Trade and import substitutions

By Fester

Inflation has long been contained to the non-core products.  This means if you don't need to eat, drive, heat your home, pay a mortgage, or go to the doctors, prices have been stable.  Otherwise you were screwed.  Now we can add that inflation is contained if you don't need to build anything with steel in it.  Raw material prices are doubling for some of the world's largest steel producers, as shown in this Guardian article (via Kat):

China has agreed to a 96.5% increase in iron ore prices in long-term contract discussions with Rio Tinto...

The agreement between China's largest steelmaker, Baosteel, and Rio Tinto is the largest annual price rise ever recorded

Iron ore is a low value bulk commodity.  Profitabily shipping it between continents requires low fuel costs, efficient ships, and large labor/energy arbitage differentials.  Paul Krugman is passing along an interesting working paper on the rise of vertical specialization and how raw material and transport costs impact trade.  China is producing intermediate and low value added goods from local and imported raw materials.  National profit margins are being squeezed from the higher costs of shipping goods across the Pacific to America and from the higher costs of buying raw materials such as Australian iron ore.  Fewer goods are economically viable in China under this economic regime. 

This means that American steel factories that are fed by American raw materials are now marginally more competitive and can either capture a larger market share, or improve their margins as prices creep up and their cost structure is less impacted by the decline of the dollar for domestic goods and a shorter supply chain.  This is one of the steps of balancing.