China MES

We’ve seen a lot of numbers being thrown around over the past year when it comes to trade actions and enforcement.

From the steel industry’s Section 337, to a Section 201 being thrown down, right up to the 332 investigation about to get underway, there are a lot of digits but sometimes a bit less clarity on what it all means.

We thought we’d share a tiny primer on the 332 investigation of the U.S. aluminum industry’s competitiveness about to get underway before the International Trade Commission.

Here’s a quick rundown, courtesy of the Aluminum Association:

332-investigation-Aluminum-Association

The Aluminum Association’s VP of Policy, Charles Johnson, shared some more details with us on how exactly the 332 investigation came about in a recent interview:

A number of AA’s member companies, including AA President Heidi Brock, are planning to testify before the ITC this Thursday morning.

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. aluminum industry – in “China vs. the World.

china shipping port title

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

top 10 list china steel companies

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).

Because nine of the top 10 steel companies in China are SOEs, which get special support (read about it in our new project,China vs. the World,” here) — it ultimately spurs trends like these:

growth-china-steel-industry-vs-US-2000-2015

Almost immediately after China joined the WTO in 2001, the country’s steel industry began its exponential rise. Courtesy of AISI.

china-steel-exports-2005-to-2015

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.

china shipping port title

china shipping port title

Whether you’re a regular MetalMiner reader, or have never heard of us before, you’re likely familiar with the outsize role China has played in trading with the Western world — and especially with the United States.

That’s why we’ve taken the opportunity to dive deep on a nuanced issue that’s central to the U.S.-China relationship, now and into the future. Our new project, China vs. the World: Why the Battle for New Trade Status is Such a Huge Deal, explores how China’s approach to global trade over the past several decades has affected American commerce (for better and worse), and how something called “market economy status” could change the rules of the game as we know it.

In the latest move, U.S. Representatives Tim Murphy (R-PA) and Peter J. Visclosky (D-IN), the chairman and vice-chairman of the Congressional Steel Caucus, respectively, introduced a House resolution calling on the current Administration to take action on this very issue. But resolving the issue will likely be a longer battle.

While the mainstream media has taken advantage of reporting presidential hopeful Donald Trump’s numerous references to China and his blunt stance on how he intends to change our relationship with that country, MetalMiner’s journalists and editors set out to unpack the tangible drivers behind these types of general sentiments, with a particular focus on — and for — U.S. manufacturing organizations.

Among the highlights:

  • The most comprehensive — yet easily understandable — exploration of what “market economy status” (MES) entails, why China is pushing the U.S. and Europe to grant the country MES, and what that would mean for trade, available today.
  • Our explainer video provides a quick ‘101’ on the topic, and an interactive timeline explores how China got from the dawn of Mao to WTO entry to today, step by step.
  • Personal video perspectives from key players across several different industries illustrate the China effect on American jobs, workers and approaches to business.

We hope you’ll find this type of project and its presentation refreshing and informative. If you like it, please share it with your networks! We welcome and value your feedback, so please feel free to send us a note at research@metalminer.com.

Thank you for reading,

Taras Berezowsky
Managing Editor

There has been considerable concern in the U.S. and elsewhere that China’s exports of primary aluminum are damaging global prices. China would maintain that it imposes an export duty on primary aluminum explicitly to prevent the export of primary metal, largely seen as exporting energy due to the high power cost associated with producing each metric ton of the metal.

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Many outside China believe a considerable amount of metal leaks out of the country in the nominal form of semi-finished products which avoid the export duty, and, indeed, attract a value-added tax refund, only to be subsequently remelted. Large volumes of exports from China make their way to Vietnam, and it is believed much of this material is remelted in the country before being sold.

The Impact of Chinese Aluminum

However, our concern in this article is not so much the impact of primary metal leakage, considerable as it may be, but rather the growing threat of Chinese value-add product manufacturers and the impact they are having on western firms that had previously had the field cornered for automotive and aerospace — to name but two high-tech applications for aluminum — applications.

Chinese material at the end of the last century was considered a joke in terms of quality, but over the first 10 years of this century the country has invested heavily in European and Japanese extrusion, rolling and heat treatment plants and equipment. By the beginning of this decade, Chinese extrusions and commercial sheet/plate were being given equivalence to material from many other sources such as Russia, Turkey, South Korea, Taiwan and other locales.

Are aluminum slabs welded together really "deep-processed extrusions?"

Are aluminum slabs welded together really “deep-processed extrusions?”

Such material is still sold at a discount to European or North American semi-finished products, but its growing penetration and the willingness of major distributors to hold a proportion of their inventory as Chinese material, speaks volumes for its growing acceptance, particularly in terms of quality.

