The Indefatigable Chinese

The US, worried about its increasing trade deficit with China, the decreasing number of jobs created at home, and the ailing steel sector in the US, decided to import a tariff of 25% tariff on all steel imports. It also decided to levy a special 200% import duty on import of Chinese steel and justified it by using the dumping argument.

Briefly, according to the WTO rules, a country cannot impose selective tariffs on goods based on geographical origin. Thus, in case a country is worried about increasing amount of steel being imported from China, it cannot selective put tariffs on only Chinese steel. Thus, the US imposed a tariff on all steel imports, which left many of its trading partners livid. It then made a few exceptions to Canada and Mexico, only to withdraw those later. However, there is one clause in the WTO, which allows you to target a country for tariffs – by showing that the country is involved in a process called dumping. Dumping is a case of price discrimination, where the producer is charging a different price to different customers. This is generally believed to be anti-competitive.

In China’s case, the allegation of dumping is based on the differential pricing of Chinese steel for consumers in China and the rest of the world. Since most Chinese steel companies are state funded, they charge a higher price at home and subsidises the export of steel, in order to conquer the other markets. China denies this, of course.

What is really interesting here though is that the Chinese have found a way to circumvent the additional dumping duties imposed by the US. China state-owned steel manufacturers are buying steel plants in other countries and then, shipping to the US, as reported in this WSJ article.

By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.

“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments.

Hesteel, a Chinese state-owned manufacturer, purchased a dying steel mill in Serbia, invested millions of dollars, ramped up production and has started exporting to the US. Not only that, it also gets to circumvent the high tariff on steel by the EU. By producing within the EU common market area, it can export to the rest of the European Union, without any tariffs or customs. Similarly, China is already investing in steel plants in India, Pakistan, Indonesia, Brazil, and many other emerging economies.

What China has managed to do is put US in a very peculiar position. If it wants to stop import of Chinese steel, it would now have to impose higher duties on a whole host of countries. If it does this, it will face severe backlash from these countries, which would end up severely hurting the US.

The cleverest move perhaps is that China has now forged a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania and is importing 300,000 metric tons of semifinished stainless-steel slabs from an Indonesian plant owned by Chinese state-owned companies. This puts the US in a real pickle.