Wall Street Journal: Why Bashing Chinese Steel Dumping Results in Bashing Allies

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There are tons of reasons not to like Trump’s trade games of chicken. First is that it isn’t clear what he is trying to accomplish, save the pleasure he gets from poking people in the eye with a stick and some talking points for upcoming elections. Second is that even though there is a case to be made for the US becoming more of an autarky, whether to increase national security or domestic employment, merely changing some trade rules of the road won’t get us there. The US has ceded too many critical skills, like operational know-how, that technocrats and MBA undervalue. Trump would need to engage in industrial policy when the both parties, but particularly Republicans, are allergic to that.1

Third is that Trump has not thought through the implications of succeeding, were he manage to radically reduce the US trade deficit. The willingness to run trade deficits is what assures the dollar its role as reserve currency. That confers the US a great deal of soft power, witness our ability to impose sanctions. Is the US ready to give that up?

However, most of the criticisms of Trump trade moves focus on different complaints: that Trump is threatening the architecture of trade rules and may kick off a trade war; that even though there is some merit in trying to rewrite the rules with China, the US should be focusing on industries of the future and not old economy ones like steel; and that Trump’s first trade salvos, his tariffs on steel and aluminum, are alienating our allies like Canada and Europe and not having much impact on China.

The Wall Street Journal, which like the rest of the business press, has been making unhappy noises about Trump’s trade brinkmanship, published a story tonight that shows that the conventional wisdom about China’s production is inaccurate. explains how China, facing antidumping tariffs on steel that can top 200%, have already been moving production offshore:

China’s steel-production boom took off around the turn of the century as Beijing threw its support behind a sector seen as vital to the nation’s emergence as a global economic power. The 2008 financial crisis prompted Beijing to undertake an economic stimulus program that included the construction of hundreds of new steel plants. Chinese steel production rose sevenfold between 2000 and 2013, when it accounted for half of all global capacity.

By 2013, China’s domestic economy was slowing, leading Chinese steel and aluminum producers to flood global markets and drive down prices. The average price of Chinese steel exports fell by about 50% between 2011 and 2016.

Governments around the world responded by imposing more than 130 antidumping tariffs against Chinese metals manufacturers, mostly on steel, depriving the domestic market of an important outlet.

Beijing responded by ordering capacity cuts: a net of 150 million tons of annual steel capacity is slated to be shut between 2016 and 2020, as are aluminum plants that were built without government approval. At the same time, in 2014, the government launched a plan, called International Capacity Cooperation, that enlisted Chinese state financial institutions to help manufacturers add production overseas…

In northern Brazil, a Chinese consortium is expected to break ground later this year on an $8 billion project to build one of the world’s biggest steel plants, expanding Brazil’s potential steel output even though the industry there operates at less than 70% of capacity.

“This is total nonsense, with all the idle capacity that we have,” says Alexandre Lyra, chairman of the Brazilian Steel Institute, which represents Brazilian producers.

The article recounts at length how government officials from Heibei province went shopping abroad for their biggest local employer, Hebei Iron & Steel Group. They found a mothballed steelmaker in Serbia, which the state had bought for $1 in 2012 from US Steel and had been keeping on life support at considerable cost. Again from the article:

During the talks with the Serbians, Hesteel pledged to invest at least $300 million in the plant over the next three years. Beijing touted the €46 million ($54 million) acquisition as one of China’s flagship overseas investments…

Hesteel executives have said that they quickly turned around the money-losing plant after taking control in June 2016. Serbian corporate records show an operating loss of $34 million over the next six months. Records for 2017 aren’t yet available.

“This is all part of a huge political initiative,” says Markus Taube, professor of East Asian economic studies at the Mercator School of Management in Duisburg, Germany. “They are extremely insensitive to losses.”

The EU for years has applied tariffs to low-price Chinese steel exports. Now, Hesteel’s Serbian plant can export tariff-free into the 28-nation bloc.

