Did Offshoring the Bay Bridge Really Save Money?

Did offshoring the Bay Bridge to China really save money? Maybe not.

Sunday’s NYT had an eye-opening article about the eastern span of the San Francisco-Oakland Bay Bridge actually being built in China, and then shipped to the United States.  Given the high unemployment rate here, that seems a remarkably poor use of money (see the piece by Clyde Prestowitz).

But something else struck me as odd about the NYT article. In terms of justifying the cost savings, it noted that:

California officials estimate that they will save at least $400 million by having so much of the work done in China.

I wondered where this $400 million number had come from, since no government statistics currently exist for comparing the cost of production in China with the cost of production in the U.S.  A little digging showed that the $400 million cost saving number dates back to 2004, when the prime contract0r submitted two bids for the project–“a bid of $1.8 billion using American steel and one of $1.4 billion using foreign steel.”  That difference–$400 million–has, as far as I know,  not been recalculated (the contractor would have no reason to redo the calculation, since they had already won the contract)(If anyone know of a recalculation, please let me know).

However, since then, the price of foreign steel has gone up faster and further than American steel. Getting an exact match is difficult, but starting in December 2005 the BLS began reporting import prices in a way that makes comparisons easier.  The chart below compares the change in import and domestic prices, as charged by the broad “iron and steel mills and ferroalloy manufacturing” industry.

You can see the import prices charged by foreign iron and steel mills went up 79% from December 2005 to May 2011, roughly double the 38% increase in the price charged by domestic iron and steel mills.

The relative change in steel prices clearly narrowed the cost difference between China and the U.S. Is it enough to eliminate the price difference between China and the U.S. for the Bay Bridge? It’s impossible to know without more information, but California might very well have made a different decision if it was bidding out the bridge today.

Comments

  1. The story of steel and China has been very similar to the old story of steel and Japan. As the U.S. steel industry began to collapse, insiders pointed out that Japanese steel exports were being produced from U.S. iron ore, and the price of the steel in the U.S. was less than the cost of the ore. Whether it was true I’m not personally in a position to say, but it certainly seemed true. Even so, the determination of China to peg the yuan to the dollar helps them compete unfairly in many arenas, but it seems to me to serve as a detriment for them when it comes to commodities like steel, and the inevitable trade-off has arrived. I say this a bit tentatively as, once again, the nitty-gritty is not that easy for any but the true insider to discover, but I’m thinking that this price behavior could have been predicted, given the current state of affairs.

  2. Although interest in this topic seems subdued, I personally find it fascinating and significant. Here is another article about it, interesting not for itself but for the comment by reader Sergei who says what I tried to say about the yuan in a much more articulate manner. http://www.businessinsider.com/societe-generale-on-the-dominos-teetering-in-china-that-will-lead-to-an-innevitable-increase-in-world-inflation-2011-5

  3. Sorry I seem to have killed this topic, but I can’t let it go — it is reported that the WTO has found China guilty of cheating on raw materials. It’s as simple as that. I suppose nobody is celebrating because the bottom line is that costs will rise.

    http://www.washingtonpost.com/business/worldbusiness/wto-rules-against-china-in-dispute-over-raw-materials/2011/07/05/gHQAtja4yH_story.html

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