Let’s set aside Donald Trump’s one-track talk on China as a currency manipulator for just a sec, and focus on a slightly less understood, and arguably bigger, issue — the role of Chinese state subsidies and state-owned enterprises.
Using the steel industry as an example:
Top 10 Chinese Steel Companies in 2014
With the exception of Shagang Group, China’s biggest steel companies are owned — therefore subsidized and otherwise supported — by Beijing. Courtesy of the American Iron and Steel Institute (AISI).
Almost immediately after China joined the WTO in 2001, the country’s steel industry began its exponential rise. Courtesy of AISI.
The Great Recession nipped Chinese exports a bit, but state-owned enterprises continued to be incentivized to produce by the Chinese government while domestic growth stagnated within the last few years, leading to a flood of Chinese steel being pushed outside the country’s borders. Courtesy of AISI.
A Special MetalMiner Project: Learn why China getting market economy status may just be the biggest trade issue of our time – and how it impacts the U.S. steel industry – in “China vs. the World.“
India will complete the second phase of its mining auctions later this month, after the first round last year received a lukewarm response. Going under the hammer will be gold, diamond and iron ore mines.
Mines in five provinces — Karnataka, Andhra Pradesh, Madhya Pradesh, Rajasthan and Jharkhand — will be auctioned. This time, there are 14 iron ore mines, 12 blocks of limestone and one block each of gold, diamond and copper. While some analysts have predicted a better response than last time to the iron ore mining auction, the limestone blocks may not see much action because of the cement market slump.
In the first round of the auction, the states offered 47 mines bearing minerals such as gold, iron ore, bauxite and limestone.
They were able to auction seven mines in that phase, earning the government billions of dollars over the next 50 years. However, 17 blocks were not sold due to an insufficient number of initial bids on account of factors such as quantity and grade of ore and low quality of the mineralization studies, among other reasons.
The first round also came under scrutiny when the comptroller and auditor general of India (CAG), a body that audits all government expenditures, passed certain adverse observations. It said in a report tabled in the Indian Parliament that competition may have been restricted in the auction of 11 coal blocks on account of multiple bids by corporate groups made through joint ventures or subsidiaries.
What Does This Mean For India’s Steel Exports?
The iron ore auction comes at a time when the Indian government is contemplating a relaxation of export duties on iron ore. This has led to protests from the domestic steel industry.
In a representation to the steel ministry, the Indian Steel Associationasked the government to continue with a 30% export duty on all grades of ore, to preserve natural resources for domestic use.
The government already cut the export duty on low-grade fines to 10% earlier this year but continued with a 30% levy on lumps.
The United Steelworkers and the petitioning domestic steelmakers praised new anti-dumping tariffs against cold-rolled flat steel products, while also saying that the damage from cheap imports has already hurt their operations.
“Today’s final duty orders by the Obama Administration expands fairer pricing conditions on cold-rolled steel products from five countries, combined with duties placed earlier this summer on the same steel import products from China and Japan,” United Steelworkers President Leo Gerard said. “We have nearly 19,000 steelworkers and iron ore miners still on extended layoff status since last year as the remaining steel trade case investigations continue to reduce huge inventories of unfairly dumped and subsidized finished steel imports that have been stockpiled before the case was initiated.”
Cold-rolled steel flat products from five countries received new tariffs. Source Adobe Stock/Jovanning.
The cold-rolled case hit producers in Brazil and the Republic of Korea hardest — South Korea’s POSCO was hit with 64.62% combined anti-dumping and countervailing duties due to a failure to confirm key elements of its response to investigators — but tariffs have already had an effect on steel imports into the U.S. Most of them were already being collected as preliminary duties that became final last week. The initial case was filed last year.
Injury Before Remedy
“The year-long investigation and duty orders show our trade laws need a rewrite in today’s world of steel overcapacity that’s putting American manufacturing workers and miners on layoff in their our own market, while foreign producers keep shipping illegally-subsidized and dumped products,” USW International Vice President Tom Conway told the Times of Northwest Indiana. Read more
Despite commitments and trade friction with several of China’s trading partners, China’s June trade data surged, raising more questions on the validity of China’s commitment to cutting steel production.