“We feel like the Serbian plant is a Trojan horse,” says Sonia Nalpantidou, a trade-policy expert with Eurofer, a trade association representing EU steel producers…

After purchasing the plant in Serbia, Hesteel began selling its output, including a sheet-steel product called wide hot-rolled coil, onto the U.S. market through Duferco, a Swiss trading company in which it owns a 51% stake.

Since 2001, China’s domestic producers of that product have faced antidumping tariffs of more than 64% at U.S. borders.

So even 25% tariffs that strike European and Canadian producers as offensively high are trivial compared to the tariffs imposed on steel made in China. Moreover, both experts and foreign officials say that these offshore Chinese manufacturers are heavily subsidized. For capital intensive industries like steel, getting subsidies to set up operations means they can keep aggressively undercutting their competitors.

And China is moving to subsidized offshoring to evade anti-dumping tariffs across a spectrum of basic industries. Again from the article:

“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. “None of this is economically viable under a supply-demand regime without state subsidies.”

I don’t see how this can possibly end well. The Chinese are setting out to bankrupt entire industries overseas. But those industries employ people who create end demand for its products. And none of these countries embrace MMT/Job Guarantee principles whereby if the private sector fails to create enough employment, the government has plenty that can be done to take up the slack. Another way to think of this is that China is exporting deflation in a world that is already heavily burdened with private and non-soverign-currency-issuer debt. As the example of Italy is showing, deflation (or merely super low inflation) and GDP shrinkage with an existing high level of debt leads to defaults, bankruptcies, and banking crises. So China will kill its end markets. Perhaps it doesn’t care, if its end game is subjugation, but turing the world into an open-air prison camp does not sound like a realistic end game.

Another conundrum is that even though it is easy to paint Trump as a reckless ignoramus who is threatening to upend a well-functioning order, the fact is that China has been flagrantly violating the rules and no one has wanted to do much about it. For instance, quite a few years ago, the US filed, and then withdrew, a case against Chinese and Indonesian coated paper makers for heavily subsidizing factory construction. Note that these would not have been classic dumping cases, since “dumping” is selling below cost, and cost as defined for dumping cases does not include the cost of the capital investment. After some years of to-ing and fro-ing, , but not very significant ones. So with the West so slow and hesitant to act, no wonder the Chinese have felt free to take so much ground.

In other words, Trump’s ham-handed efforts to deal with China’s many forms of trade cheating may have the unfortunate effect of distracting attention from the fact that the problem he is trying to address is real and not easy to remedy.

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1 Mind you, the US already has industrial policy by default. Just look at the industries that are heavily subsidized, explicitly and/or by tax policy: the military/surveillance complex, housing, banking, health care…

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18 comments

  1. PlutoniumKun

    Its a curious contrast to yesterdays article about China and its increasing control of crucial inputs for pharmaceuticals. Its entirely consistent with China’s known policy of strategic mercantilism to be willing to make huge losses in order to gain a decisive market share or monopoly in medicines, but its hard to see the benefit to China in funding steel mills around the world for the same purpose.

    I can’t see any huge benefit for China Inc. to be the main producer of steel, as its pretty hard to use this as foreign policy or trade leverage when in turn they need to import much of the ore and coking coal to produce it (not to mention that other countries might be tempted to nationalise the mills). I would guess this insane over-construction of capacity has more to do with domestic Chinese issues than any over-arching strategic purpose.

    1. The Rev Kev

      Sounds about right that last bit. We think of China as this huge, united behemoth known as China Inc but why wouldn’t there be little fiefdoms of power in the Chinese power structure with that concerned with steel being a particularly powerful fiefdom.

    2. Jim Haygood

      It’s Great Leap Forward 2.0, PK:

      Comrade Khrushchev has told us, the Soviet Union 15 years later will surpass the United States of America [in industrial output]. I can also say, 15 years later, we may catch up with or exceed the UK.” — Chairman Mao

      With no personal knowledge of metallurgy, Mao encouraged the establishment of small backyard steel furnaces in every commune and in each urban neighborhood.

