Domestic Steel vs. Chinese and Indian Imports: Stop Me Before I Countervail Again!

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The World Trade Organization ruled this week on a whole slew of claims from India and China that the US Commerce Department was not being fair in the way it imposed import duties on products from their nations. Products as varied as steel, silicon and rubber.

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In the $7.2 billion Chinese case, the panel found that Washington had overstepped the mark in justifying so-called countervailing duties it imposed as a response to alleged subsidies to exporting firms by China’s government. Commerce places countervailing duties when it believes a foreign government is unfairly subsidizing the production of its industries and selling those industries’ products at a lower rate than domestic producers here in the US.

Coiledsteel_585Trading Internationally With the Tiger and the Dragon

In a similar case involving US methods in deciding when foreign imports are unfairly priced, another WTO panel ruled in support of some claims by India against tariffs on steel exports from three of its major firms.

Trade diplomats said the two cases, both under scrutiny for nearly two years by the separate panels, reflected a widespread concern in the 160-member WTO by many over what they see as illegal US protection of its own producers. Under the 1964 Marrakesh accords, which also set up the WTO, countervailing duties can only be levied when there is clear evidence that state-owned or partially state-owned enterprises passing on the subsidies are “public bodies.”

Which begs the question, what is a “public body?”

Most of the cases between the US and India had to do with state-owned companies such as China’s Baoshan Iron & Steel. Baosteel is an entirely state-owned enterprise headquartered in the Pudong section of Shanghai. It’s the world’s second-largest steel producer only behind multinational ArcelorMittal. How does the WTO calculate what is and is not a “subsidy” to a company such as Baosteel, which is owned entirely by the Chinese government?

“The administration is committed to the strong enforcement of US countervailing duty laws in order to respond to unfair subsidies, and to a strong defense of those duties when challenged by any US trading partner,” said US Trade Representative Michael Froman.

The WTO panel rejected most of the claims brought by China against US countervailing duties under the WTO Subsidies and Countervailing Measures Agreement (SCM Agreement). On public bodies, though, the WTO panel found that, in 12 investigations, Commerce’s determinations that certain state-owned-enterprises (including Baosteel) were public bodies was inconsistent with the SCM Agreement.

State-Owned Enterprises

The US has tried for nearly a decade to build a case against Chinese SOEs, saying they benefit from both overt and hidden subsidies that unfairly lower their costs of production. It has argued that those amount to government subsidies to China’s exports, which are banned by the WTO.

Washington has also been pressing for stronger rules governing the behavior of SOEs in trade deals such as the Trans-Pacific Partnership, which it hopes to conclude with Japan and 10 other countries this year.

The US push highlights the difficulties posed by the industrial structure of China and many other developing nations for a global trading system built around the idea of corporations being clearly separated from their governments. Even if it’s not a “public body” is Baosteel really competing on even ground with Nucor or AK Steel? What about very much NOT state-owned Chinese silicon solar panel manufacturers, another case in the wide-ranging ruling, vs. German multinational Solarworld?

In the Chinese case, the three WTO  judges reaffirmed a 2011 judgment that set a narrow definition for what could be considered a government entity. According to this ruling, state-owned companies could not be considered “public bodies” because they were majority-owned by governments. Instead, the panel said, the US had to prove that Chinese state-owned enterprises also performed “government functions” or exercised “government authority.” Does Baosteel have no international market advantage simply because it does not exercise government authority in China?

Froman, the US Trade Representative, said the administration is “carefully reviewing its options.” Those options include an appeal to the WTO.

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