Ross’ high-stakes gambles set path for Trump trade wars

Source: Peter Behr, E&E News reporter • Posted: Wednesday, March 28, 2018

When Commerce Secretary Wilbur Ross took his first big gamble on steel, it was with his and investors’ money. They took the risk, and when it worked, the payoff was huge.

In 2002, against the odds, Ross began buying a group of historic but destitute American steel companies that had been sunk by their outdated plants, cheaper foreign and domestic competition, and their underwater pension and retiree health plans.

Ross’ International Steel Group (ISG), the scavenger investment group he formed for this role, bought the steelmakers at bargain prices, kept the best parts, sold the rest, downsized payrolls, imposed new labor contracts and shed the firms’ commitments to their retirees.

When he turned around and flipped ISG and its companies to Indian steel magnate Lakshmi Mittal in 2004, he personally took away $267 million.

In addition to the profit from the Mittal sale, Ross’ organization had paid an average $3.42 per share to launch ISG as a private firm, then sold stakes to institutional investors at $25 to $35 a share when ISG went public, netting him $800 million, according to Mark Reutter, a former Baltimore Sun reporter and author of “Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might.”

Ross is now in the midst of a second gamble on steel for himself and his boss, President Trump, with much more at stake. With threats of trade sanctions, Trump and Ross are trying to force China to cut back on its market-swamping overcapacity of steel production. At the same time, they are confronting President Xi Jinping’s government, accusing it of extorting leading-edge technologies and trade secrets from U.S. companies as a price for entering China’s marketplace, or simply stealing the intellectual property in some cases.

Last Thursday, Trump announced he would levy about $60 billion in tariffs on Chinese imports for predatory trade practices on technology. His administration is also granting temporary exemptions from his previously announced tariffs on imported steel and aluminum for the European Union, North American Free Trade Agreement partners Canada and Mexico, Argentina, Australia and South Korea — but not Japan or China. Trump may also move to limit volumes of foreign steel and aluminum, as yet another new front on his “America First” trade offensive.

When Ross turned steel into gold for himself and investors more than a decade ago, the tools to succeed were in place. A lawyer who had long specialized in extracting value by restructuring bankrupt American companies — his “empire of the damned,” as Bloomberg Businessweek termed it — Ross was able to use the existing levers of U.S. bankruptcy law and the wealth-multiplying opportunities available to top-level financial insiders. Others could have also pursued productive steel assets at a big discount, but they lacked the insight or the nerve, as Ross himself said.

“We bought a collection of bankrupt steel companies, LTV, Bethlehem, Weirton, Acme and Georgetown. And amazingly, we were about the only bidder in each of those companies,” Ross said in an interview with Lawrence Kudlow, then a conservative television commentator on the economy, now Trump’s chief economic adviser.

“The rest of the story is brilliant, actually,” Kudlow said. “Wilbur Ross, miracle worker.”

Unlike his steel takeover strategy that took advantage of the rules of the game, Trump and Ross have turned against the existing structure — the post-World War II international agreements to foster wider global trade that they say haven’t protected American manufacturing. Instead, Trump threatens to junk the postwar consensus and court a trade war to get concessions from China and other nations.

And unlike Ross’ earlier moves, Trump is wagering other people’s money, risking losses for U.S. consumers, taxpayers, companies and investors if his strategy blows up into a widespread trade conflict, his critics warn.

Slash benefits to save jobs

Ross’ entry and exit in domestic steel involved exploiting interlocking strategies, according to the many accounts dissecting the way Ross did business.

An explicit trade-off underpinned his deals: Cancel or cut benefits companies promised retirees in order to save jobs for a much smaller number of current and future steel industry workers. By waiting until the companies had put themselves into bankruptcy, Ross was able to pick and choose among companies with the most competitive operations, offer buyouts, and walk away from bloated health care and pension commitments.