      To fuel the furnaces, the local environment was denuded of trees and wood taken from the doors and furniture of peasants’ houses. Pots, pans, and other metal artifacts were requisitioned to supply the “scrap” for the furnaces so that the wildly optimistic production targets could be met.

      Industrial dominance is easy, if value subtraction is not an issue. In the US, global military dominance is lavishly funded to the point of pauperizing its peasantry — value subtraction again being a non-issue.

      Full-fiat nation states — a hideous global aberration that’s been with us since August 1971 — are insensitive to value subtraction. When some of them smack the wall and default, that will change.

      1. Jeremy Grimm

        I don’t think it’s a stretch to think that the making of steel has a special place in China’s mythology of industrialization. Mao’s backyard steel furnaces, as your comment reminds us, made no particular economic sense — but I believe they made tremendous ideological sense. Consider the feeling of empowerment a peasant might gain from the making of steel.

        Liking movies as I do I cannot pass over the Riddle of Steel:
        “Crom is strong! If I die, I have to go before him, and he will ask me, ‘What is the riddle of steel?’ If I don’t know it, he will cast me out of Valhalla and laugh at me.” ~Conan the Barbarian
        I also believe it is no stretch to suggest that the making of steel has a special place in America’s mythology of industrialization. Recall any inspiring stories from school about the great Carnegie Steel investments in making steel using the Bessemer Process and its place in building American Industrial might?

        The importance of ideology should not be ignored as Thulsa Doom explains to Conan, “Steel isn’t strong, boy. Flesh is stronger.” … “What is steel compared to the hand that wields it?”

    3. ewmayer

      It looks to be a another case – possibly the largest, collectively speaking – of Chinese SOE (state-owned enterprise) grifting. As Wolf Richter (bolds mine):

      By country, below are the largest steel producers in the world, with the US ranking fourth, behind India even. In 2017, the US produced 81.6 Mt. China produced 10 times as much, 831.7 Mt. Now find Mexico and Canada on this chart (hint, look low):
      [snip]
      Drilling down to the corporate level, we find that among the 12 largest steelmakers in 2017, five are owned by various government entities in China … This involvement in steelmaking by various government entities extends beyond the giant steelmakers. These steelmakers also receive no-questions asked funding from the four state-owned megabanks in China. Many of the steelmakers’ largest customers are also state-owned. China’s central bank, the PBOC, is part of the same team and makes sure that the state-owned banks don’t collapse from the results of their lending practices to state-owned steelmakers that have turned into loss-making zombies.

      It is Chinese government entities that together as a team totally dominate the global steel trade.

      This data set, provided by the World Steel Association, is what we need to keep in mind when we hear that the US imports very little steel from China. Of course! Chinese steelmakers, most of them state-owned and state-funded, transship the steel to other countries, from where it either gets shipped to the US, or where it gets processed in some way and then shipped to the US. It’s just a fig leaf.

    4. Mickey Hickey

      Risk management of important inputs to Chinese manufacturing is what China is accomplishing. If the US should decide to squash the flows of iron ore or bauxite from Brazil, Australia, Canada, Guinea to China then China has access to a flow of steel and aluminium products from its overseas plants. Similarly with oil China does not have all its eggs in one basket. Confucian management principles are being applied. Harvard and Yale have not picked up on this yet. Similarly after WW2 GB was importing iron ore from Murmansk USSR and exporting rolled steel to Romania and Nakhodka USSR. Those were the days when the US could not intimidate GB not to mind all of the EU.

  2. Scott

    In another example, last week a Chinese paper company bought mills in Maine and Wisconsin. Maine’s governor cheered the news. The last line of the article, stating, “Five paper mills in Maine have closed since 2014,” is incredibly depressing.

  3. cnchal

    “This is all part of a huge political initiative,” says Markus Taube, professor of East Asian economic studies at the Mercator School of Management in Duisburg, Germany. “They are extremely insensitive to losses.”

    How is that possible?