China’s Exports Are Up in June
China’s June steel exports up 21% year over year. Source: marketrealist.com.
In June, China exported 10.9 million metric tons of steel, a 21% increase from June 2015 and the second highest total ever. The data raises questions on whether global steel markets will be able to absorb this much steel coming from China without it weighing on prices. Read more
The U.S. and the European Union filed a joint World Trade Organization challenge against China on July 19 over its use of duties and export quotas to control shipments of metals such as tin, tantalum, lead, copper, chromium, cobalt and others.
The E.U./U.S. effort comes after the U.S. government’s original request for consultations filed on July 13. It also comes after the European Union failed to resolve a dispute with China over its use of duties and export quotas during bilateral meetings with China last week.
Chinese export quotas are being challenged by the U.S. and the E.U. Source: Adobe Stock.
The new request adds challenges to export duties on chromium to the original list of antimony, cobalt, copper, graphite, indium, lead, magnesia, talcum, tantalum and tin. The new request also includes China’s export quotas imposed on antimony, indium, magnesia, talc and tin.
Trade Rep Speaks Out
During last week’s announcement, U.S. Trade Representative officials said export duties on the raw materials ranged from 5 to 20% and enabled Chinese companies to produce lower-priced goods than their U.S. competitors. China also used the lower cost of raw materials to encourage U.S. companies to move production to China, the office of the U.S. Trade Representative charged. Read more
Heavy-walled, rectangular carbon steel pipes are used mainly as structural members in construction. The Commerce Department recently affirmed earlier preliminary anti-dumping duties on pipe imports from Turkey, Mexico and the Republic of Korea.
The U.S. construction market has remained strong this this year with home construction posting strong gains this summer and low-cost imports of structural pipe have certainly helped general contractors’ bottom lines.
Most of the anti-dumping duties for providers in South Korea and Mexico came in at less than 5.5%, but Turkey was the big importing loser with some of its steel companies hit with duties between 36 and 15%, although one Turkish steelmaker was found not to have dumped at all.
Welded, structural carbon steel pipes are a mainstay of construction but new tariffs will increase the price of of imports from Mexico, Turkey and the Republic of Korea. Source: Adobe Stock/Artzenter.
Republic of Korea
Commerce found dumping has occurred by mandatory Korean respondents Dong-A Steel Co. and HiSteel Co. Ltd. at dumping margins of 2.34% and 3.82%, respectively. All other producers/exporters in Korea will incur a final dumping margin of 3.24%. Read more
Yesterday, the U.S. and Vietnam signed an agreement to resolve two longstanding World Trade Organization disputes over imports of Vietnamese shrimp to the U.S. (the official case numbers are DS404 and DS429).
The agreement provides a framework for the settlement of American court litigation, as well as the resolution of outstanding anti-dumping duty claims covering various administrative reviews of a 2005 warmwater shrimp order. Assistant U.S. Trade Representative Barbara Weisel, Assistant Secretary of Commerce for Enforcement and Compliance Paul Piquado, and Vietnam’s Deputy Minister of Industry and Trade Tran Quoc Khanh signed the agreement yesterday.
A case involving Vietnamese shrimp shows how difficult it can be to quantify value for non-market economy goods. Source: Adobe Stock/Armcreation.
You might ask yourself, what does shrimp have to do with metals? As to how it concerns world trade, this case is important because it addresses the sometimes nebulous question of what exactly is fair in determining the proper prices of exports from non-market economies into market economies like the U.S. You see, Vietnam and China are the only two countries considered by the WTO to be non-market economies.
Market Economy vs. Non-Market Economy
Back in 2005, the U.S. imposed anti-dumping duties on several Vietnamese importers of shrimp. Vietnam asked the WTO to review the duties and, in 2014, a WTO panel found the original anti-dumping order to be inconsistent with WTO rules, including elements of the decision not to remove Vietnamese exporter Minh Phu, a producer that later proved it had not dumped for three years — from the order. In 2015, the panel’s findings were adopted by the WTO dispute settlement body and the U.S. agreed to come into compliance.
