Interview: How China kills U.S. jobs
Not Pretty, Not Rich is a newsletter about money, finance, and the economy written by me, Sam Becker.
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It’s Friday, September 18, 2020.
What’s shaping the world this week
Half of the country is on fire. I wrote about this very topic a few weeks back, and here we are again. California, Washington, and Oregon are burning up, and the smoke is even darkening the sky where I live, north of New York City.
Football came back. I didn’t expect to see any football played this fall, but it’s nice that there’s some semblance of normalcy. Plus, it’s interesting how the professional sports leagues have found a way to manage the pandemic risks with a remarkable degree of success.
More political craziness. There’s really too much to include here in a few sentences, but just keep in mind that the upcoming election is really going to dominate everyone’s attention for the next 50 days. Which brings us to our first topic of the week...
Would a Biden presidency mean you pay more taxes?
An analysis shows that taxes would increase under Biden’s proposed plans — but only for those earning a whole lot of money.
If Joe Biden were to win the presidency in November, his administration would look and behave a lot differently than the current one. And one fear that many people have is that Biden would come in with sweeping tax increases. While Biden has proposed tax increases, the vast majority of Americans wouldn’t see any large changes.
Increases would mostly affect those with annual incomes of more than $400,000, according to an analysis by the Penn Wharton Budget Model. Per that analysis, around 80% of proposed tax increases would affect the top 1% of earners, and the overall top income tax rate would increase to 43% from 31%. So, for wealthy households, it’s potentially a substantial increase.
I don’t want to get too in the weeds here, but I thought it was important to touch on this topic — I’ll probably write more about it in the coming weeks. But the takeaway is that a Biden presidency would likely lead to higher taxes — for both wealthy households and businesses. That would likely lead to slower economic growth and a fewer number of jobs created, so there are trade-offs.
You can also check out this analysis from the Tax Foundation for more.
Interview: How China kills U.S. jobs
I spoke with my cousin, who recently lost her job in an aluminum production facility, about how China influences the global aluminum market.
A few weeks ago, my cousin Christine, sent me an email sharing her recent layoff experience. Christine is young — still fresh out of college, really — and had been working as an engineer for Alcoa, a large aluminum producer. She was employed at a production plant in Ferndale, Washington, near the Canadian border, but told me that she and hundreds of her coworkers were being cut loose because American aluminum producers simply can’t compete on the global market anymore.
Intrigued, I asked if we could talk further, and we ended up spending about an hour on the phone so she could tell me the whole story. Here’s my interview with her, edited for clarity and length:
Sam: Tell me what’s going on — you’re being laid off from your job at Alcoa?
Christine: Yeah, I had been working at an Alcoa production facility in Ferndale for the past two years, and they recently announced the facility’s curtailment in April. I lost my job, along with hundreds of others, too.
Sam: Curtailment isn’t a term we hear all that often. What does that mean?
Christine: It essentially means it’s shutting down. It will continue to operate with a skeleton crew, mostly because if the company completely turns out the lights, they’re required by law to actually do some land reclamation and restoration — something that’s costly and that they won’t want to do. So, they’re instead curtailing it, which is pretty common in the industry.
Sam: What led to Alcoa’s decision to shut the plant down?
Christine: It’s all about what’s happening on the global market. Aluminum prices have fallen in a big way over the past couple of years. Prices last peaked back in 2008 or 2009 at around $3,000 per metric ton. Today, prices are somewhere around $1,700 per metric ton, and earlier this year when the curtailment was announced, they were around $1,400.
Source: The London Metal Exchange
Around 2009, prices crashed, and in short, the smelter simply can’t compete with prices that low. It’s not economically feasible for the company to continue operations, and as a result, it shut us down.
Sam: What happened to cause prices to fall so substantially in 2009?
Christine: China — that’s when China started to become a significant aluminum producer. Today, China is the world’s largest producer, with more than 3 million metric tons produced per month. There are around 5.5 million metric tons produced globally every month, and plants in North America produce only around 330,000 metric tons. A lot of that was from Canada, too. To say the least, China is kicking our butts. And the pandemic gave China a bigger opportunity to crush the competition, too, as many production facilities in North America shut down. But Chinese plants never stopped or even slowed down, and flooded the market even as demand for aluminum slowed, too.
Source: The International Aluminum Institute
Sam: Why are Chinese smelters able to produce so much more, and at a lower cost?
Christine: They don’t really have to follow any rules. Workers are paid less, as they don’t follow nearly as many (if any) safety rules or need to abide by government-mandated regulations which can increase costs. In the U.S., we also have environmental rules that producers need to abide by, something else Chinese companies don’t need to follow.
Sam: So they’re basically plowing ahead, full-steam, with no cares or worries about the health and safety of workers, or the potential environmental impacts? And since American companies do need to abide by some rules, they can’t compete?
Christine: Basically, yes. That’s why the U.S. now only has six, I think, operating smelters. And most of them are only producing at partial capacity.
Sam: And this is how China can, if it wants, affect a given market, put foreign companies out of business, and as a result, people like you lose their jobs?
Christine: Yeah, and of course there are some other things affecting the market, too. For example, the Trump administration put tariffs in place that have thrown things into disarray. They were meant to increase the price of foreign aluminum, thus making U.S. producers more competitive, but it hasn’t really worked as planned.
And then there are also the incentives being offered by the government to keep plants like mine open. Another Alcoa plant in upstate New York, in Massena, was given millions in incentives to stay open and preserve 400 or 500 jobs up there.
Sam: Oh yeah, we’ve seen that kind of thing in Washington with Boeing — they get substantial tax breaks in exchange for keeping people employed.
Christine: Right. But they don’t always keep up their end of the bargain.
This week’s numbers and links
25 years/25 weeks: The Gates Foundation released a report discussing our approach to the pandemic. Here’s a snippet: “Consider vaccine coverage, which is a good proxy measure for how health systems are functioning. Our data partner, the Institute for Health Metrics and Evaluation (IHME), found that in 2020 coverage is dropping to levels last seen in the 1990s. In other words, we’ve been set back about 25 years in about 25 weeks.”
5: The biggest U.S. utilities are committing to zero carbon emissions by mid-century.
4.5%: The estimated fall in global GDP due to COVID, according to the latest outlook from the OECD — up from an expected decline of 6% earlier this year.
I liked this post by Ryan Holiday that has ties personal finance to Stoicism — It Costs What It Costs.
With fires and hurricanes everywhere you look, a question: When will we start to abandon parts of the world because of climate change?