    Globalization is a disaster, no matter where one cares to look.

  4. a different chris

    You can’t see this all thru an economic lens. It obviously makes no sense for China to lose money on a Serbian plant… the “lost” money goes into Serbia and the mill’s customers, out of China in the purest sense.

    Makes more sense if you see China as insistent on becoming the world’s technology leader. You learn by doing. And I keep hearing that steel is some sort of low-tech product like Elvis paintings on black velvet or something. Wrong — anybody can bang out a fender. Try to make the kind of quality steel that you can successfully bang on. So the tariffs keep them from having everybody that would work in one of their home steel mills busy, but running a mill in Serbia at least keeps the engineers and managers in the game.

    However, economics don’t simply go away:

    >I don’t see how this can possibly end well.

    Me either. One more thing:

    >“We feel like the Serbian plant is a Trojan horse,” says Sonia Nalpantidou, a trade-policy expert with Eurofer, a trade association representing EU steel producers…

    Yeah, well ask the Serbians that work at, or work in support (from the electricity company to the food trucks) of the plant how they feel.

    1. Left in Wisconsin

      End well for whom? If you are the (permanent) low cost producer in an industry that has over-capacity, then overall demand is not your problem, at least until the very long term.

      Perhaps we are finally getting to the point where people start to see the world trading regime for what it is. There are subsidies everywhere you look. The notion that there is, or could possibly be, some free and fair “competitive market” is completely ludicrous. (Thanks economists.)

      The big difference between us and the Chinese is that their MNCs still seem to be fundamentally Chinese – with some allegiance to national interests – while our MNCs see themselves (insanely) as fundamentally global – without any allegiance to US national interests (like high-wage employment). Our MNCs don’t give a sh1t if global trade is “free” or “fair” – they just want it to work for them.

      I think when push comes to shove, Trump is more interested in Wilbur Ross’s interests than the interests of U.S. steelworkers. But perhaps he is opening a door that some other “economic nationalist” could break down.

      Matt Stoller has an interesting rant about China. Though he seems more certain about the CCP’e endgame than I am.

      1. Jeremy Grimm

        Interesting you should mention Matt Stoller regarding the topic of this post. At his New America bio:
        “Matt Stoller was fellow at the Open Markets program, where he researched the history of the relationship between concentrated financial power and the Democratic party in the 20th century” — and on his homepage he brags that he “was an editor of the financial site Cfdtrade.” The Open Markets program was the branch of “New America” that Goggle lopped off when they’re studies of monopoly practices reflected an unfortunate light on Goggle.

        Just as “free” competition enables all sorts of monopolistic and monopsonisitic business practices as described in Barry Lynn’s book: “Cornered — The New Monopoly Capitalism and the Economics of Destruction”, free-trade enables similar monopolistic and monopsonisitic business practices but on a much grander scale — the scale of giant Cartels and countries like China … and the US. China already has a large domestic market for goods and services and it is located very near other large potential markets. China also has very ancient reasons for not valuing relationships with Europe and the US as much as it might value its relationships with the very large populations and countries in its immediate sphere of influence.
        “I don’t see how this can possibly end well. The Chinese are setting out to bankrupt entire industries overseas. But those industries employ people who create end demand for its products.”
        But how much would China care if their policies ruin the economies of Europe and the US and ruin those markets for Chinese goods? China has no reason to love either Europe or the US and besides our own governments, our US POTUS, and our Corporations are doing their very very best to ruin our economies and markets without any help from China.

        As Barry Lynn details in his book “End of the Line: The Rise and Coming Fall of the Global Corporation”, our Corporations have crafted a fine and fragile web of supply lines for the inputs necessary to the production of the goods we rely on to maintain our economy and — in the case of drugs as noted in an earlier post — our very lives. China is wise to build cat-bird-seats here and there on a few vital inputs. How better to control things they object to like some of the US policies on Intellectual Property — one of the few things we have left to trade with them other than soybeans. The US has for many years used their comparative monopoly on high quality military weapons and associated easy financing to maintain control on other powers in the world [though unfortunately the vampire squids have sucked much of the high quality out of the weapons we sell — undercutting their control capability regardless of their financing].

    2. cnchal

      > Wrong — anybody can bang out a fender.

      Have you banged out a fender? You make it sound like all you need is mallets and a buck.

  5. Thuto

    Arcelor Mittal 2.0 writ large, with deeper pockets and more geopolitical influence to execute the strategy than Lakshmi Mittal had all those years ago. In its attempts to lock-in on China and have it in its tariff cross hairs, the US will unfortunately maim or kill some of its allies with friendly fire, and one suspects the Chinese knows this. Offshoring production achieves exactly this for China, muddying the waters by selling output through onshore companies that are protected by territorial free trade treaties. Unfortunately, there’s no easy way out of this, either ban FDI from China (reciprocal measures by China would be highly undesirable for western companies eyeing the super-large chinese market, for all intents and purposes this is a non-starter) or renegotiate a whole raft of already existing free trade treaties (e.g. having ownership supercede domicilium in determining whether a company benefits from free trade agreements, possible but will be stymied by competing interests and lack of political will). Check, or check mate by China??

  6. Thuto

    I concur of course that China risks killing its own markets in this game of geopolitical/geoeconomic chess. That endgame scenario aside, this strategy by China has the US in a bind, a rather serious one. It’s going to be a shooting fest of measures and counter-measures, with allies imposing measures on allies. We already saw this week the finance ministers of the G6 expressing their concerns to their US counterpart in the strongest of terms. It’s going to be increasingly difficult to present a united front with so much at stake. Dare I say this is something of a masterstroke by China, sowing this level of discord amongst Western allies, wittingly or unwittingly, takes some doing.

    1. Jim Haygood

      Dare I say this is something of a masterstroke by China, sowing this level of discord amongst Western allies.

      Though retaliatory tariffs are being imposed as we speak, Europe will find that the US with its less trade-intensive economy doesn’t much care. What the US cares deeply about, with an insane passion, is keeping its troops garrisoned on permanent bases in Europe. That is, booting out US troops is the only retaliation that will get its attention and produce loud yelps of pain.

      If China manages to bust up NATO, that would be not only a masterstroke but a boon to humanity.

  7. John B

    There seem to be two sources of Trump administration trade policy, with two sets of objectives.

    One is Trump himself, who relishes conflict. By provoking fights with foreigners he appeals to his core voters, and, in the case of trade, some important swing constituencies in industrial states. If the economy continues to do well overall, his trade policy may help him greatly in elections.

    Second are his trade officials, led by Ross and Lighthizer. They represent an unusual strain of conservatism, for the US — strong nation conservatives, they might be called. Perhaps the US counterpart of China. Unlike the libertarian, Austrian, or Wall Street factions, they agree with China that steel, aluminum, and other basic manufacturing are important drivers of technology and employment, and resent China’s long-standing industrial policy of destroying US manufacturing industries. They are determined to stand up to it. They might not even be averse to some industrial policy. Even though the rest of the Republican Party is dead set against it, the president has near total control over imports, which he can use to boost domestic manufacturing. Expect more conflict all around.

  8. Jeremy Grimm

    Trump is a dangerous clown and China is no paper Tiger but to my mind all other concerns become dwarfed with regard to maintaining US autarky. My concern extends beyond simple nationalism — which sin I freely admit to — but regards the very survival of our people and our way of life. We cannot and must not allow our country to rely on another country for a vital resource or critical good no matter what “wisdom” the Market promotes. It would be a grave mistake to rely on the present systems of transport and logistics for the goods we cannot live without. For that matter every community must become concerned for its autarky — especially communities of size. We are at the cusp of change, a brink. The economics of neocapitalism and the economics of Neoliberalism are dangerously flawed. We must put politics back into the topic Political-Economy. Pareto-optimality offers no answer and no regard to problems arising when someone stands on our air hose — the Market be damned.

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