Tag Archives: anti-dumping

China’s Steel: The Big Chill

CHINA’S STEEL INDUSTRY is huge — and its proposed restructuring is a commensurately massive task. The State Council has approved a cut in steel production capacity by 100 million-150 million tonnes over an unspecified time frame, part of a broader plan to reduce industrial capacity as the economy slows its growth rate and rebalances towards consumption-led growth.

In the steel industry’s case, with demand in China shrinking for the first time in a generation in what is a structural not cyclical change, that could cost as many as 400,000 jobs, according to Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute. To put that in context, the iron and steel sectors employ more than 6 million people, accounting for some 4% of total industrial employment.

However, even production cuts on the scale proposed would be sufficient to remove only one-third to one-half of the estimated overcapacity in the industry. The new five year-plan is said to target a reduction in the industry’s annual production capacity to 700 million tonnes from the current 1.2 million tonnes.

Meanwhile, China’s steelmakers have found themselves in the middle of an unexpected trade spat with the United Kingdom, whose own small steel industry is facing the loss of one of its storied steel plants, Port Talbot, now owned by Tata Steel, with the finger of blame pointed at China for the effect its overproduction has had on depressing world steel prices.

When China started industrializing in 1980, it produced less than 40 million tonnes of steel a year, accounting for 5% of global steel output. Last year, it produced 804 million tonnes, just shy of one-half of world output, according to the World Steel Association’s data.

Crude steel production, China vs rest of world, 1980-2015 '000 tonnes

As the chart above of China’s crude steel production against that of the rest of the world’s shows, China’s steel output took off a decade or so ago. Annual production has now tripled from 2003’s level, peaking at 832 million tonnes in 2014.

However, China cannot consume all the steel it is producing, although it is important to note that it is not self-sufficient in many types of speciality steels in particular, of which it imports 20 million tonnes a year.  Moving into high-end steelmaking is the direction in which the industry will be pushed by policymakers, to meet the increasing needs of the advanced engineering industries such as aerospace that have been designated at China’s industrial future.

However, this year, crude steel output may drop for the second successive year, to 783 million tonnes, on official estimates. The domestic property market, a significant customer, has slumped and infrastructure spending has been reined in. 

China still consumes the equivalent of about 45% of global steel production, so it has increasingly turned to export markets, particularly the U.S and the E.U., to rid itself of its surplus stocks. Chinese steel makers sold more than 100 million tonnes abroad for the first time last year, a 20% increase on 2014’s export volumes which were themselves, double the previous year’s level.

With Russia and Ukraine also turning aggressive exporters, it is not surprising that global steel prices have slumped to their lowest levels in more than a decade, with the depreciating yuan making Chinese steel even cheaper for foreign buyers. A tonne of steel billet sold for more than $500 a tonne at the start of 2012; today it sells for $50 a tonne.

Wherever China’s export prices lie in the inevitable chicken-or-egg argument, the world’s steel industry is in disarray. Angang Steel Co., China’s fourth-largest mill, warned that not just China’s but the global steel industry’s crisis has become so severe that it’s comparable to a new ‘Ice Age’. 

Angang, like China’s other big mills, has just announced an annual loss for last year, in its case of 4.59 billion yuan ($710 million), compared with a profit a year earlier. Overall, the Chinese steel industry recorded estimated losses of $12 billion last year, making it an easy target for those that accuse it of using state subsidies to let it dump steel at below cost on world markets.

The U.S.and the E.U. have initiated anti-dumping investigations against Chinese steel exports, prompting tit-for-tat anti-dumping tariffs including the newly announced ones on the grid-orientated electron steel (GOES), used in power and audio transformers, from the E.U., U.S. and South Korea. Japan, South Korea and India have also initiated anti-dumping complaints against Chinese steelmakers.

The bigger political concern for Beijing is not being caught in a trade skirmish with the UK, whose loss-making steel industry is only one of those within Europe that feels it has been battered by China’s cheap exports, but that it may put the  determination of whether or not China is a ‘market economy’ under World Trade Organisation rules at risk. The E.U. still has to decide its position on the issue, which has broad implications for how China would be treated in anti-dumping disputes.

The even bigger concern for Beijing is the risk of domestic social unrest  sparked by large-scale layoffs not just in the steel industry but across its heavy industry.  The coal, cement, aluminum and glass industries are all facing similar restructuring. As we have noted before industrial unrest is on the rise. In one of the latest incidents, hundreds of steel workers in Tangshan in Hebei province demonstrated in support of their demands for payment of wages after their plant was closed, according to the China Labour Bulletin, a Hong Kong-based labour activist group.

Social unrest, not trade policy, will be Beijing’s priority.

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Subsidy Or Welfare Spending?

In an economy such as China’s, standing somewhere uncertain in the transition from being centrally planned to a market economy, is everything a subsidy? The question is raised again both by the World Trade Organization’s surprise ruling that the U.S. had introduced illegal anti-dumping and anti-subsidy duties on some steel exports and by a new World Bank research working paper looking at the effects of a countervailing duties case brought by the United States in 2007 against Chinese imports of coated free sheet paper which were alleged to be being sold at below fair market value because of government subsidies to the Chinese manufacturers.

That case petered out after the U.S.’s International Trade Commission eventually found that no injury had been done to American paper producers. Its significance lies in that it reversed a long-standing American policy of not imposing countervailing and their sister anti-dumping duties on exports from non-market economies (into which category China falls until 2016 under the terms of its joining the WTO), thus opening the door for at least eight such trade actions from a wide range of industries.

Wonk warning: The paper will put any trade policy wonk in pig heaven. You will be neck deep in WTO rules and regs and the arcane arts of diving fair market value and identifying subsidies. If that is what fascinates you, you will find it a fascinating case study. If that’s not you, read on here.