The Lucrative Automotive Market

Still, while China — and to a lesser extent mills in places like Malaysia, Turkey and other locales — gradually ate into western mills’ commodity products, those same western mills moved upstream, investing heavily to meet growing demand for automotive sheet and castings, aerospace sheet, plate and extrusions. Read more

Jean-Claude Juncker, president of the European Commission, is reported by the London Telegraph to have warned China that the country’s chances of gaining market economy status are directly related to its steel exports.

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In a speech in China, Juncker is reported to have said “I do not want to dramatize this issue… but there is a clear link between the steel overcapacity of China and the market economy status for China.”

Steel Overcapacity Through the Years

China makes more than half of the world’s1.6 billion metric tons of steel but it’s suffering from slowing domestic demand and has turned to exports to dispose of its surplus. In the first quarter of the year Chinese steel exports to the European Union rose 28%, driving prices down by more than 30% according to some reports.

Steel mills Molten iron smelting furnace production line

Beijing wants to shut down unprofitable steel production, but the provinces are merely reclassifying the mills and giving them new loans.

Although China has made conciliatory comments, Chinese Foreign Minister Wang Yi said this week the E.U. and China were forming a bilateral mechanism to review, discuss and deal with overcapacity in the steel industry. Beijing may have it’s work cut out for it if it actually wants to force through closures. The government has been trying it reign in excess capacity for some time, restricting credit and urging provinces to close older polluting plants but a recent Reuters article suggests provincial governments are doing anything but cooperating. Read more

The U.S. warned China on Thursday that it had not done enough to qualify for market economy status, especially in steel and aluminum and pushed the two trading partners closer to a full-on trade war between Washington and Beijing at the end of 2016.

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U.S. trade diplomat Chris Wilson told the World Trade Organization meeting that the expiration of a clause in China’s original petition to join did not require other WTO members to automatically grant China market economy status on Dec. 11.

Instead, China must establish under each WTO member country’s domestic law that it is a market economy, he said, according to an outline of his remarks seen by Reuters.

“Second, there is little doubt that China’s market reforms have fallen short of the expectations that were held by many members when China joined the WTO,” he said. “This is particularly evident in the steel and aluminum industries where China’s pervasive interventions have led to a significant overcapacity of global supply that is threatening the viability of competitive firms in these industries around the world.”

The two giant trading partners have been locked in a war of words about China’s ascension for more than a year now.

The EU and China Announce ‘Bilateral Mechanism’

Meanwhile, China and the European Union agreed to establish a bilateral mechanism to deal with overcapacity in steel, Chinese Foreign Minister Wang Yi said on Thursday.

China is by far the world’s biggest steel producer and its annual output is almost double that of the 28-nation EU.

Rival producers have accused China of selling into export markets at below cost after a slowdown in demand at home, causing a crisis for the industry that has led to job cuts and plant closures.

“Through this bilateral mechanism, the two sides can have … in-depth discussions to find solutions acceptable to both parties and in this way maintain free trade and sustainable development of the global economy,” Wang said.

Wang did not provide details on the planned mechanism.

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 and aluminum industries – in “China vs. the World.

china shipping port title

Jennifer Diggins is the director of Government Affairs at Charlotte, N.C.-based Nucor Corp., the largest steelmaker in the U.S. and North America’s largest recycler of any material (Nucor recycled 16.9 million tons of scrap steel in 2015 at its 23 electric arc furnace mills). Diggins serves as the firm’s liaison to Washington, D.C. MetalMiner’s editorial staff recently had a chance to sit down with Jennifer for a MetalMiner Q&A to discuss recent issues in steel, including Chinese overproduction, the tariffs recently passed against some imports and the role of the international scrap market.

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MetalMiner: Recently, executives from the five leading steel companies in the U.S. told the Congressional Steel Caucus that unfair foreign trade practices have caused an increase in steel imports resulting in the loss of more than 13,000 jobs in the industry this year. How was that number arrived at? Could it be even worse than the 13,000 estimated?

jennifer_diggins_headshot_300_Nucor_052116Jennifer Diggins: There is the potential for the number to be much worse when you factor in job losses in industries that support steel.

People often fail to appreciate the broad impact the steel industry has on the rest of the economy. Every one job in the steel industry supports seven other jobs in the economy. These are jobs in businesses that supply steelmakers with raw materials, contractors who do maintenance work at steel mills, truck drivers who transport our products, just to name a few. When steel production decreases like it has, workers in these supporting industries also are impacted. Read more

The U.S. steel industry has been aggressively addressing imports of Chinese steel through the filing of multiple anti-dumping and countervailing actions in recent months.

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The enforcement of these trade laws is the responsibility of U.S. Customs and Border Protection. In Salt Lake City earlier this month, the American Iron and Steel Institute and Metals Service Center Institute held their general meetings where steel industry executives discussed why Chinese steel imports are of particular concern to the U.S. steel industry.

