trade

The Indefatigable Chinese

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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.

 

Brush up on Your History, Mr. President

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Back in 1930, 1028 prominent economists wrote a letter to Congress urging them to reject the highly protectionist Smoot-Hawley Tariff Act. Messrs Smoot and Hawley, Senator and Representative respectively, sponsored the Tariff Act which raised the tariffs on more than 20,000 imported goods. Congress did not heed to the advice of the economists and went ahead with the Tariff Act. Naturally, other countries followed suit and retaliated against the US protectionist measures. This had disastrous consequences on the American economy and global trade, in general.

US imports decreased 66% between 1929 and 1933, and exports decreased 61% in the same time period. Gross National Product fell from $103 billion in 1929 to $76 billion in 1931 and bottomed out at $56 billion in 1933. Overall, world trade decreased by some 66% between 1929 and 1934. The tariffs, which were meant to protect American jobs, did not do much on that account either. Unemployment was at 8% in 1930 when the Smoot–Hawley tariff was passed. The rate jumped to 16% in 1931, and 25% in 1932–33. To be sure, not all of these effects can be attributed solely to the protectionist measures, given that the economy was in a downturn already, but it did have a significant negative effect.

Now, in 2018, President Trump has introduced a host of protectionist measures and imposed tariffs on washing machines, solar components, and even steel and aluminium used by U.S. manufacturers. With the reintroduction of tariffs, the economists are back once again. More than 1100 economists, including several previous Nobel prize winners, have signed a letter to Trump warning him of the dangers of the new protectionist measures. They draw his attention to history, to the Smoot-Hawley tariff in particular. In fact, the latter half of the letter just reproduces the economic principles laid out in the original letter. They reason that though the components and volume of trade have changed, “the fundamental economic principles as explained at the time have not”.

We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. A higher level of protection would raise the cost of living and injure the great majority of our citizens.

Few people could hope to gain from such a change. Construction, transportation and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades, and scores of other occupations would clearly lose, since they produce no products which could be protected by tariff barriers.

The vast majority of farmers, also, would lose through increased duties, and in a double fashion. First, as consumers they would have to pay still higher prices for the products, made of textiles, chemicals, iron, and steel, which they buy. Second, as producers, their ability to sell their products would be further restricted by barriers placed in the way of foreigners who wished to sell goods to us.

Our export trade, in general, would suffer. Countries cannot permanently buy from us unless they are permitted to sell to us, and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them. Such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods.

Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations. A tariff war does not furnish good soil for the growth of world peace.

P.S: I had recorded a “The Seen and The Unseen” Podcast with Amit Varma on the 8 Myths of Protectionism. Check it out: