in an auto. Approximately 55% of a car’s weight comes from steel, according to The World Steel Association. In 2007, the average car contained 2,400 pounds of steel, and the average light truck or SUV 3,000 pounds of the metal. GM alone buys 7 million tons of steel for itself and for resale to its suppliers each year.”
http://seekingalpha.com/article/106579-cars-and-metal-metal-and-cars
The weight of a Model T was only 1,200 pounds. The weight of the 1936 Chevrolet Master Six was 2,800 pounds.
It seems as though the steel content in terms of pounds or cost per car is as high or higher than ever.
James says
I’m a huge fan of yours Bill, thanks mainly to Kevin Carson’s review of your book Rebirth of American Industry, but on this issue I beg to differ. I’m no expert, as a matter of fact, I’m not even American, but from a quick Google search, I’ve concluded that its as per usual the death of the American Steel Industry, is due primarily to managerial incompetence, short-sightedness and a reliance of these monolithic conglomerations upon the favourable intervention on their behalf of a compliant State bureaucracy.
According to a publication about Protectionism and Industrial Dumping Laws, by Claude Barfield, the Steel Industry, managed to get exemptions to the Clean Air Acts. They got a reprieve until 1985 and they convinced Congress to enter a thirty year “Stretch Out” provision in the 1990 Clean Air Act.
Should they have invested in the far more efficient and productive electric arc powered mini-mills the point would have been moot.
http://tinyurl.com/3fl4cuo