Dual Mission

CBP Chairman R. Gil Kerlikowske explained in his speech, “Protecting Our Borders, Protecting Our Industry” how CBP enforces U.S. trade law, saying that the title of his speech, “really speaks to the duality of CBP’s complex mission, which is facilitating lawful trade and travel while ensuring the safety and security of our borders and the global supply chain.”

Steel mills Molten iron smelting furnace production line

U.S. Customs and Border Protection explained its processes for dealing with illegally dumped steel products at the AISI/MSCI general meetings earlier this month. Source: Adobe Stock/ZJK.

The overarching theme of the annual conference was that the U.S. is in an economic war with China, and CBP knows it is on the “front lines of our nation’s economic security.” Read more

As part of the World Trade Organization, China is scheduled in December 2016 to achieve Market Economy Status, as opposed to its current Non-Market Economy status. This means, among other things, it will be much harder for US, Canadian or Mexican steel companies to bring anti-dumping actions against Chinese imports of steel and hundreds of other products. Some believe that status upgrade will be automatic, but not the NAFTA steel sector.

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“We don’t believe [Market Economy Status] happens automatically,” said Thomas J. Gibson, president and CEO of the American Iron & Steel Institute. “Under US law there are criteria, six, by which China’s status as a market economy should be judged. And we are just drawing the US government’s attention to that and asserting that China should not become a market economy. Our main focus was to impress upon our elected officials the urgency of the crisis. The focus was on the breadth of the problem.”

NAFTA United Against Chinese Market Economy Status

Gibson was speaking during a press conference and conference call that featured several North American steel industry executives speaking with one voice against China’s potential ascension to market economy status. It’s an issue that has united Canadian, US and Mexican steel producers and given the sometimes disparate North American Free Trade Agreement partners solidarity against what they see as a flood of particularly Chinese imports that has grown to 30% of the North America market for the first time ever.

Last week, AISI released a commissioned report concluding that treating China as a market economy in anti-dumping investigations would “severely damage the NAFTA steel industries and harm NAFTA economies.”

Six steel industry groups sponsored the report: AISI, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO (the Mexican Iron and Steel Producers’ Association), the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports.

Has the EU Already Decided for China?

Of course, the North American associations aren’t alone in this fight. European Union lawyers have already concluded that China should be formally designated a “market economy” at the end of next year. The EU would have been a powerful ally for North America.

The European Commission’s legal service circulated a confidential opinion within the institution this past summer, officials familiar with the opinion said. The confidential opinion is not binding, and the EU may still oppose China’s “graduation,” but it’s still a blow to the organizations proposing full review and not a standard graduation to market economy status for China.

The Problem With China: Overproduction

The main argument the US, Canadian and Mexican steel producers make would likely hold as much weight with the EU member nations as it does for NAFTA’s: That Beijing’s policies lead Chinese firms to pump out far more goods than China’s domestic market can consume. Or overseas markets, for that matter.

“There are almost 700 million metric tons of overcapacity globally,” said Nucor CEO John Ferriola in last week’s press conference. “That’s almost half China’s. We must allow basic market forces to influence China’s production.”

Ferriola said the case that he and his fellow steel executives made to their representatives in congress was that the ENFORCE Act, a bill stuck in congress after previous legislation was passed to address dumping, would do this. Ferriola called it a “major piece of unfinished business.”

ENFORCE would change customs enforcement and stop trans-shipments which the domestic producers say are being sent from China and other nations where their origins are concealed by relabeling and other shipping tricks. It also has a much more comprehensive definition of “material injury” than current anti-dumping laws.

The bigger issue, even if ENFORCE passes, however, would still be China achieving market economy status. The Canadian Steel Producers’ Association predicted that 400,000 to 600,000 NAFTA jobs will be lost if nothing is done about Chinese exports.

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“Our main focus was to impress upon our elected officials the urgency of the crisis. The focus was on the breadth of the problem,” Gibson said.

A report released recently concludes that treating China as a market economy in anti-dumping investigations would “severely damage the North American Free Trade Agreement (NAFTA) steel industries and harm NAFTA economies.”

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The study, composed of three economic analyses, was conducted by leading economists from Capital Trade Incorporated in Washington, DC;  the Centre for Spatial Economics in Ontario, Canada; and IMCO in Mexico City, Mexico.

Six steel industry groups — the American Iron and Steel Institute, the Steel Manufacturers Association, the Canadian Steel Producers Association, CANACERO, the Specialty Steel Industry of North America and the Committee on Pipe and Tube Imports — sponsored the report. They issued the following statement:

“China is a state-run economy and does not operate on market principles, yet it argues that it must be treated as a market economy as of the 15th anniversary of its accession to the WTO in December 2016. This third-party report found that granting China market economy status is premature and would lead to significant job losses in our sector, and in steel communities where plants are being idled and jobs are already being decimated. This is unacceptable.”

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