The broader question is how does China, or any other transitioning economy for that matter, implement social and economic development policies it legitimately wants to pursue, as set forth, for example, in the new five-year plan, without distorting trade? What counts as an export subsidy and what is fair game for a countervailing or anti-dumping duty? For example, does the VAT rebate that Chinese farmers get (they effectively pay 5.8%, not the full 13% as part of the push to narrow urban-rural income disparities) count as an export subsidy, as some at the U.S. agriculture department argue? Or discounted land or energy supplies given by central or local governments as an inducement to attract new industry to desired regions, as some in the U.S. steel industry promote. What about a bank loan; the U.S. commerce department has determined that the domestic banking sector doesn’t operate on a commercial basis? Or China’s managed currency, which some in the U.S. Congress want made subject to trade remedies? Even censorship is starting to come under the microscope to examine if it, too, is a trade issue.

China has made great progress in reducing its overt subsidies (tariffs, subsidies and export taxes/rebates), down from 8% of GDP in 1985 to 0.7% by 2005 according to one 2007 study. But there are still a lot of subsidies designed to promote economic and social welfare goals, particularly poverty reduction and environmental protection, some of which are reported to the WTO but which need to be made trade neutral and applied according to universal principles not discriminatorily in line with WTO rules.

It is now a reasonable argument to make that U.S. trade remedy laws have strayed far from their original purpose, and are now being used by special interests to shield themselves from competition. Greg Mankiw, the Harvard University economist who is a former chair of the U.S. President’s Council of Economic Advisers, has said, “Anti-dumping is the ‘third rail’ of U.S. trade politics, with few politicians of either party willing to point out its broadly negative impact.” The World Bank paper quotes recent research that found that each job saved by steel tariffs cam e at the cost of three jobs in steel-using industries and caused economic distortion equal to some $450,000.

The paper suggests three remedies: contesting these cases in the courts or via the WTO disputes mechanism, as in the case of the steel duties–China and its companies now have hordes of trade lawyers in Geneva, Washington and Brussels on retainer; changing the rules on countervailing and anti-dumping duties via the Doha round of trade negotiations, but which would depend on the chimera of the Doha round actually being concluded; and China advancing the date of its recognition as a market economy from 2016, which would come with its own baggage. That, though, would be the idealists’ solution as it would let China provide a model for developing economies designing industrial and development policies intended to achieve social objectives that don’t simultaneously distort trade.

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WTO Hands Beijing Big Trade Win

The World Trade Organisation’s ruling at the end of last week in favor of China’s appeal against E.U. anti-dumping tariffs of imports of Chinese screws and other fastenings is significant. It undercuts the basis on which the E.U. and the U.S. have imposed a welter of similar antidumping tariffs against other Chinese imports (WTO report in full). Chinese goods have been the subject of antidumping measures by the E.U. and U.S. in 445 cases over the past decade, accounting for one in four of those imposed by all WTO members (which has included China since 2001).

The essence of the WTO’s ruling is that the methodology that the E.U. uses to assess the true production cost of Chinese goods is flawed and thus there are factors other than state aid that makes their manufacture cheaper than European-produced equivalents. Beijing has publicly played down the importance of the decision, but E.U. officials have described it as a “significant setback”. They have 60 days to appeal. We believe that unless the E.U. can see some sort of workaround, a challenge will be mounted because of the precedent it sets. With Beijing playing increasing legal hardball at the WTO, it is game on.

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Follow The Honey

[picapp align=”center” wrap=”false” link=”term=china%2c+honey&iid=981429″ src=”http://view3.picapp.com/pictures.photo/image/981429/beekeepers-work-cole-field/beekeepers-work-cole-field.jpg?size=500&imageId=981429″ width=”500″ height=”333″ /]

The U.S. has imposed anti-dumping penalties on Chinese honey (above) since 2001. So little surprise that there have been attempts to circumvent them; honey laundering is the cheap joke. This has gotten worse as a mysterious disease has been devastating U.S. hives for the past five years. America now produces less than a third of the 375 million pounds of honey it consumes a year. China, for its part, produces a quarter of the world’s honey and is a leading honey exporter.

One route for trans-shipments has been through Germany. Now the U.S. has indicted 10 executives of Alfred L. Wolf Gmbh, including its chief executive, on charges that they illegally imported more than $40 million worth of Chinese honey since 2002, thereby dodging $80 million in anti-dumping duties, which might make this the biggest fake food transshipment case in U.S. history. Alfred L. Wolf, once part of the  Hamburg-based trading house, Wolf & Olsen, became the similarly-based natural raw materials company, Norevo, in February.

Those indicted potentially face up to 20 years in prison if found guilty. One Chinese national, Gong Jie Chen, a sales manager for QHD Sanhai Honey in Qinhuangdao in Hebei has also been indicted. He is accused of setting up QHD as a front company in the operation which is said to have mislabeled Chinese honey as coming from Russia, India, Indonesia. Reports from Australia say Chinese honey has also been routed to the U.S. through there.

While this is not the first honey laundering case to be brought, it is potentially the biggest and comes during a heightened U.S. crackdown on illegal imports of substandard and counterfeit products. Though the U.S. honey ban was on anti-dumping grounds, there are also health safety concerns over the levels of the antibiotic chloramphenicol, which can cause serious illness, in Chinese honey; Chinese beekeepers have been giving their colonies antibiotics to keep them healthy thought the drug is banned in both the U.S. and the E.U.

With the U.S. Congress seeking to impose stricter anti-China trade restrictions, albeit in a misguided attempt to protect U.S. manufacturing jobs, this alleged malbeesance (sorry, couldn’t resist) comes at a bad time.

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