Under pressure to restrain rising wages during the 1960s, major steel companies instead promised ever richer retirement benefits. The deal for workers was, take lower wage gains now, but secure a more comfortable life after leaving hard, health-threatening plant jobs.

Bethlehem Steel Corp., the largest of Ross’ acquisitions, was paying benefits to about 75,000 retirees and family members when it failed, with every active worker supporting seven retirees and dependents. It also carried $3 billion in health care obligations to retirees and their families, with the oldest retirees gaining health care for $6 a month, news reports explained.

These costs were unsupportable, Ross insisted.

About 95,000 retirees of Bethlehem Steel lost $380 million in health care benefits when those benefits were ended in the bankruptcy process. The older retirees could move to Medicare. Others faced premiums of over $200 a month, according to news accounts at that time.

Ross had all the leverage he needed to win unprecedented labor contract concessions from the United Steelworkers of America, compressing job categories and work rules to gain efficiencies. In 1980, it had taken nine hours of work to make a ton of steel. That number shrank to two hours by the time Ross was done, analysts said then.

Ross benefited, as well, when steel company pensions were taken over, at a reduced level, by the Pension Benefit Guaranty Corp. The icing on the cake was President George W. Bush’s decision to impose high tariffs on steel imports, announced after Ross picked up the liquidated assets of Cleveland-based LTV Corp., the first of his steel acquisitions.

He bought when steel prices averaged less than $300 a ton. When sold, the price was over $550. Ross had gambled on this happening, as well, he told reporters then, and he won that bet, too.

After Ross sold to Mittal Steel Co., it then acquired the European steelmaker Arcelor SA in 2006. The resulting firm, ArcelorMittal, with its U.S. operations centered in Chicago, has more than 18,000 U.S. employees.

Challenging ‘China First’

Will it take another “miracle” to win the gamble that Trump and Ross have taken with China?

The challenge to U.S. producers from Beijing’s “China First” trade policies isn’t in serious dispute.

John Brett, president and CEO of ArcelorMittal USA, told Ross’ Commerce Department last year that China’s excess steelmaking capacity had led to a global supply glut that had battered the company’s business this decade. By 2015, its steel plate operations were running at 55 percent of capacity, sapping the capital that ArcelorMittal needed to put back into specialty steel products for energy and defense products, he said.

“Chinese government industrial and trade policies have driven Chinese steel production from 128 million metric tons in 2000 to over 808 million metric tons last year,” Brett said. Of that total, China exported 108 million metric tons, he said.

Martin Feldstein, the Harvard University economics professor who headed President Reagan’s Council of Economic Advisers, wrote in a recent opinion piece for Project Syndicate that historic trade strategies aren’t effective when it comes to doing business with China. The issue of intellectual property appropriation demonstrates that, he wrote.

“American firms that want to do business in China are often required to transfer their technology to Chinese firms as a condition of market entry,” Feldstein said.

“These firms complain that the requirement of technology transfer is a form of extortion,” he said. “Moreover, they worry that the Chinese government often delays their market access long enough for domestic firms to use their newly acquired technology to gain market share.

“The U.S. cannot use traditional remedies for trade disputes or World Trade Organization procedures to stop China’s behavior,” he wrote. “Nor can the U.S. threaten to take Chinese technology or require Chinese firms to transfer it to American firms, because the Chinese do not have the kind of leading-edge technology that U.S. firms have.”

William Reinsch, former president of the National Foreign Trade Council, now with the Center for Strategic and International Studies, has said there is an outside chance that Trump, in forcing the issue, would take the China trade confrontation in a new direction.

But rather than try to negotiate a common strategy on China with European and Asian allies, Trump’s aggressive bull-in-a-china-shop policy has threatened would-be partners with reprisals, too.

“If South Korea, Japan and other countries respond to do the same thing to the Chinese — to focus on the problem — that might actually be a good thing,” he said.

The Chinese would have to eat the surplus steel they pour into the global market so they can maintain employment, he added.

“The odds are they won’t. They’ll strike back at us,” he said.