The panel faulted “as such” Commerce’s practice in anti-dumping cases of starting with a “rebuttable presumption” that all exporters in non-market economies are government controlled, state-sponsored entities. As we said above, Vietnam and China are the only two countries regarded by the department to be NMEs. As with steel companies in China, some Vietnamese shrimp producers are state-controlled and some are not. The WTO essentially said Commerce must prove that companies it places tariffs on are receiving government support.
A 129 review is the process used to determine how Commerce can make a redetermination that would ensure that its decisions in particular trade remedy cases are in line with the findings of the WTO. In the instance of DS429, the U.S. was faulted by the WTO dispute settlement panel in 2014 for improperly calculating the duties and in May 2015 informed the panel that it planned on coming into compliance with the panel report. The reasonable period of time for the U.S. to conform to the panel report was set to expire on Aug. 22.
Following a request from U.S. Trade Representative, the Department issued a preliminary section 129 determination on May 20, to implement findings of the WTO dispute settlement body. The preliminary decision includes a recalculation of Minh Phu’s dumping rates for 2008/2009 in a manner consistent with the WTO panel’s findings. As a result of the recalculation, Minh Phu’s rate for that period was reduced to zero and Commerce preliminarily found that revocation of the anti-dumping order with respect to Minh Phu was appropriate.
As part of the agreement, Minh Phu and its importers will be required to certify that it is the producer and exporter of any shrimp it exports to the U.S., to ensure that other exporters are not circumventing the anti-dumping order through transshipment.
The lack of a 123 review suggests that Commerce is taking a very narrow approach to implement the as-such ruling on its non-market economy practice by only making changes to these particular cases involving shrimp.
However, Commerce’s final memo on the 129 review does allude to the “as such” challenge. It stops short of pledging to resolve the criticized practice of viewing all producers as state-sponsored beyond these two cases.
So, as we discussed above, if the new, post-Brexit U.K. allows open access to workers from the European Union — and not allowing open borders and easy employment for other Europeans was the central plank and sticking point of the entire Leave campaign — it might be easier to make a deal with those former partner nations in the E.U. That would also raise the question, “what was all of this for?”
If discarding the objective of banning open access proves too much of a barrier, the U.K. may opt to fall back on World Trade Organization rules which will mean tariffs and possibly other bureaucratic barriers such as quotas will be established between the U.K. and Europe. That will encourage firms to locate future investment inside the single market rather than in the U.K.
What Might A Future Deal Look Like?
In the meantime, and a final solution could be two years away, the U.K. benefits from a lower pound which will boost exports to the single market and rest of the world. There are a number of models the U.K. could agree with Europe on, long-term, to establish trade rules and coexist in the future.
Germany exports the third-most of its goods to Great Britain behind only the U.S. and France. Negotiators are already trying to solve the puzzle of how to let the U.K. leave the E.U. without Germany leaving all of that business on the Brexit table. Source: Adobe Stock/Luzetania.
The Remain camp’s favorite is the Norwegian model that gives tariff-free access to the single market in return for free movement of labor, acceptance of many of the E.U.’s laws and payment into the E.U. budget, although no say whatsoever, into how that money is spent. The movement clause is likely a dealbreaker for Leave hardliners. Read more
On Wednesday, the People’s Bank of China weakened the yuan/renminbi to its lowest level in five years. The actual cut was small: only about 0.34%. The Chinese yuan closed 0.2% weaker on Tuesday at 6.559 per dollar compared with that morning’s midpoint of 6.5468. Since the end of April, the currency’s value has dropped three weeks in a row.
It did not send world markets spiraling downward as panicked investors did last August when China devalued its currency by nearly 2%, or in early January, when it cut by about 0.5%.
How Fast is the Chinese Economy Growing?
China’s ruling Communist Party still claims the country is growing 6.5% to 7% a year. Capital Economics, among other independent forecasters, believes the real number is closer to 4.2%.
Click for full size. Source: Bloomberg News
Market watchers believe there is a struggle going on between China’s top leaders on what to do next.
The Wall Street Journal reported that, behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the PBOC to stop fighting the financial markets and let the value of the nation’s currency fall. They supposedly got nowhere with bank officials.